House Ag on CFTC Agenda
House
Agriculture Committee
“Review the 2016 Agenda for the Commodity Futures Trading
Commission”
Wednesday, February 10,
2016
Key
Topics & Takeaways
-
Increased Market Costs:
Chairman Conaway noted that market participants face increased costs and
markets that are more volatile and less liquid. He also expressed concern
that FCMs are not able to serve smaller market participants because of cost
limitations.
-
CFTC Priorities:
CFTC Chairman Massad said the priorities for the CFTC in the coming year
include: 1) finalizing rules for cybersecurity; 2) addressing CCP resilience;
3) finalizing the position limits rule making; and 4) addressing the CFTC’s internal
accounting issues
-
Effects of the Leverage
Ratio: Rep. Thompson (R-Pa.) asked if Massad was concerned by firms’
plans to “spin off” their swaps desk due to increasing capital requirements
under the Basel leverage ratio. Massad said that the CFTC is “watching” this
but that there is not enough information yet, saying it would be helpful for
the clearing member industry to come up with data that shows the effects of the
leverage ratio.
Witness:
-
Tim Massad, Chairman,
Commodity Futures Trading Commission
Opening Statements
Chairman
Michael Conaway (R-Texas) said that current commodity
process create a “bleak back-drop” for commodity producers and that it is not
as easy as it once was for farmers to use derivatives to hedge risk. He noted
that there are increased costs for market participants and that the markets are
more volatile and less liquid than they were previously. He also expressed
concern with futures commission merchants (FCMs) being forced to cease dealing
with small market participants because of cost limitations.
Ranking
Member Colin Peterson (D-Minn.) said he looked forward to
hearing about efforts of the Commodity Futures Trading Commission (CFTC) to
harmonize their rules with other foreign regulators. He also expressed concern
with the state of the derivatives market, noting large fluctuations in prices
this year, and highlighted the importance of the CFTC protecting these markets,
which affect the economy as a whole.
Witness Testimony
Tim
Massad, Chairman of the CFTC, stated in his testimony
that the CFTC and the European Commission (EC) announced a “Common
Approach” for transatlantic central clearing counterparties (CCPs) to
ensure that CCPs can continue to provide clearing services in other
jurisdictions. He called the agreement a “significant milestone” in
cross-border regulatory harmonization efforts.
Massad
then noted that the CFTC has been active and completed work on rules for margin
for uncleared swaps and noted that the priorities for the CFTC in the coming
year include: 1) finalizing rules for cybersecurity; 2) addressing CCP
resilience; 3) finalizing the position limits rule making; and 4) addressing
the CFTC’s internal accounting issues.
Question and Answer
Regulatory
Costs
Conaway
asked what the CFTC staff is doing to assess the full cost of the agency’s
rules on the agriculture industry and if they have analyzed the declining
number of FCMs in the market. Massad replied noting the agency has seen a lot
of price volatility but that the CFTC has no effect on prices. He highlighted
efforts of the CFTC to address end-user concerns and reduce regulatory requirements.
He also noted that the number of FCMs has been declining for over a decade due
to a number of factors, including the low interest rate environment, but
expressed concern that the Supplemental Leverage Ratio may be having an adverse
effect on clearing.
Thompson
asked if the CFTC is speaking with the prudential regulators to address these
issues. Massad said discussions are continuing but that there is still a
difference of views among the regulatory agencies. Massad also stressed that it
would be helpful for the clearing member industry to come up with data that
shows the effects of the leverage ratio.
U.S.-EC
Agreement
Peterson
asked Massad to expand on his description of the agreement with the EC on CCP
recognition. Massad stated that the agreement was a compromise and that
customer margin practices “essentially won’t change.” He noted that on “house
margin,” the EC requires a “slightly higher” standard and that U.S. CCPs will
need to show that they are collecting a comparable amount of capital as they
would under the European regime. He added that the regulatory agencies on both
sides of the agreement should be able to implement it on a timely basis.
Rep.
Ann Kuster (D-N.H.) asked if the agreement would inhibit market safeguards.
