Statement of Commissioner Caroline D. Pham on Swap Data Reporting Settlement Order and the Examination Process

I am pleased that the CFTC has provided substantial credit to Barclays Bank PLC, a non-U.S. swap dealer, for self-reporting, cooperation, and remediation efforts, including two issues previously identified in a National Futures Association (NFA) exam and self-disclosed to the CFTC pursuant to the swap dealer annual compliance report requirement.[1]This is a move in the right direction for the CFTC, and is a return to a more normal and rational approach to enforcement actions for operational or technical issues with no misconduct, harm to clients, or financial losses.[2]

As reflected in recent settlement orders, the CFTC changed its approach to swap data reporting cases in 2023 to be excessively and disproportionately punitive, and more generally has shifted its enforcement program to focus on registration and compliance instead of the CFTC's mission to prevent fraud, manipulation, and abuse in our markets.

Even worse, when the CFTC is investigating fraud or manipulation and does not find evidence that substantiates the alleged charges-meaning there is no proof of fraud or manipulation-the CFTC abuses the power of the government to get firms to agree to settle for overblown charges regarding oftentimes non-material operational or technical issues.

I question why the CFTC changed its approach to assessing civil monetary penalties in swap data reporting matters in 2023 without sufficient reasoning and justification or fair notice to the public. Swap data reporting did not suddenly become more important in 2023-it has been important for transparency and monitoring of systemic risk ever since the Dodd-Frank Act was implemented in 2010. I hope that the CFTC will continue to correct this misguided change in approach.

I continue to believe that the CFTC must adopt a clear standard for self-reporting and cooperation credit that is applied consistently.[3]Implementing my proposals to improve the CFTC's internal governance and procedures, particularly regarding the process for enforcement recommendations to the Commission, will promote government accountability and provide further transparency and regulatory clarity.[4]

Overall, to achieve the agency's mission, the CFTC must get its priorities straight, stop being an outlier among all U.S. and non-U.S. regulators, and finally implement an effective CFTC examination program for systemically important swap dealers that is risk-based and proportionate in accordance with international standards for regulators. Enforcement is no substitute for the examination process.

The CFTC Has Failed to Implement a Supervisory Approach that Is Risk-Based and Proportionate

This change in the CFTC's enforcement approach to swap data reporting cases is concerning because it further highlights the CFTC's lack of expertise in supervisory oversight of CFTC registrants such as swap dealers, including basic concepts like risk-based supervision and proportionality.

Basel Committee on Banking Supervision Core Principles for Effective Banking Supervision

Although the CFTC is not a member of the Basel Committee on Banking Supervision (BCBS), the CFTC should adhere to international standards and best practices for regulators that oversee banks, the BCBS Core Principles for Effective Banking Supervision, as appropriate and adapted for the CFTC's unique jurisdiction,[5]because the CFTC directly registers and oversees banks as swap dealers (including global systemically important banks (G-SIBs)). The BCBS Core Principles are the de facto minimum standard for sound prudential regulation and supervision of banks and banking systems.[6]

While the CFTC is not per se a bank supervisor, the BCBS Core Principles can nevertheless be used as a benchmark to assess the effectiveness of the CFTC's supervisory systems.[7]For example, under the BCBS Core Principles, the CFTC is not in adherence with certain aspects of Principle 2-Independence, accountability, resourcing and legal protection for supervisors; Principle 3-Cooperation and collaboration; Principle 8-Supervisory approach; Principle 9-Supervisory techniques and tools; and Principle 11-Corrective and sanctioning powers of supervisors. These principles emphasize a supervisory approach that is risk-based and proportionate.

The International Organization of Securities Commissions (IOSCO), of which the CFTC is a member and the current Vice Chair, has issued the IOSCO Objectives and Principles of Securities Regulation that are applicable to market regulators and are consistent with the BCBS Core Principles.[8]A full gap analysis and identification of specific areas for improvement for the CFTC under these international standards is necessary.

International Monetary Fund Financial Sector Assessment Program

The International Monetary Fund (IMF) conducts the Financial Sector Assessment Program (FSAP), which is a comprehensive and in-depth assessment of a country's financial sector and includes the quality of the regulatory and supervisory framework.[9]

In the IMF's 2020 FSAP Financial System Stability Assessment (FSSA) for the United States, the IMF noted, "Supervision of swap dealers is also carried out by the NFA. The CFTC carries out oversight reviews of NFA's supervisory activities, but it has not directly examined swap dealers." The IMF further noted, "At the time of the [IMF's] fieldwork, the CFTC had decided to initiate its own program of direct examinations, which was planned to begin in early 2020." (emphasis added).[10]

In the report recommendations, the IMF stated, "The CFTC should initiate direct examinations of swap dealers by CFTC staff, as had recently been proposed at the time of the [IMF's] fieldwork." (emphasis added).[11]

I question why the CFTC has not implemented a direct examination program for swap dealers in the past four years since the CFTC represented to the IMF FSAP that the CFTC would do so in 2020. Four years is long enough that the CFTC should have been able to make at least some progress towards implementing a swap dealer examination program. Instead, the CFTC has inexplicably changed course and failed to make this a priority.

