Amid a growing trend towards vertical integration in the derivatives trading business, the U.S. Commodity Futures Trading Commission (CFTC) is proposing new rules to deal with conflicts of interest and other concerns that arise due to these kinds of structures.
On Thursday, the CFTC launched a consultation on proposed new rules and rule changes that aim to address potential issues — such as both real and perceived conflicts — stemming from the growth of common ownership for various components of the trading landscape. Those components include derivatives markets, clearing organizations, swap execution facilities, futures dealers and market makers.
Among other things, the proposals would establish new rules to deal with conflicts among affiliated firms, introduce changes to the financial oversight of futures dealers by self-regulatory organizations and require greater disclosure of affiliate relationships.
In its consultation, the CFTC noted that dealers, exchanges and clearinghouses are already subject to requirements that deal with conflicts of interest, reporting and disclosure. However, it said it believes the industry “would benefit from new regulations and amendments to increase the detail and specificity of the existing regulations in order to mitigate potential risks, particularly given the increasing number of affiliate relationships among market participants.”
For instance, the regulator said that conflicts may increasingly arise when it comes to an exchange enforcing its rules on a related market maker; or in the enforcement and oversight functions of a clearinghouse when they involve a related dealer.
The proposals also include proposed new guidance on ensuring impartiality when firms are functioning as SROs. That guidance “addresses the sharing of resources including staffing, technology and office space, and limitations on the sharing of non-public information,” the proposal noted.
“By setting forth principles-based regulations for vertically integrated market structures, the CFTC is taking a significant step in our continued efforts to support responsible innovation in U.S. derivatives markets,” said CFTC chairman, Michael Selig, in a release.
“This proposal would institute purpose-fit rules of the road that bolster market integrity without stifling novel market structures or imposing excessive compliance costs on registrants,” he added.
The consultation will be open for 60 days following its publication in the Federal Register.