Massad said that the agreement would further the efforts of safeguarding the
markets.
CFTC
Accounting Issues
Rep.
Frank Lucas (R-Okla.) asked Massad to explain the recent problems with their
accounting statements as it pertains to leasing arrangements. Massad
noted that the CFTC has been accounting for leased space in the same way for
many years, but that recently the Government Accountability Office (GAO) had
some concerns with how this is done. He explained that the agency accounted and
obligated current year payments in their financials and then disclosed future
payments in a footnote of the financials, noting that auditors and the Inspector
General had signed off on these for years.
Massad
continued that the GAO concluded that the CFTC should have obligated the entire
amount of future payments in the first year and accounted for it in the
financial statement itself. He noted that the CFTC is working with the GAO and
the Office of Management and Budget (OMB) to come into compliance. Massad said
the previous practice was incorrect for accounting purposes as well as
incorrect for federal appropriations requirements.
Rep. Steve King (R-Iowa) asked if the accounting errors were a violation of the
Anti-Deficiency Act. Massad said that he would leave it to lawyers to determine
if there was a violation, but said that it is “likely.”
Rep.
Austin Scott (R-Ga.) said that the CFTC should be held accountable for their
mistakes in the same way that the entities they regulate and small businesses
are held accountable. Massad said that CFTC compliance efforts focus on
bringing participants into compliance and that enforcement is not focused on
small businesses but rather seeks to address instances of manipulation.
De
Minimis Threshold
Rep.
David Scott (D-Ga.) expressed concern with the current CFTC rule for swap
dealer de minimis activity that will automatically drop from $8 billion to $3
billion at the end of 2017. He said if this level drops, it will raise the
price of hedging for end-users and have other damaging consequences. Massad
noted that the CFTC staff conducted a preliminary study to provide data on the
impact of a decrease in the de minimis threshold and said that once a final
report is finalized, the Commission will be in a place to make a decision on
whether to take action.
CFTC
Budget
When
asked by David Scott if the CFTC has enough funding, Massad said that the
agency does not have the budget commensurate with its responsibilities.
Rep.
Trent Kelly (R-Miss.) asked how the CFTC has tightened its budget. Massad said
that the agency is relying more heavily on the National Futures Association
(NFA) to conduct oversight and registration of swap dealers.
Asian
Markets
Rep.
Stacey Plaskett (D-V.I.) asked where market reforms are headed in Asian
jurisdictions. Massad noted that many of these markets agreed to the G20
principles, but said the U.S. is further along in its rule implementation than
this region.
Plaskett
asked if this situation creates a competitive advantage for these markets or
for the U.S. Massad said he does not think there are advantages today, but that
regulators should ensure that their regimes achieve basic harmonization.
Rep.
Alma Adams (D-N.C.) asked how the EC agreement would impact the Asian markets.
Massad said that Asia has been “waiting to see” what would happen with the EC
agreement and that now they can focus on moving forward with broader
international harmonization.
Automated
Trading
Austin
Scott expressed concern that the CFTC’s Regulation Automated Trading (Reg AT)
would allow the agency to take intellectual property from entities without a
warrant and said he does not think the agency is capable of protecting and
safeguarding this information. Massad said the CFTC is not asking for
intellectual property and that there has been a “misunderstanding” about what
the rule requires. He stressed that the CFTC intends to make sure the final
rule works in a way that protects intellectual property.
Kelly
also voiced concern that Reg AT allows the CFTC and the Department of Justice
to access source code without a warrant. Massad explained that the CFTC is not
asking for source code but for information on how algorithms and strategies
work. He stressed that the CFTC recognizes confidentiality concerns and that
keeping information safe is of the utmost importance.
Swap
Data Reporting
Rep.
Rick Crawford (R-Ark.) asked what the CFTC has done to promote consistent swap
data standards. Massad noted that the agency released a proposal on 120 data
fields for standardization and that this challenging problem would be best
addressed by working with the industry to come up with solutions.
Cross-Border
Margin
Rep.
