On September 28, ISDA responded to a request for comment from the US Commodity Futures Trading Commission (CFTC) on the affiliations between derivatives clearing organizations (DCOs), designated contact markets or swap execution facilities and intermediaries such as futures commission merchants (FCMs) and other market participants. The request for comment also looked at situations where the DCO has only one affiliated FCM, referred to as direct clearing.
In the response, ISDA focuses on the relationship between DCOs and affiliated clearing members (CMs). ISDA identifies various conflicts of interest and proposes mitigants, concluding that existing CFTC regulations do not sufficiently address potential issues when a DCO (as a self-regulatory organization) has supervisory authority over an affiliated intermediary. ISDA notes that some of the mitigants proposed by the CFTC may not adequately address the conflicts of interest inherent in a DCO’s relationship with an affiliated intermediary.
On direct clearing, ISDA identifies several issues that would need to be considered and asks the CFTC to study this further and consult the industry again before allowing such a structure.