|
Government Shutdown
The U.S. government has been shutdown for 34 days. As of yesterday evening, Kalshi’s prediction markets predict the government will be shut down for a total of 46 days. The CFTC is still operating on a skeleton crew and has posted no press releases on its website since September 30.
However, on October 1, the CFTC published an order in the Federal Register that stated that during the shutdown (“lapse in appropriations”), they will only be processing or reviewing filings for discretionary or mandatory approval that are directly related to “the safety of human life or the protection of property.” The order also recognizes that certain comment periods may (and have) expired during the shutdown. The order extends those comment periods to one business day after the CFTC is able to resume full operations.
Barrett Morris | Email
Michael Selig’s CFTC Chair Nomination
On October 25, the White House “Crypto Czar” David Sacks announced via twitter that President Trump had selected Mike Selig to lead the CFTC as its next Chair. In prior editions of The Desk, we covered some of the pushback from the Winklevoss brothers and other matters that may have ultimately led to the change from Brian Quintenz.
Selig currently serves as the SEC Crypto Task Force Chief Counsel and Senior Advisor to SEC Chair Paul Atkins. Selig got his start at the CFTC as a legal intern for former Chair Christopher Giancarlo. Former Chair Giancarlo credit’s Selig’s editorial assistance in the drafting of his 2015 white paper “Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank.” After several years in private practice, Selig joined the SEC in his current role.
Harmonization between the SEC and the CFTC stands as a key priority for the two commissions, as evidenced recently by the “SEC-CFTC Roundtable on Regulatory Harmonization Efforts” and the CFTC’s recent proposed rule on modifying certain business conduct and swap documentation requirements that makes several references to disparity with the SEC as a rationale for modification. The CFTC’s ambitious plans to provide smart regulation of crypto, as kicked off by Acting Chair Caroline Pham, will also undoubtedly be carried forward by Selig, likely in close coordination with the SEC.
We applaud Acting Chair Pham’s work during her tenure both as a Commissioner and as Acting Chair at the CFTC – we’re excited to see what’s next for her. We look forward to Selig’s tenure as Chair of the CFTC during an exciting and innovative period.
Barrett Morris | Email
Enforcement Round-Up
After a busy September—hopefully some of you are still poring through our analysis of the Enforcement Sprint results—there were no new CFTC enforcement actions in October. With the federal shutdown feeling like it may never end and a new CFTC Chair and potentially two new Commissioners on deck, we are wondering whether we will see the announcement of any new CFTC enforcement actions for the rest of this year.
On October 8, 2025, in a CFTC action filed in the U.S. District Court for the Middle District of Florida, CFTC v. Larralde et al. (No. 6:23-cv-01445) in 2023, the Court rejected the CFTC’s proposed settlements with two individuals in an alleged fraudulent crypto trading scheme. The Court found that the CFTC’s unopposed motion for entry of consent orders “fails to provide this Court with sufficient legal or factual bases for granting such relief and, further, fails to elaborate on the parties’ need for or entitlement to a judgment from this Court.” The order also cited the CFTC’s failure to comply with the Court’s
local rule concerning the length and contents of motions/briefs as well as a certain standing order. The Court gave the CFTC until October 14, 2025, to show cause why the claims against the two individual defendants should not be dismissed with prejudice pursuant to another local rule requiring parties to file a notice of resolution immediately upon reaching an agreement to resolve all or part of an action. On October 14, despite the government shutdown, the CFTC filed both a response to the show cause order and a second unopposed motion for entry of consent orders. The Court has not yet issued a decision. On October 30, the CFTC filed an unopposed motion to stay the action due to the federal government shutdown and the furlough of the only CFTC counsel of record, which had been
temporarily lifted to enable the CFTC to respond to the Court’s show cause order.
In Larralde, the individual defendants promoted a company called Fundsz that allegedly promised investors a 3% profit per week from the Company’s trading in cryptocurrency and precious metals. The CFTC alleges that the defendants misappropriated much of the $21.3 million that had been collected from investors in 2020 to 2023. Under the proposed settlements, the estate of the deceased defendant would relinquish rights to a Florida property and $2.6 million held in receivership; whereas the other defendant would be enjoined from trading in digital assets, precious metals, and other commodities.