Dan Newhouse (R-Wash.) said that the CFTC’s final rule on margin for uncleared
swaps seems to conflict with the cross-border guidance released by the agency
in 2013. Massad said that the cross-border application of the margin rule has
not been finalized yet and that the CFTC wants to be as transparent as possible
when determining how to address conflicting elements of the guidance and the
final rules from the prudential regulators and the CFTC.
Futures
Trading Amicus Brief
Rep.
Rodney Davis (R-Ill.) asked Massad if he is concerned with an amicus brief from
a futures trading industry group with regard to an intended manipulation case
saying that the CFTC intends to change years of settled law and that its
actions would have impacts on trading. Massad said that the CFTC is not trying
to change settled law and that its view has remained consistent that market
participants “cannot toy with prices.”
Position
Limits
Rep.
Scott DesJarlais (R-Tenn.) noted that recent activity in the oil market has
seen the highest number of positions in oil contracts in history and asked if
this is excessive speculation. Massad said that, at this time, this activity is
not viewed as excessive speculation, but is a result of supply and demand
factors.
DesJarlais
then asked what would be excessive, if this level of activity is not, and what
the CFTC is trying to prevent with its position limits rulemaking. Massad said
that “excessive speculation” has not been defined and that the CFTC is trying
to carry out its directive from Congress to prevent manipulation while allowing
bona fide hedging.
Conaway
noted that Congress directed the CFTC to act “as appropriate” to set limits and
asked if it would be better to let the market decide where the limits should
be. Massad said that the CFTC’s interpretation is that the agency is supposed
to make a rule, noting the agency is seeking to set limits at the right level.
FSOC
Conaway
asked what the CFTC reports at meetings of the Financial Stability Oversight
Council (FSOC) and whether regulators are in a better position to anticipate
the next financial shock. Massad noted that the CFTC gives presentations and
written reports to the FSOC, noting that they will be presenting on Reg AT
soon. He added that regulators are in a much better position today, but that
they still cannot predict everything.
For
more information on this hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:House Agriculture Committee,Publish Year:2016
House
Agriculture Committee
“Review the 2016 Agenda for the Commodity Futures Trading
Commission”
Wednesday, February 10,
2016
Key
Topics & Takeaways
-
Increased Market Costs:
Chairman Conaway noted that market participants face increased costs and
markets that are more volatile and less liquid. He also expressed concern
that FCMs are not able to serve smaller market participants because of cost
limitations.
-
CFTC Priorities:
CFTC Chairman Massad said the priorities for the CFTC in the coming year
include: 1) finalizing rules for cybersecurity; 2) addressing CCP resilience;
3) finalizing the position limits rule making; and 4) addressing the CFTC’s internal
accounting issues
-
Effects of the Leverage
Ratio: Rep. Thompson (R-Pa.) asked if Massad was concerned by firms’
plans to “spin off” their swaps desk due to increasing capital requirements
under the Basel leverage ratio. Massad said that the CFTC is “watching” this
but that there is not enough information yet, saying it would be helpful for
the clearing member industry to come up with data that shows the effects of the
leverage ratio.
Witness:
-
Tim Massad, Chairman,
Commodity Futures Trading Commission
Opening Statements
Chairman
Michael Conaway (R-Texas) said that current commodity
process create a “bleak back-drop” for commodity producers and that it is not
as easy as it once was for farmers to use derivatives to hedge risk. He noted
that there are increased costs for market participants and that the markets are
more volatile and less liquid than they were previously. He also expressed
concern with futures commission merchants (FCMs) being forced to cease dealing
with small market participants because of cost limitations.
Ranking
Member Colin Peterson (D-Minn.) said he looked forward to
hearing about efforts of the Commodity Futures Trading Commission (CFTC) to
harmonize their rules with other foreign regulators. He also expressed concern
with the state of the derivatives market, noting large fluctuations in prices
this year, and highlighted the importance of the CFTC protecting these markets,
which affect the economy as a whole.
