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Remarks Of DSIO Director Joshua B. Sterling Before The Institute Of International Bankers Risk Management And Compliance Seminar - One Step At A Time: Our Division’s Practical Approach To Overseeing Registrants In A Cross-Border Environment

Date 07/10/2019


Good morning.  I wish to thank the Institute of International Bankers (IIB) for inviting me to participate on this important panel, and its staff for organizing this excellent program.  For decades now, the IIB has played an important role in supporting a fair playing field for internationally-headquartered banks and bank affiliates that conduct business in the United States and under our rules.

This mission continues to be critical today, as we think about certain challenges that lie ahead, including events like Brexit, LIBOR transition, and the adoption and implementation of EMIR 2.2 by the European Commission and the European Securities Markets Authority, respectively.  The CFTC is coordinating closely with our international counterparts to ensure that these events cause as little disruption as possible to the global derivative markets.[1]  While the authority of each regulator is naturally limited to that within its own jurisdiction, we should all work together to ensure that our different rule sets work together as smoothly as possible.

One of the CFTC’s central goals is to ensure that international banks are able to serve their customers, counterparties, and clients in the United States while they balance our requirements with those in their home jurisdictions.  With that in mind, I will address a few key supervisory considerations for my Division over the next year.  I will also talk about substantive areas that should be in the queue for action in that same timeframe.

But, before I continue, please note that these remarks reflect solely my personal views and not necessarily those of the Commission or its staff.

Key Supervisory Considerations – Reinforcing a Culture of Compliance Through Our Five Building Blocks Program

Every Everything: Staying Focused on Complete Compliance with CFTC Rules. 

It is nearly cliché to observe that each registrant is responsible for instilling and propagating its culture of compliance, and that the tone at the top of the organization plays a central role in weaving that culture through every aspect of its operations.  No rule set or amount of supervision is likely to make a wit of difference if business leaders don’t “get it.”

I say nearly cliché because we continue to see areas where our registrants fall short by failing to comply with rules that have been on the CFTC’s books for years.  This issue has come to the fore in my mind with the recent announcement of six actions the CFTC has taken against swap dealers for failures to report swap data under our rules.[2]  There were international banks among the firms sanctioned.  The failures were generally programmatic in nature, and they marked a significant departure from what we expect of our registrants.

There are usually many reasons why “compliance failures” – or, less euphemistically, violations of the law – occur.  Sure, the compliance costs may be higher than you’d like – you’d probably be bad at business if you didn’t feel that way – and the rules may be less than perfect; I have certainly heard that last bit a time or two since becoming Director.  But these points are ultimately poor explanations for falling short of full compliance, and they certainly offer no excuse for the associated breaches.

I can’t help but think that sometimes, at least at the margins, there may be a thought that non‑compliance is a risk worth taking because the future cost of getting caught is likely to be less than the cost of doing it 100% right today.  There may also be a sense that, because some of our rules may need revision, the agency won’t be exacting in its expectations for compliance if a failure does indeed surface.

This leads me to a concern that there may be slippage in compliance cultures that is growing from these sorts of considerations.  This kind of slippage, if it indeed exists, may also stem from shortcomings in management’s tone about the importance of following through on compliance obligations.

If this slippage is occurring, the thinking and rationale behind it could not be more misplaced.  Rules are written to be followed, and the associated costs are the price one pays to conduct business as a CFTC registrant.  Over the coming months, I will be working hard with CFTC colleagues to make sure that the calculus around compliance decisions excludes these kinds of variables and is instead focused on following through, every day, on what our rules require.

In turn, firms should look closely at what they have been doing to ensure compliance with our rules and to take corrective action as needed.  Those efforts should not take place in the vacuum of some legal and compliance whiteboard session, but should encompass all relevant stakeholders in your organization and be driven by clear messaging from the top that compliance matters.

Having articulated these concerns, I am optimistic that we will find many firms take the right approach – which is to get it right under our rules at all times, and to come talk with us when there are practical issues that may be resolved with our input.  While we are less interested these days in issuing one-off relief,[3] we do want to take your insights into consideration as we prepare more general guidance or consider revisions to our rules – steps that are focused on improving compliance industry-wide.

