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From Securities Regulation Daily, June 22, 2016

Commissioner Bowen urges CFTC to strengthen corporate governance for derivatives entities

By Lene Powell, J.D.

A stronger focus on corporate governance is the best tool to re-align focus away from short-term profits and "quarterly capitalism," said CFTC Commissioner Sharon Bowen in an address to the Managed Funds Association Forum 2016. Bowen would like to see a number of ideas to strengthen governance for CFTC-regulated entities included in a re-proposal of corporate governance rules, including measures to increase board diversity and independence, establish fitness standards for directors, limit tenure for independent members of Audit and Compensation Committees, increase NFA oversight of swap execution facilities, and require registration and testing of swap intermediaries.

"Based on my 30-plus years on Wall Street, I’ve learned that everything—communication, a culture of compliance, a focus on reasonable risk-taking, and an appreciation of mission—flows from governance. It’s not just another tool in our regulators’ toolkits," said Bowen in prepared remarks. "Better governance decreases systemic risk. Better governance increases profits. Better governance acts as a superstructure on which all other market and proscriptive regulations are built."

Bowen noted that two derivatives clearing organizations (DCOs) are already subject to governance regulations. She said she largely supports CFTC governance rules proposed in 2010 and 2011, and believes more needs to be done.

Knowledgeable, independent boards. Bowen outlined a number of measures to make boards of directors more effective and independent.

  • Standards for directors: The CFTC should set both qualitative and quantitative standards to ensure that directors have sufficient experience in the industry and are fit to serve. Civil settlements with the CFTC or other financial regulators for misconduct should prevent or limit board membership for a number of years. The CFTC should require that the board’s membership be reviewed annually.
  • Tenure: Although sustained board experience can bring significant benefits including institutional knowledge, it can also compromise independence. The CFTC should consider limiting the tenure of independent members of the Audit and Compensation Committees of DCOs, DCMs, and SEFs to a "meaningful number of years." Directors could stay on beyond that time but would not be considered independent.
  • Diversity: The CFTC should seek to expand an existing diversity mandate for boards of designated contract markets (DCMs) to all registrants. Also, to the extent allowed by law, the CFTC should require companies to disclose the percentage of women and minorities who serve as either board members or senior managers.
  • Culture: The CFTC should require the board to annually review any ongoing enforcement or criminal actions involving the entity, particularly actions involving market manipulation, and devise ways to prevent similar events in the future.

Different SEF oversight. Swap execution facilities (SEFs) should not be their own self-regulatory organizations (SROs), said Bowen. There should be an SRO for all the SEFs, whether it’s the National Futures Association (NFA) or another SRO. Bowen believes that turning over enforcement and surveillance to an SRO would increase enforcement efficiency, reduce SEF conflicts of interest, standardize rules, and reduce costs for SEFs. She noted that this measure would require a statutory change.

More supervision of swap intermediaries. To give the CFTC more information about who exactly is intermediating trades for the market, Bowen urged that the CFTC should require registration and testing of all swap intermediaries. Registration would not necessarily need to be directly with the CFTC; it could be with the CFTC, the NFA, or another SRO.

The CFTC also needs to craft a robust testing regime for swap intermediaries, said Bowen, pointing out that FINRA has testing requirements for registration as a securities representative. Although the NFA requires the Series 3 National Commodity Futures Examination for registration as a sole proprietor or associated person of an FCM, RFED, IB, CTO, or CTA, applicants are exempt from this examination if their activities or the firms’ activities are solely limited to trading or brokering swaps. Bowen believes there is a disconnect here.

"There is no good reason why a person must take a detailed examination before he can become a futures broker, but the same person can become a swaps broker without ever having to sit for even a five minute examination," she said. "That just doesn’t make any sense."

Bowen also recommended that the CFTC look at fiduciary rules being implemented by the Department of Labor and SEC to see if they can be replicated in the derivatives space.

MainStory: TopStory CFTCNews CommodityFutures CorporateGovernance Derivatives DirectorsOfficers FinancialIntermediaries Swaps

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