by Matthew B. Kulkin, Elizabeth L. Mitchell, Gretchen Passe Roin, Timothy F. Silva, Tiffany J. Smith, Dino Wu, Matthew Beville, and Joseph M. Toner

At an industry event in early 2023, Commodity Futures Trading Commission (CFTC or the Commission) Chairman Rostin Behnam set out a comprehensive agenda.[1] When Chairman Behnam detailed the CFTC’s 2023 work plan, the CFTC was building on its first year with a full slate of Commissioners, new Division Directors, and senior leadership. As we look back on the recently completed calendar year and turn our attention to the rapidly approaching 2024 presidential and congressional elections, the CFTC seems poised for another year packed with a flurry of regulatory, policy, and enforcement activity. This article lays out 23 of our key takeaways from the past year and offers insights on what might take place in the coming months.

Rulemaking Agenda

1. The CFTC continues to proceed with an aggressive rulemaking policy agenda guided by its mission to “promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.”[2]

Based on the CFTC’s rulemaking agenda[3], the CFTC appears to be focused on advancing policies closely aligned with its mission. In the past year, we saw the CFTC take steps in a number of areas to further its policy objectives. Each is discussed below.

2. The CFTC remains willing to revisit Dodd-Frank Act era rules and make tailored amendments, where appropriate.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was adopted in 2010. Chairman Behnam has noted his willingness to “fine-tune” rules adopted in the past decade with the “real-time market experience” that has given the CFTC the “perspective” to ensure that the rules “remain fit for purpose.”[4]

Looking forward, we expect this trend to continue. The CFTC currently has proposed more than 10 rule changes that, if adopted, would amend certain Dodd-Frank Act rulemakings. We expect that many of these proposals will be approved by the CFTC in the coming months—in advance of the election and outside the potential reach of the Congressional Review Act (discussed below).

3. Swap data reporting rules remain a work in progress.

On December 15, 2023, the CFTC issued a notice of proposed rulemaking to amend its swap reporting and recordkeeping regulations.[5]

We expect that these efforts will continue, both at the CFTC and globally. Consultation with other jurisdictions remains important, as market participants, repositories and regulators work to harmonize swap data reporting schemes across borders.

4. The CFTC continues to work collaboratively with global counterparts.

In 2023, the CFTC also took steps to support financial market participants’ activities and provide additional flexibility for their operations around the world. We expect this work to continue in 2024 and beyond, regardless of which political party leads the Commission.

5. The CFTC continues to focus on important FCM and DCO risk management issues.

The CFTC continues to explore rules related to intermediation and clearing of derivatives. We expect risk management to remain a priority for the CFTC, the commissioners, and the staff.

6. The issue of conflicts of interest among affiliated entities remains a hot topic, even with long-standing regulations in place to address these relationships.

CFTC staff issued a request for comment on potential issues that may arise when DCOs, DCMs and SEFs are affiliated with an intermediary (e.g., an FCM) or other market participants.[6]

Affirming its focus on addressing conflicts of interest among participants, the CFTC issued a proposed rule on February 20, 2024, that would concurrently amend SEF and DCM rules to, among other things, establish governance requirements regarding market regulation functions as well as related conflicts of interest standards, and also rules for identifying, managing and resolving conflicts of interest.[7]

7. The CFTC continues to closely scrutinize political event contract markets.

The CFTC issued a long-awaited decision regarding political event contracts, ultimately disapproving political binary event contracts by KalshiEX LLC. Kalshi sued the CFTC, filing a complaint in the US District Court for the District of Columbia asking the court to vacate the order.[8] The disapproval followed an opinion issued by the Fifth Circuit Court of Appeals regarding the operation of a political event contract market pursuant to long-standing CFTC no-action relief.

The actions in 2023 suggest that the CFTC will continue to take steps to limit the existence of CFTC-regulated political event contracts as derivatives. We discussed the state of prediction markets in our client alert available here.

8. The CFTC continues to review and revise its commodity pool operator (CPO) and commodity trading advisor (CTA) disclosure regimes.

On October 2, 2023, the CFTC proposed amendments to CFTC Regulation 4.7, which would amend the regime, and increase the obligations, for CPOs and CTAs offering products exclusively to qualified eligible persons (QEPs).[9] We discussed the proposal more extensively at the time here.

The proposed increase in regulation of CPOs and CTAs follows the trend of increased regulation of private fund managers. The Securities and Exchange Commission (SEC) adopted final rules in August 2023 significantly increasing the regulatory burden on registered investment advisers to private funds. We discussed these sweeping changes here. The SEC also adopted final rules to include significant market participants as “dealers,” including potentially private funds and their advisers. We discussed these significant changes here.