One Step at a Time: Strengthening Oversight with our Five Building Blocks Program

In recent remarks, I laid out in detail the goals and plans for DSIO during my tenure.[4]  While I commend those speeches to you for further consideration, I wish to flag a few highlights for you.

The organizing principles for DSIO are to be purposeful in our actions and to provide certainty in the law to all market participants.  These principles are important, because they promote some important values of the CFTC – namely:

  • to strengthen the resilience and integrity of our markets,
  • to enhance the regulatory experience for market participants, and
  • to be tough on those who break our rules. 

Our Five Building Blocks provide the mechanisms for carrying out our mission.  Each building block reflects a core piece of a complete regulatory program that will further these values.

The building blocks are our Examination Program, Reporting Program, Guidance Program, Enforcement Referral Program, and Rulemaking Program.  These Programs are linked, and interact with each other, toward the common goal of making better use of facts to produce better law.

I will highlight further two of these Programs for this audience:

Our Examination Program will commence in the first quarter of 2020 with thematic reviews of select large swap dealers and commodity pool operators, to understand better how the big shops approach key compliance and operational issues that bear on their importance to our markets.  The thematic reviews will not duplicate or replace NFA’s ongoing efforts.  They are also unlikely to result in formal deficiency findings.  As a matter of fundamental fairness, we will need to publish a formal examinations guidebook before we can do so.  Efforts to prepare such a document will get underway soon.

Our Enforcement Referral Program is being strengthened.  The net effect will be a more focused approach to referrals, so that our coordination efforts with the Division of Enforcement become more programmatic.  Enforcement should support our mission by reinforcing the need for compliance, and we should support Enforcement when we identify a strong possibility of non-compliance in the ordinary course of work.  Director McDonald and I will be collaborating closely to ensure that there is greater ongoing coordination between our Divisions. 

Substantive Areas in Focus for 2020

Cross-Border Swaps Rules.

We anticipate recommending to the Commission later this year a set of rules that would, at their core, codify much of the 2013 cross-border guidance related to DSIO’s regulatory responsibility.[5]  There were certainly a number of steps on the long and winding road between that guidance and today, including a few no-action letters[6] and a 2016 rule proposal.[7]  My sense of the market, though, is that firms have been operating under the 2013 guidance for the duration.

Recognizing that fact, I believe a fundamental rethink of the cross-border approach might have made more sense a few years ago.  I don’t think it would be practical to undertake such an exercise now, years later, after all the money and effort that has been spent to build systems and processes that tie to the 2013 guidance.

I do think it would be practical to take an approach that embeds the following considerations:

First, let’s start with the blueprint on which market participants have relied for over six years.  In doing so, we do not necessarily need to spend much time stepping away from intervening pronouncements other than to state unequivocally that they are being left behind for good.

Second, let’s accept that our markets have many global centers of trade no matter where a particular swap transaction is discussed, documented, or effected.  (I understand this may vary in some respects with how certain security-based swaps trade in a subset of markets, or perhaps in a single market.)

Third, let’s recognize that Section 2(i) of the Commodity Exchange Act should limit the swaps requirements that apply outside the United States.  This would mean that not every foreign subsidiary that trades swaps should be considered, ex ante, to have a direct and significant effect on U.S. commerce.

My Division is working on a proposal based on these practical considerations.  I expect that we will recommend this proposal for Commission action in the coming months.

Swap Dealer Capital Rules.

We expect to move forward on getting to final rules on capital requirements in the coming months.  The Commission originally issued a proposal in 2011, which was followed by a comprehensive re-proposal in 2016 based on important feedback that we received.[8]  The 2016 re-proposal recognized existing capital structures and frameworks.  It also permitted the use of capital models for market and credit risk.  Finally, that proposal recognized foreign-domiciled swap dealers.

The re-proposal was well-received by commenters.  So, as we move forward on final rules for the Commission’s consideration, we will build on these concepts.

