This Week in Derivatives

New Developments

• CFTC Staff Issues Advisory on Market Volatility Controls. On May 22, the CFTC issued a staff advisory reminding designated contract markets and derivatives clearing organizations of certain core principles and regulatory obligations under the Commodity Exchange Act and CFTC regulations related to controls designed to address market volatility. [NEW]

• Commissioner Kristin N. Johnson Makes Statement on Departure from CFTC. On May 21, Commissioner Kristin N. Johnson announced that she intends to step down from the Commission later this year. [NEW]
• CFTC Staff Issues Interpretation Regarding Certain Cross-Border Definitions. On May 21, the CFTC issued an interpretative letter confirming the application of certain cross-border definitions. The letter pertains to SCB Limited, an offshore crypto proprietary trading entity affiliated with Susquehanna, and confirms that SCB is not and will not qualify as a US person for the purposes of CFTC regulations concerning FCMs, FBOTs, and SEFs even if it were to (1) rely on US-located persons for trading/algorithm development, (2) license technology from a US-based affiliate, and (3) use US servers for its trading. Specifically, the interpretative letter confirms that SCB Limited is not a “person located in the United States” for purposes of the “foreign futures or foreign options customer” definition in Commission regulation 30.1(c); is not a “participant located in the United States” for purposes of Commission regulation 48.2(c); is a “foreign located person” for purposes of Commission regulation 3.10(c)(1)(ii); and is not a “U.S. person” as defined by Commission regulation 23.23(a) and the Commission’s 2013 Interpretive Guidance and Policy Statement Regarding Compliance With Certain Swap Regulations. [NEW]
• CFTC Releases Procedures on Registered Non-U.S. Swap Entities Using Substituted Compliance. On May 20, the CFTC released procedures regarding CFTC-registered non-U.S. swap dealers or major swap participants relying on substituted compliance. The procedures establish how CFTC Divisions will address potential non-compliance with foreign law that has been found by the CFTC to be comparable in outcome to the Commodity Exchange Act or CFTC regulations pursuant to a substituted compliance order. [NEW]
• SEC Names Katherine Reilly as Acting Inspector General. On May 19, the SEC announced the appointment of Katherine Reilly as the agency’s Acting Inspector General. Ms. Reilly is currently serving as a Deputy Inspector General at the SEC. She replaces Deborah Jeffrey, who has served as the SEC’s Inspector General since 2023 and is retiring. [NEW]
• SEC’s Division of Trading and Markets Releases FAQ Relating to Crypto Asset Activities and Distributed Ledger Technology. On May 15, the SEC prepared responses to frequently asked questions relating to crypto asset activities and distributed ledger technology. The responses cover topics relating to broker-dealer financial responsibility and transfer agents. These responses represent the views of the staff of the Division of Trading and Markets. They are not a rule, regulation, or statement of the SEC. [NEW]
• Commissioner Christy Goldsmith Romero Makes Statement on Departure from CFTC. On May 16, Commissioner Christy Goldsmith Romero announced that she intends to step down from the Commission and retire from federal service. Her final day at the Commission will be May 31.
• Commissioner Summer K. Mersinger Makes Statement on Departure from CFTC. On May 14, Commissioner Mersinger announced that she intends to step down from her position as Commissioner at the CFTC at the end of the month, to pursue new opportunities.
• CFTC Warns Public of Imposter Scam Targeting Fraud Victims. On May 14, the CFTC warned the public about a growing imposter scam involving individuals falsely claiming to represent the agency. According to the CFTC, scammers are contacting members of the public and claiming to represent the CFTC Office of Inspector General and promise to help financial fraud victims recover lost funds from foreign bank accounts. The CFTC Office of Inspector General stated that it will never contact individuals with offers to recover money lost to investment scams.
• Acting Chairman Pham Makes Statement on Court Sanctions Against CFTC. On May 13, CFTC Acting Chairman Caroline D. Pham made a statement regarding the Federal District Court report and recommendations for sanctions against the CFTC for misconduct in CFTC v. Traders Global Group Inc, highlighting proactive efforts to overhaul the CFTC’s Division of Enforcement and reform culture and conduct, develop staff, and leverage expertise and reduce siloing.
• CFTC Staff on Leave Pending Investigation. On May 5, pursuant to the President’s executive orders on lawful governance and accountability, the CFTC placed certain staff on administrative leave for potential violations of laws, government ethics requirements and professional rules of conduct. The CFTC stated it is committed to holding employees to the highest standards, as expected by American taxpayers. Investigations are currently ongoing into these matters and the CFTC has committed to provide updates as appropriate.

New Developments Outside the U.S.

• ESMA Asks for Input on the Retail Investor Journey as Part of Simplification and Burden Reduction Efforts. On May 21, ESMA launched a Call for Evidence (“CfE”) on the retail investor journey under the Markets in Financial Instruments Directive 2014. The purpose of this CfE is to gather feedback from stakeholders to better understand how retail investors engage with investment services, and whether regulatory or non-regulatory barriers may be discouraging participation in capital markets. [NEW]
• ESMA Delivers Technical Advice on Market Abuse and SME Growth Markets as Part of the Listing Act. On May 7, ESMA published its advice to the European Commission to support the Listing Act's goals to simplify listing requirements, enhance access to public capital markets for EU companies, and improve market integrity. In relation to Market Abuse Regulation (“MAR”), the advice covers: protracted processes, identifying key moments for public disclosure; delayed public disclosure, listing situations where delays are not allowed; and Cross-Market Order Book Mechanism, indicating the methodology for the identification of trading venues with significant cross-border activity.
• ESMA Consults on Rules for ESG Rating Providers. On May 2, ESMA published a Consultation Paper on draft Regulatory Technical Standards (“RTS”) under the Environmental, Social, and Governance (“ESG”) Rating Regulation. The draft RTS cover the following aspects that apply to ESG rating providers: the information that should be provided in the applications for authorization and recognition; the measures and safeguards that should be put in place to mitigate risks of conflicts of interest within ESG rating providers who carry out activities other than the provision of ESG ratings; the information that they should disclose to the public, rated items and issuers of rated items, as well as users of ESG ratings.

