DC Bar with CFTC Chair Massad
DC
Bar
Commodity
Futures Trading Commission (CFTC) Regulatory Developments
Thursday, July 23, 2015
Key Topics & Takeaways
-
Principles of Swaps
Reform: The framework for OTC swaps reform, CFTC Chairman Massad said,
includes four basic principles: 1) clearing through central counterparties; 2)
oversight of the largest market participants; 3) transparency of trading on
regulated platforms 4) regular reporting of transactions to provide
transparency and oversight.
-
Margin for Uncleared
Swaps: Massad highlighted the “key role” that the rule on margin for
uncleared swaps plays in terms of enhanced oversight. The goal is not, he said,
to push all swaps into centrally cleared facilities, but instead to allow
regular posting and collection of margin.
-
Cross-Border
Harmonization: Massad noted that the public must “keep the issue of
cross-border harmonization in perspective” and said that since regulations are
made and implemented by nation-states, all the differences will not be
eliminated, but said that much can still be done to ease the difficulties
associated with cross-border transactions.
-
Inter-affiliate
Swaps: Massad cited both the high concentration of affiliate
organizations among the currently registered swaps dealers and the potential of
risk concentration in U.S. affiliates of non-U.S. inter-affiliate trading. He
also expressed the concerns associated with regulatory complications should
margin be imposed in inter-affiliate trades.
Keynote Speaker
-
Timothy G. Massad,
Chair, Commodity Futures Trading Commission (CFTC)
Keynote Remarks
Chairman
Timothy G. Massad, Commodity Futures Trading Commission
(CFTC)
Timothy
Massad in his remarks
outlined the fundamental need for reform in the derivatives markets following
the 2008 financial crisis, noting that derivatives markets provide substantial
benefits to the economy by permitting commercial firms to hedge risks
effectively.
The
G20 Pittsburgh Accords in 2009, he said, provided the framework through which
to reform the OTC swaps market through four basic
principles: 1) clearing through central counterparties; 2) oversight of the
largest market participants; 3) transparency of trading on regulated platforms
4) regular reporting of transactions to provide transparency and oversight. The
Dodd-Frank Act, he noted, empowered the CFTC to embrace these principles and
enact them domestically in U.S. swaps markets.
While
the work is “far from finished,” he said, the CFTC’s goal is to create a
foundation upon which the markets can continue to thrive.
Progress
to Date
In
terms of central clearing, Massad noted that 75 percent of outstanding
transactions by notional value are now centrally cleared, versus just 16
percent in December 2007. He highlighted the need to make central clearing
facilities more resilient to mitigate risk effectively.
Massad
also expressed that more than 100 swap dealers are provisionally registered
with the Commission and nearly two dozen swaps execution facilities (SEFs) are
online, whose swaps accounted for nearly half of the total trades in 2014. He
added that 60 percent of client trading by notional volume is now done
electronically.
Data
reporting is another area where the CFTC has made dramatic process, Massad
noted, since all swaps must now be reported Swap Data Repositories (SDRs) which
provides better information for both regulators and market participants.
Next
Steps
Massad,
noting the importance of “fine-tuning” its rules, highlighted the need for a
solid framework to allow for successful implementation.
Central
clearing is one area in which Massad noted a need for strengthened risk
management, increased transparency, and enhanced examination, compliance, and
risk surveillance programs. He said that providing standards for clearinghouse
stress testing, margin methodologies, and recovery and resolution plans are
several key areas that the Commission looks to address in the coming months.
Massad
highlighted the “key role” that the rules on margin for uncleared swaps and the
de minimis threshold for swap designation play in terms
of enhanced oversight. The goal is not, he said, to push all swaps into
centrally cleared facilities, but instead to allow regular posting and
collection of margins for those swaps. The CFTC is working with the bank
regulators, he said, to “harmonize” the rules as much as possible.