Witness Testimony
Tim
Massad, Chairman of the CFTC, stated in his testimony
that the CFTC and the European Commission (EC) announced a “Common
Approach” for transatlantic central clearing counterparties (CCPs) to
ensure that CCPs can continue to provide clearing services in other
jurisdictions. He called the agreement a “significant milestone” in
cross-border regulatory harmonization efforts.
Massad
then noted that the CFTC has been active and completed work on rules for margin
for uncleared swaps and noted that the priorities for the CFTC in the coming
year include: 1) finalizing rules for cybersecurity; 2) addressing CCP
resilience; 3) finalizing the position limits rule making; and 4) addressing
the CFTC’s internal accounting issues.
Question and Answer
Regulatory
Costs
Conaway
asked what the CFTC staff is doing to assess the full cost of the agency’s
rules on the agriculture industry and if they have analyzed the declining
number of FCMs in the market. Massad replied noting the agency has seen a lot
of price volatility but that the CFTC has no effect on prices. He highlighted
efforts of the CFTC to address end-user concerns and reduce regulatory requirements.
He also noted that the number of FCMs has been declining for over a decade due
to a number of factors, including the low interest rate environment, but
expressed concern that the Supplemental Leverage Ratio may be having an adverse
effect on clearing.
Thompson
asked if the CFTC is speaking with the prudential regulators to address these
issues. Massad said discussions are continuing but that there is still a
difference of views among the regulatory agencies. Massad also stressed that it
would be helpful for the clearing member industry to come up with data that
shows the effects of the leverage ratio.
U.S.-EC
Agreement
Peterson
asked Massad to expand on his description of the agreement with the EC on CCP
recognition. Massad stated that the agreement was a compromise and that
customer margin practices “essentially won’t change.” He noted that on “house
margin,” the EC requires a “slightly higher” standard and that U.S. CCPs will
need to show that they are collecting a comparable amount of capital as they
would under the European regime. He added that the regulatory agencies on both
sides of the agreement should be able to implement it on a timely basis.
Rep.
Ann Kuster (D-N.H.) asked if the agreement would inhibit market safeguards.
Massad said that the agreement would further the efforts of safeguarding the
markets.
CFTC
Accounting Issues
Rep.
Frank Lucas (R-Okla.) asked Massad to explain the recent problems with their
accounting statements as it pertains to leasing arrangements. Massad
noted that the CFTC has been accounting for leased space in the same way for
many years, but that recently the Government Accountability Office (GAO) had
some concerns with how this is done. He explained that the agency accounted and
obligated current year payments in their financials and then disclosed future
payments in a footnote of the financials, noting that auditors and the Inspector
General had signed off on these for years.
Massad
continued that the GAO concluded that the CFTC should have obligated the entire
amount of future payments in the first year and accounted for it in the
financial statement itself. He noted that the CFTC is working with the GAO and
the Office of Management and Budget (OMB) to come into compliance. Massad said
the previous practice was incorrect for accounting purposes as well as
incorrect for federal appropriations requirements.
Rep. Steve King (R-Iowa) asked if the accounting errors were a violation of the
Anti-Deficiency Act. Massad said that he would leave it to lawyers to determine
if there was a violation, but said that it is “likely.”
Rep.
Austin Scott (R-Ga.) said that the CFTC should be held accountable for their
mistakes in the same way that the entities they regulate and small businesses
are held accountable. Massad said that CFTC compliance efforts focus on
bringing participants into compliance and that enforcement is not focused on
small businesses but rather seeks to address instances of manipulation.
De
Minimis Threshold
Rep.
David Scott (D-Ga.) expressed concern with the current CFTC rule for swap
dealer de minimis activity that will automatically drop from $8 billion to $3
billion at the end of 2017. He said if this level drops, it will raise the
price of hedging for end-users and have other damaging consequences. Massad
noted that the CFTC staff conducted a preliminary study to provide data on the
impact of a decrease in the de minimis threshold and said that once a final
report is finalized, the Commission will be in a place to make a decision on
whether to take action.
