Better Markets applauds the CFTC’s proposed rules for designated contract markets, but notes critical oversights

WASHINGTON- Better Markets submitted a comment letter to the Commodity Futures Trading Commission (CFTC) in response to a rule proposing new rules and amendments to existing regulations relating to Designated Contract Markets (“DCMs”) and Swap Execution Facilities (“SEFS”).

Why is this important? The proposed rule significantly changes how SEFs and DCMs manage and report conflicts of interest, underscoring the CFTC’s commitment to rigorous oversight. Formalizing improved governance efficiency standards under DCM Core Principle 15 and SEF Core Principle 2 sets more stringent regulatory expectations. The proposal strengthens the role of Chief Regulatory Officers and Chief Compliance Officers by extending their responsibilities for proactive conflict management. New rules on Regulatory Oversight Committees will support independent compliance assessments, while changes to capital transfer notifications aim to harmonize procedures and thresholds, increase transparency and accountability in regulatory compliance and market functioning.

What we said. The CFTC’s efforts to propose new regulations to improve market governance are commendable. However, the proposed rule does not address conflicts of interest in vertically integrated market structures in which a single owner controls multiple market functions such as exchange, broker-dealer, and custodian. This structure was first approved by the CFTC in December 2023. Despite this, the proposed rule does not provide adequate regulatory resources to manage the significant risks these structures pose to market integrity and customer protection. Instead, the proposed rule deferred addressing such issues to a future rulemaking process, despite the urgent need for regulatory action. This deferral indicates a delayed commitment to address critical vulnerabilities and leaves significant gaps in the regulatory framework.

Bottom line. Better Markets appreciates the rules proposed by the CFTC to harmonize and strengthen the regulatory framework for DCM and SEF. These changes aim to enhance market integrity by establishing strong standards of governance efficiency and comprehensive conflict of interest rules. Regardless, the CFTC has unfortunately chosen not to propose measures to mitigate the risks arising from vertically integrated market structures. The absence of these protections in the current rulemaking highlights the significant oversight by the CFTC. The CFTC missed a key opportunity to directly address these vulnerabilities, thereby perpetuating gaps in the regulatory framework and undermining efforts to effectively mitigate conflicts of interest that threaten market fairness.

You can read the full comment here.