The following letter was sent to Christopher Kirkpatrick, Secretary of the Commodity Futures Trading Comission on September 18, 2023.
Dear Mr. Kirkpatrick,
The Institute for Agriculture and Trade Policy (“IATP”)1 appreciates the opportunity to respond to some of the questions in the ANPRM.2
It is an understatement to say that the ANPRM is timely. If we think of effectively implemented RMPs as tools to obviate or reduce the need for supervisory intervention, 2023 was not a good year for RMPs. It may be gratifying, for example, that the Federal Deposit Insurance Corporation (FDIC) admitted having been lax about analyzing First Republic Bank’s liquidity risk before FDIC shut the bank down in May and sold most of its assets to JP Morgan Chase.3 More gratifying still would have been if the FDIC had the supervisory resources and the regulatory culture to intervene to prevent First Republic’s reckless dependence on uninsured deposits and unmitigated interest rate risk for its growth.
For the persistently under-resourced Commission, a revised RMP regulation with clear lines of accountability and a framework to analyze new FCM and SD risks will help prevent unmanaged or under-managed risks from disrupting markets and contributing to insolvencies. However, having ample supervisory and regulatory resources cannot ensure that RMPs alone will prevent insolvencies and subsequent bailouts, as Better Markets has demonstrated in its analysis of the contribution of Federal Reserve Bank supervisory failures to the Silvergate Bank, Signature Bank, Silicon Valley Bank and First Republic insolvencies and bailouts.4 A strong RMP Regulation must enable the Commission to use its data monitoring and enforcement resources proactively.
Overview
In this letter, we contend that both the Commission and Commission registrants will benefit by amending 17 CFR Parts 1 and 23 to anticipate the SD and FCM deployment of artificial intelligence (AI) models in RMPs (as well as in their business units). We also request that the Commission include climate-related financial risk in a proposed rule, preferably as an enumerated risk in reporting to the Commission in Risk Exposure Reports (RERs). We also call for standardization of the RERs to enable the Commission to compare and aggregate risk profiles among FCMs and SDs. With the help of the National Futures Association (NFA) in reviewing monthly SD and FCM risk data, the Commission will be better able to investigate proactively potentially unsustainable risks among CFTC registrants. Proactive investigation to prevent unsustainable risks is preferable to reacting with Commission enforcement actions and fines that seldom prevent recidivism among the largest parents of SDs and FCMs.5
Questions concerning Risk Management Program Governance
Question 1 and parts on the definition of “governing body”
The current definition of “governing body” in 17 CFR Part 23.600 allows for the possibility that the chief executive officer also functions as the governing body, a fundamental conflict of interest: “The chief executive officer of a registrant, or any such board, body, committee, or officer of a division of a registrant, provided that the registrant's swaps activities for which registration with the Commission is required are wholly contained in a separately identifiable division.” SDs are usually a division of a parent firm. To allow the CEO to act as the “governing body” of the SD means that the Risk Management Unit’s (RMU) operation, even if legally separated from the SD’s “business unit,” may report to nobody other than the CEO. Even the most diligent CEO, who oversees both the RMU and the business unit, should not be permitted to be the final arbiter of the performance of the RMP. That final arbiter should be the board or similar governing body.
Because the board or similar governing body has numerous responsibilities, the definition of “governing body” should stipulate that a subcommittee of the governing body should review the RMP at least annually or “as needed” and the RER at least quarterly or “as needed.” The subcommittee should report its findings to the full board or governing body, including any recommendations on the RMP or RMU operations. This definition of “governing body” would apply equally to FCMs.
