MFA Submits Letter to CFTC on Project KISS Recommendations

September 29, 2017

From: Stuart J. Kaswell (MFA)

To:

Christopher Kirkpatrick, Commodity Futures Trading Commission

Today, MFA filed a letter with the CFTC in response to its request for comments on where the CFTC rules can be simplified and made less costly to comply. MFA submitted recommendations with respect to the CFTC’s Registration, Reporting, Executing, and Miscellaneous categories. Below is a summary of our recommendations.  

A. Registration

1. Avoiding Duplicative Registration

i. Commodity Pool Operator (“CPO”) Registration.  MFA recommends that the CFTC reinstate an exemption from CPO registration for a CPO of a private commodity pool, provided that such CPO is registered as an investment adviser with the Securities and Exchange Commission (“SEC”) or affiliated with an SEC-registered investment adviser—a narrower exemption than former Rule 4.13(a)(4).

ii. Commodity Trading Advisor (“CTA”) Registration.  MFA recommends that the CFTC and the SEC should each adopt a rule or provide interpretive guidance that would subject a firm to advisor/adviser registration with either the CFTC or SEC, depending on whether it is primarily engaged in the business of advising on trading in commodity interests or securities.

2. Reviewing Rule 4.13(a)(3).  As the CFTC and the SEC work to rationalize and avoid dual registration, MFA recommends that the Commission exclude compo swaps from calculation under Rule 4.13(a)(3) with respect to determining a pool’s commodity interest position, and to issue related guidance.  MFA recommends that the Commission issue guidance setting forth that in calculating the Rule 4.13(a)(3) de minimis trading exemption, a CPO should conduct the calculation for a commodity pool including any wholly owned subsidiary of the commodity pool; and that the CPO need not conduct the Rule 4.13(a)(3) exemption calculation with respect to a wholly owned subsidiary on its own.

3. Simplifying Regulation Through Interpretive Guidance

i. Registration & Interpretation of Commodity Pool Operator.  MFA recommends that the Commission: (1) adopt a more streamlined approach to registration or CPO delegation by issuing guidance analogous to the SEC’s umbrella registration; and (2) provide consistent treatment to natural persons serving on the governing body of a commodity pool and issue guidance that members of an investment company’s or commodity pool’s board of directors or other governing body are not considered to be CPOs.

ii. Interpretation of Commodity Pool.  MFA recommends that the Commission issue guidance providing that a wholly owned subsidiary of a commodity pool is not a separate commodity pool.  In the alternative, MFA recommends that the Commission provide guidance that for purposes of CPO exemptions from registration or exclusions, and for regulatory reporting purposes, a wholly owned subsidiary of a commodity pool need not be considered a separate commodity pool.

iii. Updating Qualified Eligible Person (“QEP”) Status.  MFA recommends that the CFTC issue interpretive relief or guidance that an employee in certain technology-related roles at a firm with a technologically-driven trading model may satisfy the Rule 4.7(a)(2)(viii)(A)(4)(ii) prior work experience requirement through work experience at a technology company, rather than exclusively at a financial services company.  

 B. Reporting

1. Forms CPO-PQR and CTA-PR.  MFA plans to submit in a separate submission to the Commission and the SEC detailed recommendations for a single and simpler systemic risk reporting form for CPOs, CTAs and investment advisers.

2. Reduce Complexity of Cleared Swap Reporting Requirements.  MFA recommends that the CFTC eliminate alpha swap reporting requirements to reduce the reporting complexities of its cleared swaps reporting regime and to streamline the data actually reported to swap data repositories (“SDRs”) without sacrificing the amount of information available to the CFTC regarding the entire life cycle of a swap.  As an alternative to eliminating SDR reporting for cleared swaps, MFA suggests that the CFTC consider simplifying the regulatory reporting infrastructure by making registered derivatives clearing organizations i.e., central counterparties (“CCPs”) responsible for maintaining data on their cleared swaps, and have SDRs maintain data for uncleared swaps.

C. Executing.  MFA recommends that the CFTC improve the legal framework for swaps trading on registered swap execution facilities (“SEFs”) and designated contract markets (“DCMs”) by:

1. Allowing investors more flexibility in how they trade swaps while: (i) enabling true impartial access to SEFs and execution methods for all eligible participants, and (ii) preserving crucial requirements for pre-trade price transparency, price competition, and a multiple-to-multiple trading system or platform;

2. Assuming responsibility for determining when particular swap contracts have to be SEF-traded while carefully considering the distinct liquidity issues for any such contract; and

3. Simplifying and codifying with certain changes, the existing universe of CFTC staff guidance and no-action relief that the CFTC used to smooth the implementation of the SEF framework.

4. Requiring SEFs to make public disclosures regarding important aspects of their offerings, including trading protocols, fees, and governance.

D. Miscellaneous

1. Repeal Segregation Interpretation 10-1 for Futures and Options Transactions.  MFA recommends that the Commission repeal the Division of Clearing and Intermediary Oversight’s (“DCIO”) Amendment of Interpretation (“Segregation Interpretation 10–1”)[1] to the Financial and Segregation Interpretation No. 10 on the Treatment of Funds Deposited in Safekeeping Accounts (“Segregation Interpretation 10”)[2] for futures and options transactions (together, “Futures”).

2. Initial Margin Requirements Should be Tailored to the Risk of Certain Non-Clearable Swaps.  MFA recommends that the CFTC recalibrate and appropriately tailor its initial margin requirements for uncleared swaps to reflect the actual risk posed by certain non-clearable swap products, such as total return swaps for complex equity trades.

3. Liquidation Periods Should be More Closely Calibrated to Product Liquidity.  MFA suggests that the CFTC work with the Working Group on Margining Requirements of the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (“Basel-IOSCO WGMR”), the SEC, the Board of Governors of the Federal Reserve (“Fed”) and the other U.S. prudential regulators to re-examine market practice and historical data to more accurately calibrate minimum liquidation time periods to account for a product’s liquidity profile, regardless of whether the product is a futures contract, a cleared swap, or an uncleared swap.

4. Organization of CFTC Staff Letters.  MFA recommends that the Commission enhance the organization of its website and CFTC staff letters to facilitate compliance of CFTC regulations by market participants.

[1] 70 Fed. Reg. 24768 (May 11, 2005), available at: http://www.gpo.gov/fdsys/pkg/FR-2005-05-11/pdf/05-9386.pdf.

[2] See Comm. Fut. L. Rep. (CCH) 7120 (May 23, 1984) available at: http://www.cftc.gov/tm/finseginterp_10.htm.

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