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February 15, 2023

CFTC Must Do More to Strengthen Reporting Requirements for Clearing Houses to Address Systemic Threats Such As Crypto and Cybersecurity

Better Markets filed a comment letter  with the Commodity Futures Trading Commission (CFTC) on its proposed rule that would amend certain reporting and information requirements applicable to derivatives clearing organizations (“DCOs”):

Why It Matters. 

Concerns about DCO transparency have intensified over the past several years by virtue of the relentless growth in cybersecurity threats and the extraordinary volatility of the crypto markets. The risks surrounding digital assets are an increasingly important threat to DCOs’ stability and financial health.  Just over the last several months, this asset class has experienced an extraordinarily rapid and steep decline, triggering massive investor losses, a string of bankruptcies in the industry, and the freezing of activity in digital asset exchanges. If these assets were more connected to the financial system, such as through broader clearing of futures contracts on cryptocurrencies, they certainly would have posed a significant threat to our entire economy. Therefore, the CFTC must remain vigilant and forward-looking in its approach to establishing regulations, especially those related to reporting, that will cover new threats and new financial products.

What We Said. 

This proposal represents a positive and important step forward in the oversight of derivatives clearing houses.  Those entities are entrusted with a crucially important role in the derivatives marketplace because they clear derivatives trades and essentially guarantee each side of the transactions.  They are part of the regulatory architecture that Congress established in Dodd-Frank to reform the opaque and risky derivatives markets that did so much to fuel the 2008 financial crisis.  By virtue of their function, DCOs can accumulate and pose potentially systemic risks to the markets.  For that reason, it is imperative that they promptly report a wide range of information to the CFTC so it can effectively oversee these increasingly vital market utilities.

Bottom Line. 

This Proposal would strengthen a number of reporting requirements.  For example, it would shed more light on the risk characteristics of products that are comingled in accounts; remove unwarranted limitations on the duty to report threats to DCO security or systems; and broaden the reporting about concerns or problems related to DCO funding sources.

In some respects, however, the proposal should go further. The proposed rule would require a DCO to report any change to the entity or person that holds a controlling interest, either directly or indirectly, in the DCO. While this is a positive change, it is actually significantly weaker than the requirements established under prior versions of the rules. The final rule should return to earlier language that required a DCO to submit extensive information to the CFTC and obtain approval from the CFTC whenever a DCO goes through a change of control or sale of its business

Read our full Comment Letter here or click the button below.

Comment Letters

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