Comment Text:
Greetings,
I align strongly with Chairman Christy Romero's sentiments expressed in the following link:
https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement062823
The prospective integration of clearinghouses with customer-facing intermediaries, as outlined, raises concerns about its impact on market stability, investor safeguarding, and overall market risk reduction. The proposed regulatory paradigm shift should not be embraced under any circumstances. Rather, it appears to transfer a substantial share of risk and leverage to a vertically integrated clearinghouse—effectively a monopoly—while diminishing both the visibility of risk and the efficacy of a naturally evolving corrective mechanism.
This novel market framework, along with its accompanying regulatory proposition, merits rejection in its entirety.
One resonating statement from Romero's discourse holds particular relevance: "Our clearinghouse rules were not set up to protect customers, because they were written with the idea of a separate intermediary that interacted with customers and had regulatory obligations for customer protections."
The elimination of the intermediary reconfigures regulatory dynamics, weakening customer protection and potentially permitting investor exploitation due to the absence of adequate safeguards. In the absence of regulatory oversight and consumer security, investor confidence in the market is eroded, a critical cornerstone for a functional market. Furthermore, the alignment with clearinghouses' prioritization of customer and investor interests is dubious.
Assurance of equitable trade execution for the investor can no longer be assured. The landscape now features reduced competition, diminished regulatory scrutiny, and no imperative for clearinghouses to adhere to equitable trade execution standards.
As per Romero's subsequent observation, a vertically integrated market stifles competition. Beyond the dissolution of regulatory safeguards aimed at holding clearinghouses accountable, the vertical integration concentrates power within a solitary entity. This transition dampens the role of competition in market self-regulation, as articulated in her statement:
"The traditional market structure contains inherent bumper guards—market discipline resulting from differing interests of different entities—that promote financial stability. Expanding to a novel vertically integrated market structure for example, for clearinghouses raises particular concern because the resilience of our clearing system depends in significant part, on the disciplining effect that clearing members can have on clearinghouses. Because clearing members may be asked to mutualize losses and accept risks in a default waterfall, they have much at stake in the decisions made by clearinghouses. They often have a different perspective, and do not always have fully aligned interests with the clearinghouses. What happens to that disciplining effect where the clearing member (the futures commission merchant (FCM)) is owned by the same parent company as the clearinghouse?"
The outcome is a conspicuous absence of disciplinary influence, with the determination of accepted risks and potential losses residing with the new clearinghouse monopoly. Accountability, competition, and corrective mechanisms are replaced by unchecked risk-taking within the vertically integrated framework. This scenario draws unsettling parallels with the unchecked risk-taking seen in credit default swaps and mortgage-backed securities, culminating in the 2008 financial crisis. To ignore history is to invite its repetition. While not identical, the present vertically integrated clearinghouse model shares the vulnerability of unchecked risk-taking without regulatory insight or competitive balance, potentially yielding a hazardous market environment.
Equally notable is Romero's observation regarding the omission of discussions on vertical integration of crypto platforms: "Conspicuously absent from this request for comment is a discussion of vertical integration of crypto platforms. This market structure has come up the most in that context, given that many crypto companies are vertically integrated in the unregulated space. Appropriate regulation does not mean that we automatically port over to regulated markets a structure that exists in the unregulated space."
This concern bears immense significance. The proposed model mirrors the structure of the unregulated crypto space, known for its scant investor safeguards. The precedent set by fraudulent cases like FTX underscores the imprudence of replicating an unregulated structure.
Romero's foresight, expressed prior to the fall of FTX, is particularly prophetic: "Crypto-related companies may serve multiple functions that are separated into different entities in traditional finance. An exchange may also be a market maker, clearinghouse, lender, and/or custodian. These conflicts present significant risk that in a regulated environment would be disclosed and resolved. In an unregulated environment, the full extent of these conflicts may not be disclosed or resolved, which could lead to cascading losses and contagion risk.”
Remarkably, the risks she outlined materialized in the binance domain. Yet, the proposed regulatory shift now appears to emulate the binance structure, despite its demonstrated susceptibility to cascading losses and contagion.
Romero's testimony to Congress in 2009, addressing the 2008 financial crisis, is instructive: "In my Congressional testimony, I cited to then-Treasury Secretary Timothy Geithner who told Congress on June 18, 2009, that the rise of new financial instruments “that were almost entirely outside of the Government’s supervisory framework left regulators largely blind to emerging dangers.” The same could be true of a vertically integrated market structure. Without visibility into the risks, we would be largely blind as to emerging dangers to customers and financial stability. Public comment can help give visibility. However, we may still lack visibility into unregulated affiliates."
The proposed vertical integration amplifies market risks, curtails regulatory oversight, and diminishes transparency and reporting from consolidated clearinghouses. The precedent of history, elucidated in these remarks, underscores the propensity for unfettered risk-taking when profit is the driving force.
This vertical integration introduces additional risks without commensurate benefits. Therefore, I advocate against the implementation of this new regulatory proposal in any capacity. It appears to vest greater authority in clearinghouses, eliminate competition, and prioritize profit over risk mitigation, potentially exposing investors and customers to heightened risk, contagion, and cascading losses.
