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CFTC GMAC Meeting

Commodity Futures Trading Commission

Global Markets Advisory Committee Open Meeting

Monday, October 25, 2021


Panel 1: Treasury Market Structure and Recent Stresses
Presenters:

  • Sam Schulhofer-Wohl, Senior Vice President and Director of Financial Policy and Outreach, Federal Reserve Bank of Chicago
  • Michael Pedroni, Executive Vice President and Managing Director, Head of Global Research and Markets, Managed Funds Association (MFA)
  • Jennifer Han, Chief Counsel and Head of Regulatory Affairs, Managed Funds Association (MFA)

In Schulhofer-Wohl’s presentation, he explained two events during September 2019 and March 2020 to highlight recent major stresses in the Treasury markets. He discussed a few areas to mitigate against future stresses including calls to improve the collection of market data and address gaps in data for the repo market. He also mentioned there have been suggestions from the SEC to extend Regulation ATS (alternative trading systems) for government securities, which he said can help support access and reliability.

In Pedroni and Han’s presentation, they began discussing Treasury market attributes that impact new policy reforms going forward. Pedroni emphasized that Treasuries are not uniform markets and highlighted the importance of expanded central clearing solutions for reforms moving forward. He said Treasury markets rely on a multitude of market participants with banks being the most important source of financing, followed by nonbanks and then hedge funds. Pedroni added that Treasury markets on both the cash and repo side do not have enough central clearing options, and said having more options for central clearing would help modernize Treasury markets and bring them in line with other parallel markets. Their recommendations for reforms included: (1) expand central clearing solutions, (2) make targeted enhancements to regulatory data collection like shortening the reporting time for treasuries and adding clearing indicators, (3) carefully introduce public dissemination of post-trade transaction data, and (4) rationalize trading venue oversight.

Question & Answer
Supurna VedBrat, BlackRock, said the suggestions for enhancing the Treasury market should be put in place over the next several months. Additionally, she said from a collateral standpoint, she would like to see a consideration for an expansion of the type of collateral that would be acceptable for clearing margin, as well as allowing client’s to net collateral posted. Finally, she asked about clearing solutions and if they are meant to be for both on-the-run and off-the-run Treasuries. Pedroni said the solutions would more greatly benefit off-the-run Treasuries, noting that it is an area where clearance solutions are currently very slight.

Panel 2: Clearing in the Treasury Market
Presenters:

  • Professor Darrell Duffie, Adams Distinguished Professor of Management and Professor of Finance, Graduate School of Business, Stanford University
  • Graham Harper, FIA Principal Traders Group Executive Committee Member and Head of Public Policy and Market Structure, DRW Trading Group
  • Laura Klimpel, General Manager, Fixed Income Clearing Corporation

In Professor Duffie’s presentation, he said central clearing is not to be taken for granted and must be very well regulated. He presented slides which showed the implications of settlement failures which soared dramatically during mid-March, explaining that as the dealer balance sheets get clogged up, it gets more and more difficult to finish trades as promised. He said the discussion today will help the understanding of where impediments might be, and hopes that reforms will not cause undue cost or worsen the performance of the market.

In Harper’s presentation on Treasury clearing, he discussed the importance of client clearing and focused on the limitations within current FICC client clearing. Specifically relating to sponsored clearing, he said clearing members are permitted by FICC and elect to only accept transactions that are executed with them, meaning market participants are unable to locate a clearing member to clear their entire portfolio across execution counterparties. Harper concluded with recommending that FICC implement similar enhancements to its client clearing offering so that it is available to all types of market participants. The main suggestions were to (1) remove the ability for Sponsoring clearing members to discriminate based on execution counterparty, and (2) require clearing members to operate independently from affiliated trading businesses when deciding whether to offer clearing services to a particular client and the associated commercial terms.

In Klimpel’s presentation, she described the benefits of improving clearance in treasuries markets and emphasized mitigation of fire sale risk as a top priority to strengthen resiliency of the treasury market to future stresses. She also discussed sponsored clearing and how FICC permits transactions of sponsored member clients to be completed by members themselves or a third party. She added that providing access to central clearing requires retention all of the models currently in use. Klimpel also insisted on improving the efficiency of cross margining and expressed her hope to roll out an enhanced model in the future. She added that a public-private partnership is needed to improve cross-margining and treatment of margin.

