CFTC Division of Swap Dealer and Intermediary Oversight ("DSIO") Director Joshua B. Sterling provided clarification on the CFTC's announcement that it would conduct "targeted thematic reviews" of CPOs and swap dealers.

In remarks before the Alternative Investment Management Association, Mr. Sterling stated that the thematic review program is part of the CFTC's recently announced "Five Building Blocks" Program, which is designed to make the CFTC the "global standard for sound derivatives regulation." The two principal goals of the thematic review program are, according to Mr. Sterling, to (i) improve the agency's understanding of market participants and activities so as to identify "blind spots" in its oversight and (ii) improve communications between the DSIO, on the one hand, and CPOs and swap dealers, on the other.

Mr. Sterling addressed questions and concerns about the thematic review program, reporting that it is designed to:

  • be targeted in scope and help educate the DSIO on registered firms;
  • help the DSIO evaluate potential rule amendments to CPO and swap dealer requirements;
  • be completed onsite and within five business days;
  • review a limited number of CPOs and swap dealers that have a significant impact on the derivatives market; and
  • not be duplicative of NFA examinations.

Mr. Sterling stated that the thematic reviews would "look[] at key issues across firms for the purpose of providing general guidance and informing potential future rulemakings . . . [and] are intended to enhance our oversight abilities." He said the results of the review would be kept confidential.

Mr. Sterling emphasized that the DSIO is conducting these reviews for education, not enforcement purposes. However, he said that the DSIO communicates with the Division of Enforcement regularly and reserves the right to change direction during the reviews.

Commentary / Steven Lofchie

Mr. Sterling remarked that the "DSIO has not itself conducted direct reviews of CPOs and swap dealers, yet we are the registrant oversight division of the federal regulator for the derivatives markets." 

Consider that comment for a moment. Does it describe a good way to regulate? Should the entity that makes rules be largely separate from the entity that oversees those rules? This is not a question that is specific to the CFTC. Not only are the SEC's rules largely enforced by FINRA, but even within the SEC, the Divisions that make the rules no longer examine for compliance (that task has been given off to the Office of Compliance Inspections and Examinations). Though these separations may produce efficiencies, they may not be the best way to create financial regulation.

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