Presentation to Ukraine Commodity Market Development Conference The author of the presentation: Kevin Piccoli, Commodity Futures Trading Commission (US)

1. December 5 -7, 2017
Christa Lachenmayr
Kevin Piccoli
Tracey Wingate

2. The statements and documents we will present
are our own opinions and do not represent that
of the Commodity Futures Trading Commission,
its Commissioners or Commission Staff
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3.  Created by Congress in 1974 as an independent
agency with the mandate to regulate US commodity
futures and option markets
 In 1974 the majority of futures trading took place in
the agricultural sector but has become increasingly
varied over time and today encompasses a vast array
of highly complex financial futures contracts
 The CFTC's mission is to protect market users and
the public from fraud, manipulation, and abusive
practices related to the sale of commodity and
financial futures and options, and to foster open,
competitive, and financially sound futures and option
markets
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4. The CFTC Organization
December 2017
Chairman
Giancarlo
Commissioner
TBD
Commissioner
Quintenz
Commissioner
Benham
Commissioner
TBD
General Counsel Inspector General
Legislative Affairs
Public Affairs
Office of Diversity
and Inclusion
Executive Director
Chief Economist Clearing and Risk
Data and
Technology
Enforcement
International
Affairs
Market Oversight
Swap Dealer and
Intermediary
Oversight
Chicago Kansas City New York
Regional Offices
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5.  Guiding Principles
◦ Foster open, transparent, competitive and
financially sound markets
◦ Avoid systemic risk
◦ Protect market users and their funds, customers
and the public from fraud, manipulation and
abusive practices
 It is not safety and soundness of the financial
institutions
 Commodity markets are for risk management
◦ Securities markets are for capital raising
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6.  Require Registration of:
◦ Exchanges
◦ Clearing Houses
◦ Floor Brokers/Traders
◦ Futures Commission Merchants
◦ Introducing Brokers
◦ Commodity Pool Operators
◦ Commodity Trading Advisors
◦ Investment Advisor
 Require licensing of individuals
◦ Tests for IAs, Principles, Financial/Operational Officer
◦ Background check
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7.  Specific definition of what is a commodity
product
◦ Includes:
 Futures
 Options on futures
 Bilateral options
 Forward contracts
 Off-exchange foreign currency transactions
 FX bilateral trades
 Bitcoin
◦ Not spot trades or currency
◦ Not securities/bonds or options on securities/bonds
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8.  Specific products are developed by the
exchanges
◦ Sent to CFTC to review for compliance with
Commodity Exchange Act
◦ CFTC reviews for
 Manipulation
 Industry need
 Fairness/transparency of pricing
 Not for profitability
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9.  Principles based approach
◦ Not prescriptive regulations
 Monitoring of trading and trade processing
◦ Real time
 Position limits
 Publication of trading information
 System safeguards
 Compliance Officer
 Market access
 Prevent market manipulation, disruption
 Financial integrity
 Disciplinary procedures
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10.  Regulations, not principles
 Capital requirement
 Customer segregation requirements
 Books and records, financials, confirmations,
statements
 Notices to customers and CFTC
 Compliance Officer
 Risk management procedures
 Know Your Customer/Anti Money Laundering
 Reports by traders (Large Trader Reporting)
 Business conduct standards
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11.  Financial resources
 Risk management
 Margin requirements
 Participant and product eligibility
 Settlement procedures
 Treatment of funds
 System safeguards
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12.  CFTC may request certification from the FCM that it has
sufficient liquidity to continue operating as a going concern
◦ If such certification is not provided or the FCM is not able
to demonstrate its access to liquidity, the FCM must
transfer all customer accounts and immediately cease doing
business as an FCM
 Require an FCM to take capital charges for under margined
customer, noncustomer and omnibus accounts that are under
margined for more than one business day after a margin call
is issued.
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13.  All futures customers funds deposited with a bank or trust
company must be immediately available
 Standardization of written acknowledgement letter that an
FCM or DCO is required to obtain from a depository holding
futures customer assets
 Depositories must respond to CFTC request for Balance
information
 CFTC to have on-line access to accounts for information
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14.  FCM that carries customer accounts must establish a risk
management program designed to monitor and manage the
risks associated with the FCMs activities including:
◦ Written policies and procedures approved by the governing
body of the FCM
◦ Establishment of a risk management unit that is
independent from the business to administer the risk
management program
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15.  The risk management program includes a supervisory system
that is reasonably designed to ensure that the risk
management policies and procedures are diligently followed
◦ An annual review and testing of the FCMs risk management
program by internal audit or a qualified external, third party
service
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16. In theory, very similar
 Focus on customer protection, not the safety
and soundness of the firm
 Segregate customer assets
 Capital and margin requirements
 Risk management requirements
 Recordkeeping requirements
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17.  What is different?
◦ Not really that much… In theory
◦ Devil is in the details
 Key is in the uniqueness of the products
◦ Futures are highly leveraged
◦ High volatility in the markets
◦ 24/7 trading
◦ More sophisticated investors (???)
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18.  Capital
◦ Focus is on “liquid” net capital under both regs
 Differences for undermargined accounts
 Regulations call for liquid net equity, with liquid being
within 30 days
 CFTC has a new regulation to help ensure the firm is truly
liquid
◦ No adjustment for risk measures other than market
and credit risk
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19.  Customer asset protection
◦ Both have the same concept of segregate and “lock
up” customer assets
 Commodity regs require 24/7 compliance
 Restrictions on withdrawal of excess assets
 Require a target residual to provide a cushion
◦ Commodity accounts have different legal
protections:
 No SIPC or FDIC insurance
 Foreign futures and FX customers are general creditors
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20.  Risk management requirements are tighter in the
futures world
◦ More specific requirements covering all risks
 Operational
 Legal
 Affiliate
 Compliance
 IT, including cyber
 Capital controls
 Risks associated with the safekeeping and
segregation of customer funds
◦ Specific reporting to the Board and CFTC
 Quarterly risk exposure reports
 Annual assessment report
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21.  Role of the Chief Compliance Officer more
defined in CFTC regs
◦ Grew out of industry events
◦ Annual report to Board and CFTC
 Certified by CCO
 Qualification of accountants is more focused
in CFTC regs
◦ Futures dealers can be smaller organizations who
tend to hire local CPA
◦ More complex computations requires a specific
knowledge of regs
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22.  Given uniqueness of products, disclosures are
more prescriptive
◦ Customer assets not protected by government
funds or insurance
◦ Specific firm disclosures
 Business activities and capital applied against each
business
 Breakdown of customer business – types of accounts,
markets traded, clearing houses and carrying brokers
used, depositories, etc.
 Disclosure of material risks of the FCM and how they
may impact customer assets
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23. ◦ Specific firm disclosures, cont.
 How customers may file a complaint
 Financial data
 Summary of current risk practices, controls and
procedures
◦ Additional notice filing requirements
 Material changes in operations of the firm
 Change in senior management
 New or terminated business line
 Change in clearing or banking arrangements
 Forward reports from other US regulators
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