9. The CFTC, and the SEC, continue to expand the scope of Form PF.

On February 8, 2024, the CFTC approved a final rule amending Form PF, the confidential reporting form for certain SEC-registered investment advisers to private funds, including those that also are registered with the CFTC as a commodity pool operator or commodity trading adviser.[10] As Form PF data is confidential, the two agencies also entered into a memorandum of understanding (MOU) related to the sharing of Form PF data between the two agencies.

Enforcement Agenda

10. The CFTC continues to pursue an aggressive enforcement agenda in terms of cases brought and remedies imposed.

As noted in the Division of Enforcement’s 2023 Annual Report, the Division brought a record 96 actions and obtained a record $4.3 billion in civil monetary penalties, restitution and disgorgement. While the recoveries obtained in 2023 were double those obtained in 2022, $2.7 billion of the $4.3 billion—or roughly 63 percent––stemmed from a single case against a cryptocurrency exchange for allegedly operating an illegal digital asset derivatives exchange.[11]

We expect continued upward pressure on penalties imposed. In October 2023, the Division of Enforcement issued new guidance on penalties, monitors and admissions (the Advisory).[12] We expect the CFTC to seek higher penalties than have been imposed previously in similar cases, particularly in matters involving multiple market participants violating similar laws in similar ways and matters involving perceived recidivists.

11. The Division of Enforcement has put registrants on notice that it will seek to impose monitorships and consultants where it lacks confidence that an entity will remediate misconduct on its own.

The October 2023 Advisory also highlights the use of corporate compliance monitors and consultants to minimize the risk of future misconduct, specifically noting that they will be sought when the Division has concerns about an entity’s ability to remediate without third-party assistance. We anticipate that, going forward, the Division will recommend similar undertakings in a broader range of enforcement actions.

12. The CFTC brought its first case against a chief compliance officer, demonstrating its willingness to charge CCOs for what it perceives to be “egregious conduct.”

In November 2023, the CFTC charged the chief compliance officer (CCO) of a cryptocurrency exchange with violating the Commodity Exchange Act (CEA) and willfully aiding and abetting the firm’s violations of the CEA. This action represents the first time the CFTC has imposed liability on a compliance officer individually.

13. The CFTC will continue its enforcement focus on swaps reporting and business conduct standards.

We expect that compliance with swaps reporting and business conduct standards will continue to be a focus for the Division of Enforcement. The Commission’s regulations under Dodd-Frank have been in place for over a decade, and the CFTC appears to be increasingly focused on ensuring that firms are meeting the associated business conduct standards.

14. The CFTC continues to prioritize investigation integrity, including charging firms that even negligently provide inaccurate or incomplete information during the enforcement process.

The Commission has the authority under Section 6(c)(2) of the CEA to bring actions against any person who negligently provides false or misleading information to the Commission or its staff, including during Division of Enforcement investigations. In September, the CFTC announced charges against a large financial institution for, among other things, material omissions in a letter to the Division of Enforcement regarding a potentially disruptive trading incident.[13]

These matters highlight the importance of conducting appropriate diligence before providing information to the staff in the course of an enforcement inquiry or exam.

15. The CFTC continues to pursue market-wide “sweeps” for recordkeeping failures.

As noted above, a big driver for 2023 was the continued sweep of off-channel communications activity. Off-channel communication cases resulted in settlements against eight firms and $331 million in monetary penalties in 2023.

16. The CFTC is willing to use CEA Section 8a to revoke registrations following findings of serious misconduct.

Another unique development in 2023 was the CFTC’s proceedings to revoke a firm’s CTA and CPO registrations.[14] The CFTC brought proceedings under Section 8a of the CEA, which gives the CFTC the authority to institute revocation proceedings against any entity that violates the securities or commodities laws. In practice, this authority has been very rarely used. It remains to be seen whether this is a one-off event given the exceptional circumstances or whether the Commission will seek to use Section 8a in other contexts.

17. The CFTC continued to use its authority to bring actions in the digital asset market related to registration violations, fraud and market manipulation.

In 2023, the CFTC brought significant enforcement actions related to digital assets, including actions against executives of platforms alleging fraud and registration violations. The CFTC brought a record-setting 47 enforcement actions involving conduct related to digital asset commodities, representing more than 49 percent of all actions filed during the year.[15] These actions include those against individuals for perpetrating fraudulent schemes and for fraudulently solicitating US customers. In 2024, we expect there to be continued aggressive enforcement actions against crypto intermediaries and market participants.

The Political Climate Surrounding the CFTC

18. The CFTC continues to demonstrate its digital asset regulatory capabilities as Congress considers comprehensive market structure legislation.