Massad
also noted that the swaps de minimis threshold will decline from $8 billion to
$3 billion automatically if no action is taken by December 2017, and emphasized
that the CFTC will be releasing a report for public comment on this issue to
complete the re-evaluation of the de minimis well in advance of the deadline.
In
terms of cross-border harmonization, Massad asked the
crowd whether any area exists in the financial markets that has equal
cross-border regulations worldwide and noted that the public must “keep the
issue of cross-border harmonization in perspective.” Since regulations are made
and implemented by nation-states, Massad said, all the differences will not be
eliminated but much can still be done to ease the difficulties associated with
cross-border transactions.
Data
reporting, Massad expressed, is one area in which there is “still much to do”
and the CFTC’s focus in this area is on data harmonization, for which he said
the CFTC will be proposing a rule in the fall. The goal, Massad said, is to
“clean up the noise in the system” to provide coordination between
international and domestic data collection and reporting.
Massad
also noted concerns about liquidity in the markets, highlighting that many
forces including changes to market structure and the decline in clearing
members can impact liquidity market-wide.
Conclusion
Many
other issues continue to be of concern to the CFTC, Massad said, including
automated trading, cyber security, position limits, and continuing a robust
enforcement program. While Dodd-Frank and the G20 commitments made fundamental
changes to the swaps market, the discussion and debate around which reforms to
enact is “healthy.” Massad criticized those who question the need for reform at
all, and expressed the “sensible” nature of the basic principles themselves
Question & Answer
In
response to an audience question on whether margin requirements will apply to
inter-affiliate swap transactions, Massad noted the importance of the issue,
citing both the high number of affiliate organizations among the currently
registered swaps dealers and the potential of risk concentration in U.S.
entities that have non-U.S. affiliates trading.
He
highlighted that other regulators have concerns about the potential for evasion
of rules if an affiliate in an unregulated jurisdiction “lays off” its risk to
a U.S. entity. However he also noted concerns associated with regulatory
complications that arise when conducting a series of inter-affiliate
transactions and the need to collect both initial and variation margin for each
transactions, while holding capital for them.
He
said the CFTC has not yet made a decision in this area and that the CFTC is
working with prudential regulators on this issue.
CFTC
Budget
In
response to an audience question on Massad’s view of CFTC underfunding by
Congress, Massad expressed dismay that, despite the increased responsibilities
assigned to the Commission by Dodd-Frank, the resources provided by Congress
are not to scale with what is needed.
Massad
cited electronic trading, regulatory surveillance, and cyber security as areas
that pose significant risks to the market but, due to the budget shortfalls,
the Commission is not able to do as much in these areas as it would like to.
Supplemental
Leverage Ratio (SLR)
In
response to an audience question about the status of the SLR, Massad expressed
that while he supports the rule and goals behind it, he is concerned that the
rule does not make a distinction for cash margin posted with a clearing member
and treats this cash the same as other assets on the balance sheet. His main
concern, he said, is that the rule does not properly balance the objectives of
the SLR while still encouraging central clearing.
He
added that the CFTC is engaged with prudential regulators but that no
conclusion has been reached.
Regulatory
Harmonization
Former
Securities and Exchange Commission (SEC) Commissioner Annette Nazareth asked
about regulatory harmonization within U.S. regulatory agencies, and how the
CFTC views the SEC’s recent proposal on cross-border with regards to the terms
“arrange, negotiate, and execute” as applied to transactions performed by
U.S.-based persons.
While
the CFTC is in discussions with the SEC, Massad said, they have yet to decide
what to do. The CFTC is “not in the business of creating cliffs” for market
participants, he said, but noted that the CFTC-regulated markets are different
than SEC-regulated markets and so should be treated differently.
SEF
Designation & European Trading
In
response to an audience question about what the current timeline is for
permanent SEF approval and the European trading mandate, Massad expressed his
desire to complete the SEF registration by the 2016 deadline and noted
continued engagement with Europe to prevent obstacles for trades performed on
SEFs in both jurisdictions even if the rules themselves are not the same.
