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May 14, 2024

Better Markets Commends CFTC’s Proposed Rules on Designated Contract Markets, but Highlights Critical Oversights

WASHINGTON, D.C.— Better Markets filed a comment letter with the Commodity Futures Trading Commission (CFTC) in response to a rule that proposes new rules and amendments to its existing regulation for designated contract markets (“DCMs”) and swap execution facilities (“SEFS”).

Why it Matters. The Proposed Rule significantly changes how SEFs and DCMs manage and report conflicts of interest, emphasizing the CFTC’s commitment to rigorous oversight. Formalizing enhanced governance fitness standards under DCM Core Principle 15 and SEF Core Principle 2 sets stricter regulatory expectations. The proposal strengthens the roles of Chief Regulatory Officers and Chief Compliance Officers, expanding their responsibilities for proactive conflict management. New rules for Regulatory Oversight Committees will support independent compliance assessments, while amendments to equity transfer notifications aim to standardize procedures and thresholds, enhancing transparency and accountability in regulatory compliance and market functioning.

What we said. The CFTC’s efforts in proposing new regulations to improve market governance are commendable. However, the Proposed Rule does not address conflicts of interest in vertically integrated market structures, where a single owner controls multiple market functions, such as exchange, broker-dealer, and custodian. This structure was approved for the first time by the CFTC in December 2023. Despite this, the Proposed Rule fails to provide adequate regulatory measures to manage these structures’ significant risks to market integrity and customer protection. Instead, the Proposed Rule defers addressing such issues to a future rulemaking, despite an urgent need for regulatory action.  This postponement indicates a delayed commitment to addressing critical vulnerabilities and leaves significant gaps in the regulatory framework.

Bottom Line.  Better Markets appreciates the rules the CFTC has proposed to unify and strengthen the regulatory framework for DCMs and SEFs. These changes seek to enhance market integrity by establishing robust governance fitness standards and comprehensive conflict of interest regulations.  Notwithstanding, the CFTC has regrettably opted not to propose measures to mitigate risks stemming from vertically integrated market structures. The absence of these protective measures within the current rulemaking underscores a significant oversight by the CFTC.  The CFTC has missed a critical opportunity to tackle these vulnerabilities head-on, thereby perpetuating gaps in the regulatory framework and undermining efforts to effectively mitigate conflicts of interest that compromise market fairness.

You can read the full comment letter here.


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