This isn’t the first time in this action that the Court has ruled against the CFTC due to a lack of details in its filings, as it previously dismissed the original complaint as an “impermissible shotgun pleading”.
Tiffany Payne | Email
Credit Risk Transfers
In October, the IMF issued a working paper on Synthetic Risk Transfers. In U.S. markets these transactions are commonly referred to as a Credit Risk Transfer (“CRT”). This year the volume and momentum of CRTs in the U.S. increased substantially. The IMF estimates that $1 trillion in assets “ranging from auto loans to subscription credit lines have been synthetically securitized globally since 2016.”
We have also seen an uptick in interest and activity surrounding CRTs, so we thought this may be a good time to offer/revisit a brief primer on some typical elements of CRTs.
What is a CRT?
CRTs are very similar to a traditional securitization, except the originator/issuer (i.e., the bank or an SPV created by the bank) retains ownership of the assets and credit risk is only synthetically transferred to the purchaser (i.e., the investor). A typical CRT is for a period of about three to five years, during which (if structured correctly) the bank gets to de-risk or reduce that concentration on its balance sheets.
CRTs provide protection for events of default often related to bankruptcy, failure to pay or perform, and restructuring. If an asset in the portfolio experiences an applicable event of default, the bank notifies the investor by issuing a credit event and the tranche (or entire asset depending on the structure of the CRT) is written down by the amount of the loss and the bank continues to pay the investor based on the smaller notional balance of the portfolio (or asset). Generally, CRTs are collateralized by corporate, small- and medium-sized loans, residential real estate loans, auto loans, and subscription lines.
CRTs can be based on (1) a “static” pool of assets – meaning no new loans or assets can enter the portfolio and the portfolio; or (2) a pool of assets that “replenishes” – meaning new loans or assets can be added to the portfolio as others mature (these new loans are subject to certain criteria such that they are similar to the old loans). CRTs can also be “funded” (investor places collateral in an amount equal to the maximum potential loss), “unfunded” (investor has a high credit rating), or tied to a Credit Linked Note (“CLN”).
In bank issued CLNs, the bank receives cash proceeds from the CLNs including the value of purchased credit protection, makes periodic interest payments (typically SOFR plus a spread) equivalent to CDS premiums and if credit protection is triggered, either the CLN principal balance is written down or the bank can make principal payments to CLN investors (similar to the payout to a CDS protection buyer).
In 2023, the Federal Reserve (“FRB”) provided guidance concerning Regulation Q about how FRB-regulated institutions that issue CLNs should treat those notes under the FRB’s capital rule. Among other requirements provided in the guidance, the FRB states that CLNs “must include a guarantee or credit derivative”. If a credit derivative is utilized, the derivative must be executed using industry standard documentation. The FRB’s guidance also states it is “less clear” that CRTs meet the regulatory requirements for capital relief when CLNs are directly issued by banks, but the guidance provides information on how FRB regulated institutions can have CLN structures reviewed by the FRB.
Why CRT?
The answer here could be its own whitepaper, but in two words – capital relief. Prudential banking rules require banks to hold capital for credit risk at a certain percentage of their risk weighted assets. Banks can reduce the amount of capital required to be held by purchasing credit protection. The transaction can be structured a number of different ways, but the bank will maintain ownership of the assets and the transaction either involves an entire asset, a portfolio of assets or the bank will break up a portfolio of assets into two or more tranches, which are designed to absorb the bank’s losses on the portfolio. Any losses on
the assets in the portfolio are first absorbed by noteholders to the junior tranche up to a negotiated amount and then losses are borne by the more senior tranche(s). Banks like CRTs because the credit protection provides capital relief and banks still retain all of the assets’ risks and rewards, except the credit risk and investors like CRTs because it can give them access to customized portfolios that are hard to syndicate using traditional credit derivatives or access to portfolios that are of a specific interest to that investor.
With the credit relief resulting from lower capital required against risk weighted assets, banks have more flexibility in their balance sheet and greater capacity to make investments and extend capital to the market.
While CRTs are not a new or recent phenomenon, the market has experienced increasing usage and investor demand in both Europe and the U.S. As practices and familiarity with a variety of CRT structures become more robust and commonplace, they will surely serve as an important tool for bank’s to manage their capital and means for investors to gain desired exposures.
Barrett Morris & Stuart Armstrong | Email
Interesting Links
|