For
more information on this meeting, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:Special Event,Publish Year:2015
DC
Bar
Commodity
Futures Trading Commission (CFTC) Regulatory Developments
Thursday, July 23, 2015
Key Topics & Takeaways
-
Principles of Swaps
Reform: The framework for OTC swaps reform, CFTC Chairman Massad said,
includes four basic principles: 1) clearing through central counterparties; 2)
oversight of the largest market participants; 3) transparency of trading on
regulated platforms 4) regular reporting of transactions to provide
transparency and oversight. -
Margin for Uncleared
Swaps: Massad highlighted the “key role” that the rule on margin for
uncleared swaps plays in terms of enhanced oversight. The goal is not, he said,
to push all swaps into centrally cleared facilities, but instead to allow
regular posting and collection of margin. -
Cross-Border
Harmonization: Massad noted that the public must “keep the issue of
cross-border harmonization in perspective” and said that since regulations are
made and implemented by nation-states, all the differences will not be
eliminated, but said that much can still be done to ease the difficulties
associated with cross-border transactions. -
Inter-affiliate
Swaps: Massad cited both the high concentration of affiliate
organizations among the currently registered swaps dealers and the potential of
risk concentration in U.S. affiliates of non-U.S. inter-affiliate trading. He
also expressed the concerns associated with regulatory complications should
margin be imposed in inter-affiliate trades.
Keynote Speaker
-
Timothy G. Massad,
Chair, Commodity Futures Trading Commission (CFTC)
Keynote Remarks
Chairman
Timothy G. Massad, Commodity Futures Trading Commission
(CFTC)
Timothy
Massad in his remarks
outlined the fundamental need for reform in the derivatives markets following
the 2008 financial crisis, noting that derivatives markets provide substantial
benefits to the economy by permitting commercial firms to hedge risks
effectively.
The
G20 Pittsburgh Accords in 2009, he said, provided the framework through which
to reform the OTC swaps market through four basic
principles: 1) clearing through central counterparties; 2) oversight of the
largest market participants; 3) transparency of trading on regulated platforms
4) regular reporting of transactions to provide transparency and oversight. The
Dodd-Frank Act, he noted, empowered the CFTC to embrace these principles and
enact them domestically in U.S. swaps markets.
While
the work is “far from finished,” he said, the CFTC’s goal is to create a
foundation upon which the markets can continue to thrive.
Progress
to Date
In
terms of central clearing, Massad noted that 75 percent of outstanding
transactions by notional value are now centrally cleared, versus just 16
percent in December 2007. He highlighted the need to make central clearing
facilities more resilient to mitigate risk effectively.
Massad
also expressed that more than 100 swap dealers are provisionally registered
with the Commission and nearly two dozen swaps execution facilities (SEFs) are
online, whose swaps accounted for nearly half of the total trades in 2014. He
added that 60 percent of client trading by notional volume is now done
electronically.
Data
reporting is another area where the CFTC has made dramatic process, Massad
noted, since all swaps must now be reported Swap Data Repositories (SDRs) which
provides better information for both regulators and market participants.
Next
Steps
Massad,
noting the importance of “fine-tuning” its rules, highlighted the need for a
solid framework to allow for successful implementation.
Central
clearing is one area in which Massad noted a need for strengthened risk
management, increased transparency, and enhanced examination, compliance, and
risk surveillance programs. He said that providing standards for clearinghouse
stress testing, margin methodologies, and recovery and resolution plans are
several key areas that the Commission looks to address in the coming months.
Massad
highlighted the “key role” that the rules on margin for uncleared swaps and the
de minimis threshold for swap designation play in terms
of enhanced oversight. The goal is not, he said, to push all swaps into
centrally cleared facilities, but instead to allow regular posting and
collection of margins for those swaps. The CFTC is working with the bank
regulators, he said, to “harmonize” the rules as much as possible.
