Senator Warren Raises Concerns over CFTC's Proposed Rule, Risks to Financial System

Letter

Dear Chair Behnam:

I am writing to express my concerns about the Commodity Futures Trading Commission's
(CFTC's) proposed rule regarding seeded funds' and money market funds' participation in the
swaps market.1 These rules would weaken margin requirements and restrictions on using money
market funds in uncleared swaps that are currently in place to protect market participants.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 strengthened the
CFTC's regulatory authority to oversee the swaps market -- transactions that were previously
unregulated and at the center of the 2008 financial crisis2 -- and "subject [swap dealers] to capital and margin requirements to lower risk in the system."3 However, the Commission is now
proposing to weaken these existing margin requirements and collateral restrictions that apply to
swap dealers and major swap participants, rolling back important Dodd-Frank Act reforms and
increasing risks to the stability of our financial system.4 I urge the Commission not to move
forward with this proposed rule and maintain existing regulations for seeded funds and the use of
money market funds in uncleared swaps.

Under the CFTC's current regulatory requirements, "seeded funds" that act as investment vehicles
and receive start-up capital from a sponsor are treated as a margin affiliate of the sponsor for the
purposes of triggering the initial margin requirement.5 As such, swap dealers and major swap

1 Federal Register, "Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants," U.S. Commodity Futures Trading Commission, August 8, 2023, https://www.federalregister.gov/documents/2023/08/08/2023-16572/margin-requirements-for-uncleared-swaps-forswap-dealers-and-major-swap-participants.
2 U.S. Government Accountability Office, "Understanding Derivatives One Swap at a Time," June 13, 2018, https://www.gao.gov/blog/2018/06/13/understanding-derivatives-one-swap-at-a-time.
3 U.S. Commodity Futures Trading Commission, "Dodd-Frank Act," https://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.
4 Federal Register, "Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants," U.S. Commodity Futures Trading Commission, August 8, 2023,
https://www.federalregister.gov/documents/2023/08/08/2023-16572/margin-requirements-for-uncleared-swaps-forswap-dealers-and-major-swap-participants.
5 Id.

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participants that are not prudentially regulated must post and collect an initial margin with eligible
seeded funds for uncleared swaps.6 The CFTC initially finalized its framework for margin
requirements in consistency with the U.S. federal prudential banking regulators (Prudential
Regulators) and as part of the Dodd-Frank Act's mandate to adopt "rules establishing margin
requirements for uncleared swaps of [swap dealers] and [major swap participants]" that have no
Prudential Regulator.7 These regulations are in line with Dodd-Frank Act reforms that were
"designed to reduce risk, to increase transparency, and to promote market integrity within the
financial system" by requiring all uncleared swaps to be held to margin requirements, whether
prudentially regulated or not.8

However, the CFTC's Seeded Funds Proposal would change the definition of seeded funds by
deeming them not to have any margin affiliates.9 This change would relieve swap dealers and
major swap participants from the requirement to post an initial margin when they engage in
uncleared swaps in which the calculated margin amount is below $50 million.10 If finalized and
implemented, the proposed rule would differentiate the rules governing swaps between those that
are covered and not covered by Prudential Regulators, introducing inconsistency among U.S.
banking regulators' rules.11 The CFTC proposal would loosen margin requirements that were
designed as "the most basic risk management tool" and considered "best practice and a foundation
for systemic stability"12 -- creating new potential vulnerabilities.

The Money Market Funds Proposal in the proposed rulemaking would allow swap dealers that are
not subject to prudential regulation to use money market funds for eligible initial margin
collateral.13 Currently, the CFTC restricts using money market funds for repurchase or similar
agreements. After the 2008 financial crisis, regulators "implemented reforms to make money
market funds more stable and repurchase agreements more transparent."14 But in March 2022, the
Covid-19 pandemic still led to stresses on money market funds when investors rushed to withdraw

6 Id.
7 Federal Register, "Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants," U.S. Commodity Futures Trading Commission, January 6, 2016,
https://www.federalregister.gov/documents/2016/01/06/2015-32320/margin-requirements-for-uncleared-swaps-forswap-dealers-and-major-swap-participants.
8 Id.
9 Federal Register, "Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants," U.S. Commodity Futures Trading Commission, August 8, 2023,
https://www.federalregister.gov/documents/2023/08/08/2023-16572/margin-requirements-for-uncleared-swaps-forswap-dealers-and-major-swap-participants.
10 Id.
11 U.S. Commodity Futures Trading Commission, "Dissenting Statement of Commissioner Christy Goldsmith Romero on Notice of Proposed Rule Making for Seeded Funds and Money Market Funds," July 26, 2023, https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement072623e#fnt3.
12 Better Markets, "Statement Following CFTC Vote on Margin Rules," press release, September 16, 2015, https://bettermarkets.org/newsroom/statement-following-cftc-vote-margin-rules/.
13 Federal Register, "Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants," U.S. Commodity Futures Trading Commission, August 8, 2023,
https://www.federalregister.gov/documents/2023/08/08/2023-16572/margin-requirements-for-uncleared-swaps-forswap-dealers-and-major-swap-participants.
14 U.S. Commodity Futures Trading Commission, "Dissenting Statement of Commissioner Christy Goldsmith Romero on Notice of Proposed Rule Making for Seeded Funds and Money Market Funds," July 26, 2023, https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement072623e#fnt3.

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money, forcing the Federal Reserve to step in and rescue the funds with taxpayer-backed
bailouts.15 These crises revealed that the "lack of sufficient regulations" in money market funds
make them vulnerable to panic and massive runs that lead to "near-crippling turmoil in short-term
funding markets."16 Furthermore, they suggest that the CFTC has not fully analyzed or prepared to
mitigate the danger of enabling these risks in the financial system. Given these risks, CFTC should
not remove the existing restrictions on swap dealers using money market funds for initial margin
collateral.

The Global Markets Advisory Committee, largely made of industry insiders, recommended these
proposed rules in its Margin Subcommittee Report in 2020 during the Trump administration.17 It is
unclear why the Commission is choosing to propose these rules now, three years later, without
conducting its own additional analyses of whether the changes are necessary or will strengthen the
stability of the domestic financial system. I strongly urge the Commission not to loosen the
existing rules, and not to roll back important Dodd-Frank Act reforms.

Sincerely,
________

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