On July 30, the CFTC announced a notice of proposed rulemaking purporting to address “perceived and potential conflicts of interest” arising from affiliated relationships among CFTC-regulated entities, including swap execution facilities, designated contract markets (DCMs), derivatives clearing organizations (DCOs), and futures commission merchants (FCMs).

The CFTC framed the proposal as a response to increasing numbers of “vertically integrated” corporate structures in which exchanges, clearinghouses, and market participants share common ownership. The proposed rule would: (i) prohibit a self-regulatory organization (SRO) from acting as the designated SRO for its affiliate FCM and require designation of an independent third-party SRO; (ii) require exchanges with affiliated market participants to maintain conflicts-of-interest procedures addressing systems, personnel, office space, documentation and disclosures, and provide guidance on safeguards including information barriers and structural separation; (iii) prohibit affiliate principal trading firms from trading on an affiliated DCM unless they qualify as bona fide market makers subject to conditions including order-priority subordination, continuous two-sided quoting obligations, and independent third-party verification; (iv) require DCOs with affiliate clearing members to adopt procedures to identify, address, and manage related conflicts of interest and publicly disclose such relationships; and (v) strengthen FCM disclosure requirements regarding affiliate relationships with exchanges and clearinghouses.

The CFTC noted that while affiliated market structures may provide benefits, including enhanced liquidity, they present risks to unaffiliated market participants, including potential preferential treatment in surveillance, enforcement, margin and fee decisions. The proposal distinguishes between affiliated intermediaries that act as agents for customers and affiliate principal trading firms that trade for their own account, characterizing the latter as presenting “the most acute” conflicts because every transaction situates the exchange’s own affiliate as counterparty to unaffiliated participants. For affiliate market makers, the proposed order-priority subordination requirement would fill orders of unaffiliated members at every price level before those of the affiliate, regardless of time priority. The proposal also sets out conflicts-mitigation safeguards, including guidance on information barriers and structural separation, requirements for independent reporting lines for certain examination staff, and codification of existing requirements for DCM regulatory oversight. Comments are due by October 5.