Despite its limited enforcement authority, as described above, the CFTC has established itself as an effective regulator of digital commodity derivatives markets. Lawmakers introduced stand-alone crypto bills that gained record traction in both chambers: the House Financial Innovation Technology for the 21st Century Act (FIT21) and the Senate Responsible Financial Innovation Act (RFIA). Both the House and Senate bills would establish a regulatory framework for digital assets and grant the CFTC authority over digital asset spot markets.[16]

19. The Congressional Review Act provides urgency for Commission action in 2024.

With 2024 elections approaching, there is a heightened sense of urgency for federal agencies to complete rulemaking before the “lookback” provision deadline in the Congressional Review Act (CRA), which allows an incoming Congress to review the past 60 days of rules issued during the previous Congress.

Looking Forward: Hot Topics in 2024

20. The CFTC has positioned itself as both a regulator of, and thought leader on, decentralized finance.

The CFTC has increased its focus on DeFi. The Commission brought enforcement actions against developers of DeFi protocols and other DeFi participants. In the future, the CFTC is likely to bring additional enforcement actions against DeFi market participants alleging registration failures and other violations of the CEA and CFTC regulations.

In addition, the Digital Assets and Blockchain Subcommittee of the CFTC’s Technology Advisory Committee (TAC) presented a 79-page report titled “Decentralized Finance” to the CFTC.[17]  The goal of the report is to offer a general roadmap of DeFi for regulators and policymakers. We discuss the DeFi report more extensively here.[18]

21. The CFTC is considering regulations designed to address risks related to artificial intelligence in CFTC-regulated markets.

Recently, CFTC staff issued a request for comment (RFC) on the current and potential uses and risks of AI in the markets that the CFTC regulates. The RFC includes 20 questions that are specific to the use of AI in CFTC-regulated markets. As the CFTC continues to explore use cases for AI, information gathered from the RFC will guide policymaking by CFTC staff. More information is available in our recent client alert here.[19]

22. The CFTC is leading the charge on pursuing fraud in the carbon credit markets.

In the past few years, and particularly in 2023, the CFTC ramped up efforts to regulate carbon markets, and we expect that focus to continue in 2024. In June 2023, the CFTC announced the establishment of an Environmental Fraud Task Force.[20] In December, the CFTC issued proposed guidance and a request for public comment regarding the listing of voluntary carbon credit derivative contracts. The flurry of activity in 2023 reflects the CFTC’s focus on carbon markets and leadership in this space, from both a regulatory and an enforcement perspective.

23. The CFTC’s budget remains a persistent limitation on the Commission’s expanding jurisdiction.

Since 2010, when Dodd-Frank was passed, the CFTC has expanded its jurisdiction from futures and options to include over-the-counter swaps. The CFTC’s budget has not increased proportionally to reflect the increases in market size, complexity, and participation. While Congress considers CEA reauthorization, the CFTC’s role in digital asset spot market regulation (discussed above), and the CFTC’s role in climate risk and voluntary carbon markets, the CFTC will be limited in its ability to fully execute its statutory mission, as well as its examination and enforcement programs, at its current funding level.

Footnotes

[1] Rostin Behnam, Keynote Address of Chairman Rostin Behnam at the ABA Business Law Section Derivatives & Futures Law Committee Winter Meeting (Feb. 3, 2023), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam31.

[2] See CFTC Mission Statement, https://www.cftc.gov/About/AboutTheCommission.

[3] CFTC Agency Rule List (Fall 2023), https://www.reginfo.gov/public/do/eAgendaMain?operation=OPERATION_GET_AGENCY_RULE_LIST&currentPub=true&agencyCode=&showStage=active&agencyCd=3038&csrf_token=EAB9EF7E5B174902D056470B5A95CE732250303E55EC3A573B194660385BCB2EF899200DBB7EC52E068E6201B803201B76DB.

[4] Keynote of Chairman Rostin Behnam at the FIA Boca 2022 International Futures Industry Conference (Mar. 16, 2022), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam21.

[5] CFTC Approves Proposed Amendments to Regulations Regarding Real-Time Public Reporting and Swap Data Recordkeeping and Reporting Requirements, CFTC Press Release No. 8835-23 (Dec. 15, 2023); See Real-Time Public Reporting Requirements and Swap Data Recordkeeping and Reporting Requirements, 88 Fed. Reg. 90046 (Dec. 28, 2023), https://www.federalregister.gov/documents/2023/12/28/2023-28350/real-time-public-reporting-requirements-and-swap-data-recordkeeping-and-reporting-requirements.

[6] Request for Comment on the Impact of Affiliations on Certain CFTC-Regulated Entities (June 27, 2023), https://www.cftc.gov/media/8826/rfcimpactaffiliations062823/download.