Massad
also noted that the swaps de minimis threshold will decline from $8 billion to
$3 billion automatically if no action is taken by December 2017, and emphasized
that the CFTC will be releasing a report for public comment on this issue to
complete the re-evaluation of the de minimis well in advance of the deadline.
In
terms of cross-border harmonization, Massad asked the
crowd whether any area exists in the financial markets that has equal
cross-border regulations worldwide and noted that the public must “keep the
issue of cross-border harmonization in perspective.” Since regulations are made
and implemented by nation-states, Massad said, all the differences will not be
eliminated but much can still be done to ease the difficulties associated with
cross-border transactions.
Data
reporting, Massad expressed, is one area in which there is “still much to do”
and the CFTC’s focus in this area is on data harmonization, for which he said
the CFTC will be proposing a rule in the fall. The goal, Massad said, is to
“clean up the noise in the system” to provide coordination between
international and domestic data collection and reporting.
Massad
also noted concerns about liquidity in the markets, highlighting that many
forces including changes to market structure and the decline in clearing
members can impact liquidity market-wide.
Conclusion
Many
other issues continue to be of concern to the CFTC, Massad said, including
automated trading, cyber security, position limits, and continuing a robust
enforcement program. While Dodd-Frank and the G20 commitments made fundamental
changes to the swaps market, the discussion and debate around which reforms to
enact is “healthy.” Massad criticized those who question the need for reform at
all, and expressed the “sensible” nature of the basic principles themselves
Question & Answer
In
response to an audience question on whether margin requirements will apply to
inter-affiliate swap transactions, Massad noted the importance of the issue,
citing both the high number of affiliate organizations among the currently
registered swaps dealers and the potential of risk concentration in U.S.
entities that have non-U.S. affiliates trading.
He
highlighted that other regulators have concerns about the potential for evasion
of rules if an affiliate in an unregulated jurisdiction “lays off” its risk to
a U.S. entity. However he also noted concerns associated with regulatory
complications that arise when conducting a series of inter-affiliate
transactions and the need to collect both initial and variation margin for each
transactions, while holding capital for them.
He
said the CFTC has not yet made a decision in this area and that the CFTC is
working with prudential regulators on this issue.
CFTC
Budget
In
response to an audience question on Massad’s view of CFTC underfunding by
Congress, Massad expressed dismay that, despite the increased responsibilities
assigned to the Commission by Dodd-Frank, the resources provided by Congress
are not to scale with what is needed.
Massad
cited electronic trading, regulatory surveillance, and cyber security as areas
that pose significant risks to the market but, due to the budget shortfalls,
the Commission is not able to do as much in these areas as it would like to.
Supplemental
Leverage Ratio (SLR)
In
response to an audience question about the status of the SLR, Massad expressed
that while he supports the rule and goals behind it, he is concerned that the
rule does not make a distinction for cash margin posted with a clearing member
and treats this cash the same as other assets on the balance sheet. His main
concern, he said, is that the rule does not properly balance the objectives of
the SLR while still encouraging central clearing.
He
added that the CFTC is engaged with prudential regulators but that no
conclusion has been reached.
Regulatory
Harmonization
Former
Securities and Exchange Commission (SEC) Commissioner Annette Nazareth asked
about regulatory harmonization within U.S. regulatory agencies, and how the
CFTC views the SEC’s recent proposal on cross-border with regards to the terms
“arrange, negotiate, and execute” as applied to transactions performed by
U.S.-based persons.
While
the CFTC is in discussions with the SEC, Massad said, they have yet to decide
what to do. The CFTC is “not in the business of creating cliffs” for market
participants, he said, but noted that the CFTC-regulated markets are different
than SEC-regulated markets and so should be treated differently.
SEF
Designation & European Trading
In
response to an audience question about what the current timeline is for
permanent SEF approval and the European trading mandate, Massad expressed his
desire to complete the SEF registration by the 2016 deadline and noted
continued engagement with Europe to prevent obstacles for trades performed on
SEFs in both jurisdictions even if the rules themselves are not the same.
For
more information on this meeting, please click here.