Comment Text:
Dear Commodities Futures Trading Commission,
I am writing to express my deep concerns regarding the proposed new regulatory framework for vertical integration of clearinghouses with customer-facing intermediaries. This comment letter will be in alignment with Commissioner Christy Romero's insightful statement, which can be found at the following link: https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement062823
I believe that the implementation of this new market structure would pose significant threats to market stability, investor protection, and overall market risk reduction. The suggested regulatory overhaul, by allowing a vertically integrated (potentially monopolistic) clearinghouse to assume greater risk and leverage, while simultaneously diminishing the presence of risk oversight and a naturally occurring disciplinary feedback mechanism, can only be described as a dangerous proposition to the health of financial markets.
Commissioner Romero astutely points out that the traditional clearinghouse rules were crafted to protect customers, operating under the premise of a distinct intermediary with regulatory obligations for customer safeguards. However, with the elimination of this intermediary, the framework significantly diminishes customer protection and potentially exposes investors to abuse due to a lack of regulatory oversight.
Confidence in the market is paramount for its proper functioning. Any shift towards reduced regulatory oversight and consumer protection would undermine this confidence. As Commissioner Romero highlighted, the proposed vertically integrated structure could lead to a loss of competition and the ability of the market to self-regulate effectively. This is concerning, especially considering the potential for market manipulation, lack of risk insight, and a diminished disciplining effect on clearinghouses. These are issues that already exist and need to be fixed. This is especially true when you consider fairly recent market upheavals and the threat of future ones. A vertically integrated market structure is not the proper course of action in my opinion. It will only exacerbate the major problems in our markets.
The risks posed by this new market structure are not to be taken lightly. As history has demonstrated, neglecting to address emerging dangers can lead to catastrophic consequences, as evidenced by the 2008 financial crisis. Once again, I echo Commissioner Romero's call for a comprehensive study of the potential risks and consequences, particularly those impacting customers and financial stability. The analysis should delve into conflicts of interest, clearing system risk, concentration risk, contagion risk, and more while striving to maintain a "same risk, same regulatory outcome" approach that prioritizes customer protection, market stability, and transparency. I see the request for comment already has these questions taken into account and I just wanted to reiterate their importance.
Furthermore, I am concerned about the potential alignment of the proposed vertically integrated market structure with the model observed in the unregulated crypto space. This bears significant risks, as illustrated by fraudulent practices in platforms like FTX. Mirroring a market structure known for its lack of investor protections and rampant conflicts of interest seems ill-advised and counterproductive. This change paves the way for fraud and deceptive practices to occur at the cost of retail investors, regulators, and potentially the entire economy. I hope the CFTC works in tandem with the Securities and Exchange Commission to bolster and enhance traditional market structures and genuinely improve all of these concerns I have mentioned. For example, there has been a recent wave of swap/short reporting rules being passed by the SEC. I implore the CFTC to take similar initiatives by making equity swap data public and transparent. That is just one course of action that could fortify our current market structure as opposed to pivoting to one with an egregious lack of investor protection.
Given the urgency of the situation and the ongoing applications seeking such market structure changes, I implore the CFTC to conduct thorough studies to evaluate these concerns and make informed decisions. While public comment is valuable, it cannot be the sole basis for such impactful changes. The lessons from the 2008 financial crisis and the need for a proactive approach to risks should guide our actions. It’s no mystery that there has been significantly more interest from average household investors when it comes to financial regulation as of late. This is great and hopefully can serve as an extra level of accountability to ensure our regulatory institutions are prepared for unethical market practices and severe risks. I urge the CFTC not to let self-interested institutions and market participants speak for us on these rules. We are making our voice heard and the CFTC should use that to know where we stand.
In conclusion, I stand with Commissioner Christy Romero in asking the Commission to reconsider the implementation of this new regulatory proposal for a vertically integrated market structure. The potential risks and lack of safeguards inherent in this framework far outweigh any perceived benefits. It is essential to protect customers, ensure market stability, and maintain the standards of regulation that have proven successful in safeguarding financial markets.
Thank you for your attention to this critical matter. I trust that the Commission will prioritize the interests of investors, consumers, and the stability of our financial markets. I also trust that the commission will seek other avenues to fortify our markets and enforce regulation on actors that try to circumvent it for their gain.
Sincerely,
Hussain Shahabuddin
Retail Investor
