The Commodities Futures Trading Commission (CFTC) has formally issued a Notice of Proposed Rulemaking targeting conflicts of interest and governance across affiliated derivatives entities. Amending CFTC Regulations Parts 37, 38, and 39, along with Rules 1.52 and 1.55, the proposal aims to establish a unified regulatory framework for vertically integrated market structures.

Background and Context

Historically, commodity and derivatives markets operated under a clear structural separation between separately owned exchanges, clearinghouses, and market intermediaries. In recent years, the industry has seen continued growth in affiliations where trading facilities, clearing entities, market makers, and futures commission merchants (FCMs) operate under common corporate ownership.

According to Chairman Michael S. Selig, the proposal aims to balance market growth with supervisory oversight:

“By setting forth principles-based regulations for vertically integrated market structures, the CFTC is taking a significant step in our continued efforts to support responsible innovation in U.S. derivatives markets,” said Chairman Michael S. Selig. “This proposal would institute purpose-fit rules of the road that bolster market integrity without stifling novel market structures or imposing excessive compliance costs on registrants.”

Key Regulatory Provisions

  1. FCM Oversight and Self-Regulatory Organizations (Parts 1 & 38)
  • DSRO Prohibition: SROs are prohibited from acting as the Designated Self-Regulatory Organization (DSRO) for their own affiliated FCMs.
  • Mandatory Independent Surveillance: SROs with an affiliated FCM must delegate the financial surveillance of that affiliate to an independent third-party SRO.
  • Regulation 1.52 Adjustments: Non-affiliated FCMs are granted the explicit right to elect a registered futures association (such as the National Futures Association) as their DSRO to avoid oversight by a competitor-affiliated exchange.
  • Independent Reporting Lines: Staff executing self-regulatory functions must report directly to the board of directors or a designated Regulatory Oversight Committee (ROC) to avoid commercial interference.
  1. Exchange and Clearinghouse Mitigation (Parts 37, 38, and 39)
  • Principal Trading Restrictions: The rules establish limits on DCMs hosting affiliated principal trading firms, alongside conditional exceptions for affiliated market makers.
  • Structural Safeguards: Regulated entities (SEFs, DCMs, and DCOs) with affiliated participants must implement strict operational firewalls:
    • Systems: Information technology and surveillance systems must logically segregate non-public market data from affiliates.
    • Personnel: Operational, market oversight, and compliance staff cannot be shared between affiliates (excluding specific administrative or system-safeguard roles).
    • Office Space: Physical separation is required between the office spaces of registered entities and their affiliated market participants.
  • Clearing Oversight: Derivatives Clearing Organizations (DCOs) face heightened standards, public disclosure obligations, and risk-management safeguards when handling affiliated clearing members.
  1. Expanded Public Disclosures (Part 1 & Part 38)
  • Regulation 1.55 Disclosures: FCMs must explicitly disclose affiliate relationships with SEFs, DCMs, or DCOs directly to clients.
  • Exchange Transparency: DCMs must publicly disclose affiliate relationships on their websites, rulebooks, and trading platforms.

Public Comment Window

The CFTC is accepting public comments on all aspects of the proposed rules, including potential alternatives, implementation timelines, and operational costs. Comments must be submitted within 60 days following the proposal’s publication in the Federal Register.