CFTC Chief of Staff Updates on Project Kiss

The progress of a project to simplify and streamline regulations at the Commodities Futures Trading Commission (CFTC) was presented at a major press club.

The National Press Club is the premier organization for Washington, DC journalists and their sources. Everyone from Bob Woodward to Golda Meir and Muhammad Ali have all spoken there; on February 12, 2018, the CFTC Chief of Staff Mike Gill was given the honor to speak about Project KISS, keep it simple stupid, the CFTC’s initiative to simplify and streamline regulations.

“Project KISS is an attempt to enhance the application of rules and practices in a policy-neutral way.” Gill stated.“We are working to make Legislative and Executive direction more effective and efficient.

“This is a matter of necessary housekeeping; time to simplify and clean up the clutter. And, we found that, in forty years, we had accumulated a moderate amount of complex clutter.

“The goal is to become better regulators, which in turn leads to more efficient markets and greater economic growth.”

Gill said since announcing the project CFTC also asked for suggestion from the public and they received 149 comments from the public and another 51 proposals from staff.

In this speech, Gill provided specific proposals in three areas: Division of Clearing and Risk, Division of Market Oversight, and Division of Swap Dealer and Intermediary Oversight

Division of Clearing and Risk (DCR)

Of DCR, Gill noted: “The Division of Clearing and Risk (DCR) is considering recommending a proposed change to codify in regulation the process the Commission has followed in granting exemptions from Derivative Clearing Organization (DCO) registration. The benefits of this would be greater transparency in the DCO exemption process, making it easier for clearinghouses to seek an exemption; and reduced staff time and resources required to process clearinghouse requests for exemption.

“Another proposed set of changes DCR is considering would involve amending various DCO regulations. For example, one change would codify an interpretative letter that gives DCOs some flexibility in determining when the customer margin ‘bump-up’ rule – which requires customer initial margin to be greater than clearing member initial margin – applies. Another change would eliminate the requirement that DCOs petition for a Commission order when seeking to hold cleared swaps customer collateral in a futures customer account, allowing it to be done by rule filing, consistent with the process for holding futures in the swaps customer account. And another change would eliminate the need for DCOs that require full collateralization for positions to comply with certain risk management standards.”

He also proposed to “codify existing no-action relief through amendments to the Commission’s required clearing rules for certain small bank holding companies, savings and loan holding companies, and community development financial institutions to qualify for an exemption to the clearing requirement, and to codify existing no-action relief relating to an exemption for swaps between affiliates.”

Division of Market Oversight (DMO)

In the DMO, Gill proposed to “to revisit, revise and re-propose guidance on peaking supply contracts, including to clarify that other similar customary commercial agreements are not swaps.

“Another proposed change would be to codify the no-action letter DMO issued last year with respect to notice filing requirements under the final aggregation rule for position limits. This change would clarify when an entity must submit a notice filing to claim an exemption from aggregation of position limits.”

Division of Swap Dealer and Intermediary Oversight (SDIO)

With regard to the SDIO, Gill noted, “several proposed changes would codify no-action letters for swap dealers related to trading activity. One would incorporate permanent no-action relief, some of which has been in place for years, into the regulations. For example, it would codify NAL 13-11 to allow swap dealers to allocate disclosure obligations to other swap dealers acting as executing dealers in prime brokerage transactions. Another proposal would codify NAL 13-70 to provide exceptions to business conduct and documentation requirements for swap dealers entering into ‘intended to be cleared swaps’ on SEFs. Another swap dealer-related proposal would codify NAL 17-12 to permit SDs entering into swaps with separately managed accounts to treat each account of the same legal entity as a separate counterparty for purposes of applying a maximum Minimum Transfer Amount (MTA) of $50,000 per account.”

He continued further stating; “we have identified several swap dealer business conduct standard rules where amendments, guided by our implementation experience or Project KISS comments, indicate efficiencies can be achieved. These changes would add flexibility for different types of swap dealers and simplify and clarify requirements. We would also simplify risk management rules (1.12 for FCMs and 23.600s for swap dealers) to allow more effective programmatic risk management rather than prescriptive policies and procedures that don’t apply for many registrants.

“For example, we would modify quarterly reporting obligations in light of new National Futures Association monthly risk reporting. We would adjust risk unit reporting line requirements to accommodate different types of swap dealers. We would simplify segregation notice requirements to reduce burden and increase potential for more segregation. We would modify SD reconciliation requirements that overlap with reconciliation required by subsequent margin regulations.”

The National Futures Association is a so-called Self-Regulatory Organization (SRO), which provides licensing for futures dealers.

An SRO is created by the federal government but then functions as an independent regulator.

FINRA, or the Financial Industry Regulatory Authority, functions in a similar manner regulating stock broker/dealers.

CFTC Chairman Christopher Giancarlo first announced Project Kiss in March 2017 and has since put great emphasis in the project.

In August, he separately announced an overhaul to SWAPs data reporting, also as part of Project KISS.