The CFTC proposed amending its regulations to "enhance certain risk management and reporting obligations, clarify the meaning of certain provisions, simplify processes for registration and reporting, and codify existing relief and guidance." The extensive proposal is the result of Commission review of the derivatives clearing organizations ("DCO") regulatory framework under the CFTC initiative Project KISS (the agency initiative to simplify and modernize agency regulations).
CFTC Commissioner Dan Berkovitz expressed support for the proposal, but also noted a number of areas where public comment is specifically requested:
- whether more explicit guidance is necessary;
- if members' role in DCO governance should be expanded;
- requirements relating to member default management (the proposed rules specifically require DCOs to have a default committee that includes clearing members);
- changes to Rule 39.13(g)(8) concerning initial margin calculations;
- proposed Rule 39.13(i), which will "provide[] specific procedures" for implementing a cross-margining program with other clearing organizations; and
- proposed Rule 40.5, which is intended to enhance the process for voluntary submission of DCO rule changes.
Comments must be submitted within 60 days after the proposal is published in the Federal Register.
Commentary / Nihal Patel
The proposal contains a number of issues of note for non-DCO market participants, particularly those relating to margin requirements. The proposal would require DCOs to require margin "commensurate with the risk presented by each customer account." The CFTC said that it believes a "bright-line test" would be inappropriate because "the circumstances for each DCO and the nature of its clearing members and their customers vary."
The proposal would also permit multi-entity cross-margining with other clearing organizations that would allow offsets or reductions if one product is "significantly and reliably correlated with the risk of the other product." The CFTC notes that it has permitted a number of cross-margining arrangements (see text accompanying footnote 51), and requests comment on a series of factors that the CFTC will consider in approving a cross-margining arrangement.
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