CFTC Proposes Rules on Affiliations Among Regulated Market Entities
Commentary by Stephan Ariyan
The CFTC proposed new rules, amendments to existing regulations, and guidance to address conflicts of interest that arise when regulated entities share common ownership with market participants.
In the proposal, the CFTC sought to address the growth in affiliations between derivatives-clearing organizations, designated contract markets, swap-execution facilities, futures-commission merchants, and other market participants, such as market makers (see prior coverage). The CFTC said that it preliminarily believes such structures may benefit the markets but that the current patchwork of voluntary safeguards is uneven and subject to change at each entity's discretion.
Among other things, the proposal would bar a self-regulatory organization from acting as the designated self-regulatory organization ("DSRO") for its affiliate futures-commission merchant ("FCM") while allowing an FCM to select its DSRO, subject to certain conditions. The proposal would also prohibit designated contract markets from having affiliate principal trading firms, subject to a conditional exception for affiliate market makers; add board composition and regulatory oversight committee requirements; and expand FCM disclosure of affiliate relationships.
It would also add requirements for swap-execution facilities and derivatives-clearing organizations. Accompanying guidance addresses shared staffing, technology, and office space, as well as limits on sharing non-public information.
Comments are due 60 days after publication in the Federal Register.
Commentary
The NPRM is not merely a governance proposal for incumbent exchanges; it is also a statement about the future shape of derivatives market infrastructure. While established exchange groups are likely to face additional disclosure and conflict-management obligations, the proposal's most consequential effects may be on emerging platforms that seek to combine trading venues, clearing services, and affiliated liquidity provision within a single corporate structure.