Our expectation is to recommend that the Commission re-open the comment period to ask some directed questions focused on getting our rules right.  I encourage you to respond quickly and comprehensively to the request for comment once it is released.  We will be very pleased if these coming next steps lead to final rules being adopted next year.

Phase 5 of Implementation for Uncleared Swaps Margin.

The Commission’s uncleared margin rule implements the initial margin requirements in five separate phases, from September 1, 2016, through September 1, 2020, depending on the size of the swap dealer’s portfolio of non-cleared swaps and the counterparty’s portfolio of non-cleared swaps.[9]  This schedule is consistent with an internationally agreed-upon framework promulgated by the BCBS and IOSCO.

The swaps industry has raised concerns about certain operational difficulties associated with the exchange of initial margin, given the large number of relatively small counterparties encompassed in the rule’s fifth phase.

In recognition of these difficulties, and consistent with work being taken at the international level to revise the existing framework, the Commission has already undertaken certain measures to address possible “congestion” when Phase 5 begins in September 2020, and is contemplating further efforts as well.  I covered these efforts in an earlier speech, which you may review for further detail if you wish.[10] 

Given the audience today, I want to highlight our ongoing efforts pertaining to Brexit and LIBOR transition:

* * * * *

In closing, I would like to thank IIB once more for inviting me to speak with you today.  It is extremely helpful to engage with our registrants from around the world as we focus on our priorities and carry out core programs.

I sincerely hope that this conversation will continue as we move forward with our priorities for the Division and the CFTC as a whole.  Please do not hesitate to reach out and share with us what you see and what you think; every data point and anecdote matters.

My world-class staff and I look forward to working with you.

Thank you for your time.




[1] See, e.g., Joint Statement of the CFTC and the European Commission Following Meeting on Cross-Border Derivatives Regulatory Issues (Sep. 13, 2019), available at

[2] See CFTC Orders Six Financial Institutions to Pay Total of More Than $6 Million for Reporting Failures (Oct. 1, 2019), available at

[3] See New Day Rising: Focusing the Division of Swap Dealer and Intermediary Oversight to Embrace Today’s Challenges and Tomorrow’s Opportunities (Sep. 25, 2019) (“DC Bar Association speech”), available at

[4] See DC Bar Association Speech, supra n.3; What’s Going On: Our Division’s Measured Approach to Key Derivatives Market Issues for Bank-Affiliated CFTC Registrants (Sep. 26, 2019) (“ABASA speech”), available at

[5] See Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations, 78 FR 45292 (Jul. 26, 2013), available at

[6] See, e.g., CFTC Letter No. 13-64, No-Action Relief: Certain Swaps by Non-U.S. Persons that are Not Guaranteed or Conduit Affiliates of a U.S. Person Not to be Considered in Calculating Aggregate Gross Notional Amount for Purposes of Swap Dealer De Minimis Exception (Oct. 17, 2013), available at; CFTC Letter No. 13-71, No-Action Relief: Certain Transaction-Level Requirements for Non-U.S. Swap Dealers (Nov. 26, 2013), available at; CFTC Staff Letter No. 18-13; CFTC Staff Letter No. 18-13, No-Action Position: Relief for Certain Non-U.S. Persons from Including Swaps with International Financial Institutions in Determining Swap Dealer and Major Swap Participant Status (May 16, 2018), available at

[7] See Cross-Border Application of the Registration Thresholds and External Business Conduct Standards Applicable to Swap Dealers and Major Swap Participants, 81 FR 71946 (Oct. 18, 2016), available at

[8] Capital Requirements of Swap Dealers and Major Swap Participants, 76 FR 27802 (May 12, 2011), available at; Capital Requirements of Swap Dealers and Major Swap Participants, 81 FR 91252 (Dec. 16, 2016), available at

[9] 17 CFR 23.161.

[10] ABASA speech, supra n.4.

[11] Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants, 84 FR 12065 (Apr. 1, 2019), available at

[12] Press release, BCBS/IOSCO statement on the final implementation phases of the Margin requirements for non-centrally cleared derivatives (Mar. 5, 2019), available at