The Commodity Futures Trading Commission (CFTC) announced through Release No. 9123-25 that it is withdrawing its proposed rulemaking under Parts 37 and 38, which would have reshaped governance and conflict-of-interest standards for Designated Contract Markets (DCMs) and Swap Execution Facilities (SEFs). The decision follows more than a year of industry consultation and comes amid rapid innovation across derivatives markets.
The withdrawal signals a notable regulatory recalibration: rather than imposing potentially duplicative mandates, the Commission is acknowledging that exchanges and platforms have already adapted governance frameworks internally, particularly as they have become part of larger corporate structures.
Background: What Were Parts 37 and 38 About?
The CFTC regulates DCMs — traditional futures exchanges such as CME or ICE — and SEFs, which were created under the Dodd-Frank Act of 2010 to bring transparency to the swaps market after the global financial crisis.
- Part 37 sets the regulatory framework for SEFs. It covers execution methods, access criteria, trading protocols, and compliance responsibilities.
- Part 38 governs DCMs. It outlines exchange-level responsibilities, including market surveillance, reporting obligations, and fair trading practices.
In March 2024, the Commission proposed significant amendments that would have:
- Introduced fitness standards for individuals involved in market regulation.
- Required exchanges and SEFs to adopt formal conflict-of-interest policies.
- Mandated new structural governance requirements for boards and oversight committees.
The goal was to strengthen impartial market regulation and align governance standards with the growing complexity of derivatives markets.
The proposal generated substantial industry feedback. Some stakeholders welcomed clearer guardrails, while others raised concerns about cost, duplication, and overlap with governance frameworks already mandated by corporate parents or other regulators.
Why the CFTC Withdrew the Proposal
According to the Federal Register notice, the Commission concluded that:
- Industry Has Evolved — Many SEFs and DCMs are part of global exchange groups or diversified financial institutions that already enforce strong governance and conflict-management standards.
- Redundancy Risk — Imposing additional rules risked duplicating corporate requirements, potentially adding compliance costs without clear benefits.
- Dynamic Market Structures — With derivatives markets undergoing rapid structural changes — from increased algorithmic trading to integration of digital asset derivatives — the CFTC deemed it more appropriate to pause, reassess, and potentially return with a fresh rulemaking tailored to current realities.
The Commission emphasized that if future regulatory action is warranted, it will be pursued through new proposals consistent with the Administrative Procedure Act (APA).
Industry Implications
1. Reduced Regulatory Uncertainty
The withdrawal provides clarity for SEFs and DCMs that had been uncertain about the scope and timing of potential governance changes. This may free resources that would otherwise have been reserved for compliance build-outs.
2. Confidence in Self-Governance
The move effectively endorses the self-regulatory capacity of large exchange groups, many of which already operate under global governance and compliance standards.
3. Potential Gaps in Oversight
Critics may argue that without standardized CFTC-imposed rules, there could be uneven governance quality across smaller or independent SEFs and DCMs.
4. Flexibility for Innovation
By avoiding rigid governance mandates, the decision preserves operational flexibility at a time when markets are rapidly experimenting with new asset classes — including tokenized commodities, environmental derivatives, and AI-driven trading platforms.
Historical Context: Lessons from Dodd-Frank
The Dodd-Frank Act (2010) introduced sweeping reforms following the 2008 financial crisis, particularly around derivatives trading. Among its key outcomes:
- Creation of SEFs: Designed to bring transparency to previously opaque swaps markets.
- Clearing Mandates: Required many swaps to be centrally cleared through clearinghouses.
- Enhanced CFTC Authority: Expanded the Commission’s role in supervising trading venues and intermediaries.
Parts 37 and 38 have since been central to how U.S. derivatives markets function. While governance was always a consideration, the 2024 proposal marked the most direct attempt to hard-code governance and conflict standards into regulatory text.
By stepping back in 2025, the CFTC is showing willingness to recalibrate — a contrast to the post-crisis regulatory surge, when momentum favored maximum oversight regardless of industry readiness.
International Comparisons: ESMA and FCA Approaches
While the CFTC has withdrawn its governance proposal, overseas regulators continue to refine their frameworks.
- European Union (ESMA): Under MiFID II and EMIR, trading venues face strict governance standards, including independent directors, conflicts policies, and reporting protocols. EU regulators tend to favor prescriptive frameworks.
- United Kingdom (FCA): Post-Brexit, the FCA has emphasized principles-based governance, allowing exchanges more discretion but holding them accountable for outcomes.
The CFTC’s withdrawal aligns more closely with the UK approach, prioritizing flexibility and adaptation over rigid compliance checklists. However, it leaves U.S. markets less harmonized with Europe, where prescriptive governance is the norm.
Market Outlook
Analysts suggest that the withdrawal will likely:
- Support Exchange Valuations: By avoiding new compliance costs, large exchange groups may see improved operating efficiency.
- Preserve U.S. Competitiveness: A lighter governance framework could attract trading volume compared with more heavily regulated jurisdictions.
- Invite Future Scrutiny: If a governance failure or market abuse case emerges, pressure may mount on the CFTC to revive or redesign the rules.
Industry Voices
While no official statements from major exchanges were immediately available, industry experts have hinted at mixed views:
- Pro-Withdrawal: Many compliance officers view the withdrawal as pragmatic, noting that “corporate governance is already embedded at the parent company level.”
- Cautious Concerns: Some investor protection groups argue that “leaving governance to industry self-regulation risks inconsistency across platforms, particularly for smaller SEFs.”
The Bigger Picture: Regulation in an Age of Innovation
The decision underscores a broader regulatory dilemma: how to oversee rapidly evolving markets without stifling innovation.
From AI-powered trading systems to on-chain derivatives platforms, new technologies are reshaping how contracts are listed, traded, and cleared. Regulators face pressure to remain agile, avoiding prescriptive rules that may be obsolete within a few years.
By withdrawing Parts 37 and 38 proposed amendments, the CFTC is effectively signaling:
- It trusts market maturity and corporate governance systems.
- It prefers to wait, watch, and adapt rather than lock in outdated rules.
Conclusion
The CFTC’s decision to withdraw its Parts 37 and 38 proposed rule is more than a technical regulatory update. It is a statement of philosophy: U.S. market oversight must balance investor protection and market integrity with industry-driven innovation.
For now, the derivatives industry will continue to operate under existing governance structures, with flexibility preserved. Yet the Commission has left the door open to future action — particularly if governance failures, conflicts of interest, or systemic risks resurface.
The lesson is clear: regulation, like markets, must evolve. And in 2025, the CFTC has chosen recalibration over rigidity.
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