New Industry-Led Developments

• ISDA Publishes ISDA SIMM® Methodology, Version 2.7+2412. On May 22, ISDA published updates to its Standard Initial Margin Model (“SIMM”) methodology that are based on the full recalibration of the model and marked the first SIMM version publication of the new semiannual calibration cycle in 2025. The effective date of July 12, 2025 means that ISDA SIMM users should use SIMM version 2.7+2412 to calculate the initial margin for close of business on Friday July 11, 2025 onwards. This means that the first day for exchange of initial margin calculated using SIMM version 2.7+2412 would be on Monday July 14, 2025. [NEW]
• ISDA/SIFMA/SIFMA AMG Publish Joint Response to CFTC Request for Comment on 24-7 Trading. On May 21, ISDA, the Securities Industry and Financial Markets Association (“SIFMA”), and the SIFMA Asset Management Group (“SIFMA AMG”) jointly filed a comment letter in response to the CFTC’s request for comment on 24/7 trading and clearing. ISDA, SIFMA, and SIFMA AMG believe that the feasibility of both 24/7 trading and clearing needs to be evaluated holistically with an understanding of the interdependencies between market participants, trading venues, middleware and software providers, clearing systems, margining frameworks, payments systems, default mechanisms and adjacent markets. [NEW]
• IOSCO Makes Statement on Combatting Online Harm and the Role of Platform Providers. On May 21, IOSCO reiterated its concern about risks associated with investment fraud orchestrated through online paid-for advertisements and user-generated content. IOSCO stated that regulators and platforms providers are strategically positioned to mitigate the potential investor harm arising from these risks and asks platform providers to enhance efforts, consistent with local law, aimed at reducing risk of pecuniary harm to investors, which also threatens public trust in the services provided by platform providers. [NEW]
• IOSCO Releases Sustainable Bonds Report. On May 21, IOSCO published its Sustainable Bonds Report which identifies the key characteristics and trends tied to the sustainable bond market. IOSCO’s Report includes five key considerations which are designed to address market challenges, including enhancing investor protection, ensuring sustainable bond markets are operating in a fair and efficient way, and improving accessibility. [NEW]
• IOSCO Publishes Final Reports on Finfluencers, Online Imitative Trading Practices and Digital Engagement Practices. On May 19, IOSCO published the Final Reports on Finfluencers, Online Imitative Trading Practices and Digital Engagement Practices, as part of the third wave of its Roadmap for Retail Investor Online Safety. The Finfluencers Final Report explores the evolving landscape of finfluencers, the associated potential benefits and risks, and the current regulatory responses across jurisdictions. [NEW]
• IOSCO Concludes its 50th Annual Meeting. On May 15, IOSCO concluded its 50th Annual Meeting, which was hosted by the Qatar Financial Markets Authority (“QFMA”) in Doha. IOSCO welcomed near 500 participants over the course of three days, followed by the QFMA public conference. The IOSCO Annual Meeting brings all 130 member jurisdictions together to discuss the most relevant issues and risks with regard to global financial markets, and how to assist regulators in implementing standards through capacity building.
• ISDA Publishes Paper Exploring Use of Generative AI to Extract and Digitize CSA Clauses. On May 15, ISDA published a whitepaper that shows generative artificial intelligence can be used to accurately and reliably extract, interpret and digitize key legal clauses from ISDA’s credit support annexes, showing how this technology could increase efficiency, cut costs and reduce risks in derivatives processes that have traditionally been highly manual and resource intensive.
• ISDA Margin Survey Shows Leading Derivatives Firms Collected $1.5 Trillion of Margin at Year-end 2024. On May 14, ISDA published its latest annual margin survey, which shows that initial margin (“IM”) and variation margin collected by leading derivatives market participants for their non-cleared derivatives exposures increased by 6.4% to $1.5 trillion at the end of 2024. The 32 responding firms included all 20 phase-one entities (the largest derivatives dealers subject to regulatory IM requirements in the first implementation phase), five of the six phase-two firms and seven of the eight phase-three entities.
• ISDA Extends Digital Regulatory Reporting to Support Revised Canadian Reporting Rules. On May 13, ISDA extended its Digital Regulatory Reporting solution to cover new reporting rules in Canada and has made it compatible with a trade reporting messaging format used for North America reporting to maximize the benefit of adoption by those firms subject to the rules. The revisions are being implemented by the Canadian Securities Administrators and are scheduled for implementation on July 25, 2025.
• ISDA Publishes Governance Committee Proposal for CDS Determinations Committees. On May 8, ISDA published a proposal for a new governance committee for the CDS Determinations Committees (“DCs”), the first in a series of amendments to improve the structure of the DCs and maintain their integrity in changing economic and market conditions. The governance committee would be responsible for taking market feedback and adopting rule changes affecting the structure and operations of the DCs to ensure their long-term viability and meet market expectations for efficiency and transparency in credit event determinations.
• ISDA Presents Proposed Charter for the Credit Derivatives Governance Committee. On May 8, ISDA presented the proposed Charter for the Credit Derivatives Governance Committee and accompanying DC Rule changes to implement. Pursuant to the announcement made in 2024, an ISDA working group formed from ISDA’s Credit Steering Committee has worked on producing the Governance Committee solution. ISDA views the Governance Committee as the first step in implementing the other recommended changes from the Linklaters’ report as part of an independent review on the composition, functioning, governance and membership of the DCs.