Rule for Reporting & Information Requirements for Derivatives Clearing Organizations effective 9/7/2023.
Previous Superstonk posts:
https://www.reddit.com/r/Superstonk/comments/12kqjbs/cftc_alert_open_for_comment_cftc_proposing_to/
https://www.reddit.com/r/Superstonk/comments/1497cmp/cftc_alert_extension_of_comment_period_through/
AMENDMENTS TO REGULATION ยง 39.13:
39.15(b)(2) outlines how a Derivatives Clearing Organization (DCO) can get approval from the Commission to mix customer positions and their related funds from various account classes.
- CFTC is merging the procedures for both futures and cleared swaps customer accounts into one paragraph.
- Some data that DCOs are currently required to submit seems repetitive or of limited utility to the Commission. This is due to the CFTC's existing familiarity with a DCO's risk management.
Modifications & Removals:
- Clarifying the analysis of risk characteristics of products set for commingling.
- Removing details about where swaps to be commingled would be executed.
- Removing the need for an analysis on the availability of reliable prices for eligible products.
- Changing requirements regarding clearing member standards for those that commingle products.
- Altering the discussion requirements about risk management systems.
- Removing the need for DCOs to detail their financial resources.
- Removing the need to explain margin methodology and instead requiring a discussion about portfolio margining.
- Modifying the discussion about default management to focus on unique procedures for commingled products.
- Deleting descriptions about arrangements for daily position data.
- Replacing provisions about requesting additional information from the DCO and the related approval process.
- CFTC emphasizes the standard of review for approving a commingling rule submission. The changes make clear the requirements and standard of review present in ยงโ40.5.
- CFTC acknowledges it possesses supervisory data not accessible to market participants, which can play a role in evaluating commingling rule submissions.
Other points:
- Organizations like OCC, Eurex, ICE, and Better Markets backed these proposed amendments.
- The changes aim to offer clear guidance to DCOs regarding what they need to include in their merging requests.
- A new proposal, ยง 39.15(b)(2)(vii), wants DCOs to confirm that portfolio merging is allowed only when the price risks are "significantly and reliably correlated."
- ICE, while supportive, feels the express confirmation in the new proposal is redundant, given that existing regulations require DCOs to ensure compliance.
- However, CFTC wants to emphasize that approval of merging does not automatically mean approval of the DCOโs portfolio margining, hence the need for the confirmation.
- In terms of transparency, ICE believes that no further information disclosure is needed for the public to understand a DCOโs merging proposal.
Better Markets suggests that the amendments should delve deeper, emphasizing understanding any increased risks due to merging products that might usually be kept in separate accounts.
- CFTC agrees with Better Markets' perspective, deciding to include specifics in ยง 39.15(b)(2)(ii) on what a DCO's analysis must cover.
- CFTC will move forward with the changes to ยง 39.15(b)(2) as suggested, without further alterations.
Commingling โ
(i) Cleared swaps account. In order for a derivatives clearing organization and its clearing members to commingle customer positions in futures, options, foreign futures, foreign options, and swaps, or any combination thereof, and any money, securities, or property received to margin, guarantee or secure such positions, in an account subject to the requirements of section 4d(f) of the Act, the derivatives clearing organization shall file rules for Commission approval pursuant to ยง 40.5 of this chapter. Such rule submission shall include, at a minimum, the following:
(A) Identification of the products that would be commingled, including product specifications or the criteria that would be used to define eligible products;
(B) Analysis of the risk characteristics of the eligible products;
(C) Identification of whether the swaps would be executed bilaterally and/or executed on a designated contract market and/or a swap execution facility;
(D) Analysis of the liquidity of the respective markets for the eligible products, the ability of clearing members and the derivatives clearing organization to offset or mitigate the risk of such eligible products in a timely manner, without compromising the financial integrity of the account, and, as appropriate, proposed means for addressing insufficient liquidity;
(E) Analysis of the availability of reliable prices for each of the eligible products;
(F) A description of the financial, operational, and managerial standards or requirements for clearing members that would be permitted to commingle eligible products;
(G) A description of the systems and procedures that would be used by the derivatives clearing organization to oversee such clearing members' risk management of any such commingled positions;
(H) A description of the financial resources of the derivatives clearing organization, including the composition and availability of a guaranty fund with respect to the eligible products that would be commingled;
(I) A description and analysis of the margin methodology that would be applied to the commingled eligible products, including any margin reduction applied to correlated positions, and any applicable margin rules with respect to both clearing members and customers;
(J) An analysis of the ability of the derivatives clearing organization to manage a potential default with respect to any of the eligible products that would be commingled;
(K) A discussion of the procedures that the derivatives clearing organization would follow if a clearing member defaulted, and the procedures that a clearing member would follow if a customer defaulted, with respect to any of the commingled eligible products in the account; and
(L) A description of the arrangements for obtaining daily position data with respect to eligible products in the account.
TLDRS:
- Rule for Reporting & Information Requirements for Derivatives Clearing Organizations effective 9/7/2023.
- DCO procedures for CFTC approval to commingle customer positions & associated funds from 2 or more of 3 separate account classes, in either a futures or cleared swaps customer account.
