After the swearing in of a new chairman in July, the U.S. Commodity Futures Trading Commission is staffed up and getting down to business. And based on recent remarks from Joshua Sterling, the agency's new director of the CFTC's Division of Swap Dealer and Intermediary Oversight, that business will include an increased focus on the oversight of swap dealers and asset managers.
In remarks on Sept. 25 before the District of Columbia Bar Association, Sterling stated his intentions to allocate more of the DSIO's examination resources to swap dealers and commodity pool operators, an agency registration category that includes certain hedge funds and other types of fund managers that use futures and other derivatives in their trading strategies.
He said the increased focus was driven by two factors: the increasing number of swap dealers that have registered with the agency since the implementation of Dodd Frank, and the significant capital managed by the asset management industry, which elevates its importance to derivatives markets.
Sterling, who was a partner at the law firm of Morgan Lewis before joining the CFTC in August, went on to say that early next year the division will launch "thematic reviews" of certain large swap dealers and commodity pool operators that will help the agency understand the risks these entities pose to derivatives markets.
"We are designing a program of targeted thematic reviews of select large swap dealers and CPOs that will commence in the first quarter of 2020," Sterling said. "These reviews will be carried out directly by division staff."
He explained that these are "important actors in our markets" and the agency needs to understand how they approach "key compliance issues like risk management and risk reporting." He also said he expects to announce the findings of these reviews "later next year."
The DSIO primarily oversees intermediaries such as commodity pool operators, futures commission merchants, introducing brokers, swap dealers and major swap participants. Historically the division was mainly focused on FCMs and IBs, but in the wake of Dodd Frank, it has the added responsibility of overseeing intermediaries in swap markets.
At Morgan Lewis, Sterling represented a number of asset managers, including the sponsors of exchange-traded commodity pools, registered investment companies, and other pooled investment vehicles, and helped them structure their derivatives activities in compliance with the Dodd-Frank Act and the requirements of the CFTC and the Securities and Exchange Commission.
During his remarks, Sterling touched on two other areas of importance to derivatives market participants:
Automated Trading: Sterling noted that automated trading was an area of interest to CFTC Chairman Heath Tarbert and confirmed that the agency will revisit Reg AT, a rulemaking proposed several years ago to address concerns about the risks of high-speed trading. Sterling did not provide any details on how the agency plans to address this issue, but he expressed skepticism about one of the more controversial provisions in the original proposal—collecting the software code that runs automated trading systems and storing that code at the agency. He added, however, that he believes the CFTC should have the ability to test automated trading systems.
No-Action Relief: Sterling indicated that DSIO was moving away from issuing no-action letters to individual companies in favor of more general industry guidance. He specifically noted that DSIO was not planning on responding to a significant number of the currently pending no-action requests that it has received. He explained that the division will focus on providing guidance "applicable to all, rather than taking on issues one by one for individual firms."