CFTC
Budget
When
asked by David Scott if the CFTC has enough funding, Massad said that the
agency does not have the budget commensurate with its responsibilities.
Rep.
Trent Kelly (R-Miss.) asked how the CFTC has tightened its budget. Massad said
that the agency is relying more heavily on the National Futures Association
(NFA) to conduct oversight and registration of swap dealers.
Asian
Markets
Rep.
Stacey Plaskett (D-V.I.) asked where market reforms are headed in Asian
jurisdictions. Massad noted that many of these markets agreed to the G20
principles, but said the U.S. is further along in its rule implementation than
this region.
Plaskett
asked if this situation creates a competitive advantage for these markets or
for the U.S. Massad said he does not think there are advantages today, but that
regulators should ensure that their regimes achieve basic harmonization.
Rep.
Alma Adams (D-N.C.) asked how the EC agreement would impact the Asian markets.
Massad said that Asia has been “waiting to see” what would happen with the EC
agreement and that now they can focus on moving forward with broader
international harmonization.
Automated
Trading
Austin
Scott expressed concern that the CFTC’s Regulation Automated Trading (Reg AT)
would allow the agency to take intellectual property from entities without a
warrant and said he does not think the agency is capable of protecting and
safeguarding this information. Massad said the CFTC is not asking for
intellectual property and that there has been a “misunderstanding” about what
the rule requires. He stressed that the CFTC intends to make sure the final
rule works in a way that protects intellectual property.
Kelly
also voiced concern that Reg AT allows the CFTC and the Department of Justice
to access source code without a warrant. Massad explained that the CFTC is not
asking for source code but for information on how algorithms and strategies
work. He stressed that the CFTC recognizes confidentiality concerns and that
keeping information safe is of the utmost importance.
Swap
Data Reporting
Rep.
Rick Crawford (R-Ark.) asked what the CFTC has done to promote consistent swap
data standards. Massad noted that the agency released a proposal on 120 data
fields for standardization and that this challenging problem would be best
addressed by working with the industry to come up with solutions.
Cross-Border
Margin
Rep.
Dan Newhouse (R-Wash.) said that the CFTC’s final rule on margin for uncleared
swaps seems to conflict with the cross-border guidance released by the agency
in 2013. Massad said that the cross-border application of the margin rule has
not been finalized yet and that the CFTC wants to be as transparent as possible
when determining how to address conflicting elements of the guidance and the
final rules from the prudential regulators and the CFTC.
Futures
Trading Amicus Brief
Rep.
Rodney Davis (R-Ill.) asked Massad if he is concerned with an amicus brief from
a futures trading industry group with regard to an intended manipulation case
saying that the CFTC intends to change years of settled law and that its
actions would have impacts on trading. Massad said that the CFTC is not trying
to change settled law and that its view has remained consistent that market
participants “cannot toy with prices.”
Position
Limits
Rep.
Scott DesJarlais (R-Tenn.) noted that recent activity in the oil market has
seen the highest number of positions in oil contracts in history and asked if
this is excessive speculation. Massad said that, at this time, this activity is
not viewed as excessive speculation, but is a result of supply and demand
factors.
DesJarlais
then asked what would be excessive, if this level of activity is not, and what
the CFTC is trying to prevent with its position limits rulemaking. Massad said
that “excessive speculation” has not been defined and that the CFTC is trying
to carry out its directive from Congress to prevent manipulation while allowing
bona fide hedging.
Conaway
noted that Congress directed the CFTC to act “as appropriate” to set limits and
asked if it would be better to let the market decide where the limits should
be. Massad said that the CFTC’s interpretation is that the agency is supposed
to make a rule, noting the agency is seeking to set limits at the right level.
FSOC
Conaway
asked what the CFTC reports at meetings of the Financial Stability Oversight
Council (FSOC) and whether regulators are in a better position to anticipate
the next financial shock. Massad noted that the CFTC gives presentations and
written reports to the FSOC, noting that they will be presenting on Reg AT
soon. He added that regulators are in a much better position today, but that
they still cannot predict everything.
For
more information on this hearing, please click here.