Importantly, the IMF also identified challenges with the CFTC's cross border regulation of derivatives in its 2020 report:

"143. A further development since the last FSAP [in 2015] has been the adoption of various determinations of equivalence between aspects of U.S. and other jurisdictions' regimes . . . Stakeholders welcomed these agreements, but some considered there was still a lack of clarity about the precise interaction between the regimes and extent of the substituted compliance, and that other obstacles remained."[12]

Proposed CFTC Swap Dealer Examination Program

The Dodd-Frank Act created big shoes to fill for the CFTC by putting the agency front and center in the global regulation of swaps markets with extensive jurisdiction and authority over G-SIBs. While the SEC had a Dodd-Frank Congressional mandate to make sure the SEC would be up to the job, the CFTC had no similar mandate.[13]

The unfortunate result is that the CFTC has not yet matured as an agency to fill those big shoes, and instead keeps tripping up because the CFTC does not have the resources or expertise to adequately implement its new Dodd-Frank authorities through an effective supervisory approach for swap dealers that is risk-based and proportionate. Accordingly, I have previously proposed organizational reforms and a GAO study and recommendations for improvement in order to ensure that the Commission has the internal operations, structure, technology, expertise, personnel, and funding to be effective in our oversight of commodity derivatives markets.[14]

To illustrate the CFTC's challenges, consider that the CFTC has promulgated extensive swap dealer regulations that include prudential requirements such as capital and risk management program rules, which interact and overlap with banking regulations in complex and sometimes duplicative or contradictory ways. Because of the CFTC's lack of recognition and harmonization with other U.S. and non-U.S. regulatory regimes, the CFTC has often had to amend CFTC regulations or issue no-action letters to resolve these challenges. The IMF FSAP in 2020 highlighted this lack of regulatory clarity and the need for progress on cross border regulation and substituted compliance.

It is well past time for the CFTC to establish a systemically important swap dealer examination program that is adequately resourced with qualified bank examiners that have the requisite expertise and experience to supervise G-SIBs in a complex regulatory environment involving both U.S. and non-U.S. regulations. This is especially urgent because I have noticed an alarming trend with respect to the CFTC's use of NFA exam reports and findings in the CFTC's enforcement actions against swap dealers.[15]

The CFTC Must Not Abuse the NFA Examination Process

It is in the public interest to promote transparency in the examination process and a positive and open relationship between NFA and CFTC registrants. Examinations are supposed to find issues-it means that the continuous improvement process is working. It is how issues are identified and remediated, and enhancements to a firm's control framework are made. This is part of operational risk management pursuant to assurance and audit standards and regulatory requirements. An appropriate control environment includes policies and procedures, controls, monitoring, testing, and assessment. Just like going to the doctor for a physical exam, or taking a test in school to see how well you learned a new subject, finding issues is part of the process to diagnose problems and address them early on.

I am troubled that too many of our recent enforcement actions have "mined" NFA exam reports in order to penalize CFTC registrants with hefty penalties for operational or technical issues that do not have any misconduct, harm to clients, or financial losses, and that every other major regulatory authority addresses through an examination program conducted by trained and qualified examiners.[16]These are mistakes, glitches, or other circumstances where systems and processes are not 100% perfect. Bringing an enforcement action against a firm because of a NFA exam report finding, especially if the finding is not a material non-compliance issue, is a "gotcha" approach that is inappropriately punitive and is an abuse of the examination process.

Moreover, whacking firms for exam findings that have already been self-disclosed and remediated before the start of an enforcement investigation-sometimes years before the investigation began-will have the negative consequence of discouraging firms from being open and transparent with NFA during an examination because they will expect a CFTC enforcement action to follow directly onto the NFA exam report. It is a dangerous precedent for the CFTC to set and seriously undermines NFA's mission and the examination process. Problems that go undiagnosed and untreated can turn into something much worse.

The CFTC needs to take a hard look in the mirror and realize that bringing enforcement actions for routine exam findings is not done by any regulator in the world because it is the antithesis of risk-based supervision that is proportionate. This basic failure demonstrates that the CFTC simply does not currently have the expertise to properly supervise a bank and the right resources to ensure that our registrants have robust risk management and compliance programs.[17]

There are thousands of certified examiners with years of specialized training at the Fed and each Federal Reserve Bank, the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corporation (FDIC), the Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and NFA. The CFTC's hubris in thinking that headline-grabbing enforcement actions are a substitute for a properly resourced examination program is unfortunate. As I have previously stated, examination by enforcement is inherently ad hoc, not applied consistently across market participants, and does not provide a horizontal view to inform the Commission of potential systemic risk.[18]

Conclusion

It is time for the CFTC to be held to the same standards as the rest of the world. The Commission must address the CFTC's failure to implement appropriate supervisory oversight for systemically important swap dealers that is risk-based and proportionate and utilizes basic supervisory tools such as examinations. Until then, the CFTC should stop abusing the NFA examination process and undermining the NFA's supervision of swap dealers that has been in place for over a decade since Dodd-Frank.