[7] Requirements for Designated Contract Markets and Swap Execution Facilities Regarding Governance and the Mitigation of Conflicts of Interest Impacting Market Regulation Functions (proposed Feb. 20, 2024), https://www.cftc.gov/media/10286/DCMSEF-NPRM_asapproved022024/download.

[8] KalshiEX LLC v. Commodity Futures Trading Commission, No.1:23-cv-03257 (D.D.C. Nov. 1, 2023).

[9] Commodity Pool Operators, Commodity Trading Advisors, and Commodity Pools: Updating the ‘Qualified Eligible Person’ Definition; Adding Minimum Disclosure Requirements for Pools and Trading Programs; Permitting Monthly Account Statements for Funds of Funds; Technical Amendments, 88 Fed. Reg. 70852 (Oct. 12, 2023), https://www.cftc.gov/sites/default/files/2023/10/2023-22324a.pdf.

[10] Form PF; Reporting Requirements for All Filers and Large Hedge Fund Advisers, Advisers Act Release No. 6546 (Feb. 8, 2024), https://www.sec.gov/files/rules/final/2024/ia-6546.pdf.

[11] Consent Order, CFTC v. Zhao, No. l:23-cv-01887 (N.D. Ill. Dec. 14, 2023), ECF No. 80, https://www.cftc.gov/media/9981/enfchangpengzhaoconsentorder121423/download. The CFTC also ordered $1.7 billion in restitution and a $1.7 billion penalty—the highest civil monetary penalty ever imposed by the CFTC––in a default judgment against the owner and CEO of Mirror Trading International Proprietary Limited involving a fraudulent Bitcoin scheme, but those amounts have not been recovered.  Order, CFTC v. Mirror Trading International Proprietary Ltd., No. 1:22-cv-635-LY (W.D. Tex. Apr. 24, 2023), https://www.cftc.gov/media/8506/enfsteynbergfinaldefaultjudgment042423/download.  

[12] Commodity Futures Trading Commission, Advisory Regarding Penalties, Monitors and Consultants, and Admissions in CFTC Enforcement Actions (Oct. 17, 2023), https://www.cftc.gov/media/9466/EnfAdv_Resolutions/download.

[13] In re Goldman Sachs & Co. LLC, CFTC Docket No. 23-60 (Sept. 29, 2023), https://www.cftc.gov/media/9416/enfgoldmansachsorder092923/download.

[14] CFTC, Notice of Intent to Revoke the Registrations of Allianz Global Investors US LLC, In re Allianz Global Investors US LLC, CFTC Docket No. SD 23-01 (Mar. 21, 2023), https://www.cftc.gov/media/8316/enfallianznoticeofintent032123/download.

[15] CFTC Releases FY 2023 Enforcement Results, CFTC Press Release No. 8822-23 (Nov. 7, 2023), https://www.cftc.gov/PressRoom/PressReleases/8822-23.

[16] The CFTC has jurisdiction over futures and derivatives but does not have regulatory authority over the spot market for digital asset commodities. The CFTC’s enforcement authority is limited to pursuing fraud and manipulation in the spot market.

[17] Digital Assets and Blockchain Subcommittee of the CFTC Technology Advisory Committee, DeFi Report (Jan. 8, 2024), https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement010824b.

[18] “CFTC Advisory Subcommittee Issues Report on DeFI; Issues, Findings and Recommendations” (Feb. 16, 2024), https://www.wilmerhale.com/en/insights/client-alerts/20240215-cftc-advisory-subcommittee-publishes-report-on-defi.

[19] “CFTC Issues Request for Comment on Uses of AI” (Feb. 2, 2024), https://www.wilmerhale.com/insights/client-alerts/20240201-cftc-issues-request-for-comment-on-uses-of-ai.

[20] CFTC Division of Enforcement Creates Two New Task Forces, Release No. 8736-23 (June 29, 2023), https://www.cftc.gov/PressRoom/PressReleases/8736-23.

Matthew B. Kulkin, Elizabeth L. Mitchell, Gretchen Passe Roin, Timothy F. Silva, Tiffany J. Smith, and Dino Wu are Partners and Matthew Beville and Joseph M. Toner are Special Counsel at Wilmer Cutler Pickering Hale and Dorr LLP.  Benjamin Lobley, Alexandrea L. Rahill, Andy V. Reynolds, who are Senior Associates, and Ayana Dow and Joshua Nathanson, who are Associates, assisted in preparing this post. This post first appeared on the firm’s blog

This post was written in memory of Mike Gill, who passed away in February 2024.  Mike previously served as Chief Operating Officer and Chief of Staff at the CFTC.  His professional and personal contributions to our industry will be missed. May his memory be a blessing.

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