This week the US CFTC announced (click here) the approval of Final Rules to amend its large trader reporting regulations for futures and options under Part 17 of the CFTC’s regulations.
Part 17 obligates certain firms to report daily position information to the CFTC who uses the data for a wide range of supervisory activities, including for market manipulation surveillance, the enforcement of speculative position limits and forming the basis for the CFTC’s weekly Commitments of Traders (“COT”) report. Last June the CFTC announced (click here) a proposed rule amendment for industry comment. According to the CFTC, 12 substantive responses were received and considered before approving the Final Rule (the final text published in the Federal Register may be found here).
The current submission standard and data fields used in large trader reports have been in place since 1986 and have remained largely unchanged since the last amendments were made in 1997. The amendments approved by the CFTC transition this legacy reporting format to the Financial Information eXchange Markup Language (or “FIXML”) and updates several reported data elements and associated guidance. The changes are aimed at streamlining the CFTC’s data collection process. The final rules also provide for the publication of a separate Part 17 Guidebook (click here). The Guidebook contains the technical detail necessary to report under the new FIXML standards.
While Commissioners Johnson and Mersinger were highly supportive of this development (click here and here), Commissioner Pham was somewhat scathing in her dissent (click here) over certain aspects of the Final Rule in relation to fair notice and due process concerns as outlined below.
The first issue is the new delegation of authority made to the Director of the Office of Data and Technology (ODT) in Regulation 17.03(d) to determine the “form, manner, coding structure, and electronic data transmission procedures for reporting the data elements in Part 17 appendix C and to determine whether to permit or require one or more particular data standards”. Commissioner Pham noted the following in this regard commenting “I find it deeply troubling and against all common sense that the Commission is making a new delegation of authority to an office that no longer exists at the CFTC.”
Her concern stems from the fact that the new rule delegates authority to a “ghost office” to make unilateral, key decisions in relation to reporting under the revised rule that may cost firms millions of dollars to implement thereby negating any certainty for market participants. As per this announcement by the CFTC in 2020, the ODT was merged into the new “Division of Data” – clearly an issue given the final rule mentions the ODT no less than 73 times!
The second issue is the combination of delegating reporting changes to the ODT along with the failure to include a reasonable notice standard in the regulation under 17.03(d). The Commissioner’s concern is that even a minor change to reporting requirements decreed by the ODT Director will require firms to allocate technology budget and resources to effect the necessary changes. She finds the lack of a notice standard to be inexplicable, sharply noting “Considering the CFTC’s aggressive enforcement posture towards pursuing reporting violations with a strict liability standard and no materiality threshold, resulting in seven-figure penalties for anything less than 100% perfection, I am deeply concerned about using delegated authority to change reporting standards without reasonable notice requirements in the regulation.”
The Final Rule is effective 60 days after publication in the Federal Register. Reporting firms must comply with the new requirements two years after publication. Compliance teams with large trader position reporting obligations are advised to notify their internal technology teams responsible for this development, along with the detailed Guidance document, so that the relevant project planning may commence.