Panel 3: Dodd-Frank Act Implementation
Presenters:

  • Tara Kruse, Global Head of Infrastructure, Data and Non-Cleared Margin, International Swaps and Derivatives Association, Inc. (ISDA)
  • Kyle Brandon, Managing Director, Head of Derivatives Policy, Securities Industry and Financial Markets Association (SIFMA)
  • Colin Lloyd, Partner, Cleary Gottlieb Steen & Hamilton LLP

Kruse began her presentation on swap data repositories (SDR) and mentioned the November 2020 rule, saying it was an overhaul of the real time reporting requirements with the intention to approve the data available to the Commission on derivatives trading practices. She noted that in September 2021, the updated technical specifications for SDRs was published and each SDR will now need to update their systems and counterparties will need to build out the changes to their logic with only seven months before the go-live date. Kruse also addressed the difficulty of having three different compliance dates, one of the rule, one for the unique product identifier, and one for ISO 20022 standard to be updated to incorporate CFTC fields. She added that many firms and ISDA have been working on an open source code through the Digital Regulatory Reporting Imitative, which is currently being built out for the CFTC and will be extended and harmonized as other jurisdictions finish their rule sets.

In Lloyd’s presentation, he discussed three main implementation issues. (1) The requirement for non-bank swap dealers (SDs) to maintain capital to a percentage of their uncleared swap margin amount, which extends to trading reporting in scope for uncleared margin requirements. (2) Some dual CFTC and SEC registrant firms are electing to use an alternative compliance mechanism approach at the SEC, which allows them to comply with comparable home country rules, but there remain a number of questions of how this mechanism will be administered in practice. (3) The ability to use internal models to compute market and credit risk charges for capital and the backlog of approvals that currently exists at the NFA, specifically for those non-bank firms who do not already have internal models approved.

In Brandon’s presentation, she spoke about the joint CFTC and SEC request for comment on uncleared swaps and non-cleared security-based swaps, noting that in the coming days non-bank SD-SBSDs will be subject to a different margin regime, putting them at a competitive disadvantage. Brandon discussed portfolio margining and that it would offer benefits to both market participants and the securities and derivatives markets, and agreed with the Commission that any portfolio margining arrangement should take into account customer protection, financial stability, and other margin regulatory objectives. Brandon also presented on cross-border issues of the CFTC capital rules and said the CFTC allowed SDs to rely on the bank-based approach, which allows non-U.S. firms who are looking to rely on substituted compliance, to use their home country methods, which differs from the net capital approach. Brandon then moved onto financial reporting for non-U.S. bank SDs, noting it was accidentally left out of the capital rule. While the Commission addressed the issue through temporary no-action relief, Brandon said she looks forward to continuing to engage with staff for a more permanent solution.

Question & Answer
Amy Hong, Goldman Sachs, said the Commission should look into the cause for U.S. non-bank SD difficulties surrounding implementation of initial margin and model valuation rules, which are particularly challenging given the current timeline.

Ashley Belich, RBC, noted that one aspect compounding current SDR issues on implementation is that many jurisdictions outside of U.S. look to CFTC rulemaking as guidance for rewriting of own rules. Belich said this is especially important in areas of coding and interpretation of complex technical scenarios and if firms are facing these issues from a U.S. perspective, they will likely face similar issues from a home country perspective, thus causing further fragmentation.

Closing Remarks
Commissioner Stump said they need time to conduct analysis heard today on Treasury markets, and to set the record straight on who is actively selling and why. She stated that we do not operate in a vacuum and cannot ignore the impact of post-crisis reforms. The Commissioner stated the swap data repository rules have been a labor of love and that immediate attention needs to go to substituted compliance for SDR. The Commissioner also stated she is aware there are things that require Commission attention to make the SD capital rule workable.

For more information on this hearing, please click here.