CFTC Chairman on Derivatives Reform
AT SEPTEMBER 27TH’s US CHAMBER OF COMMERCE International Group of Treasury Associations event, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler spoke about the current state and future path of derivatives regulation.
In his remarks, Gensler noted that the swaps market “was at the center” of the financial crisis, five years ago and said that the regulatory shift to address this market “has taken place with a consistent eye toward ensuring these reforms work for end-users.” He added that the CFTC’s “61 final rules, orders and guidance have brought traffic lights, stop signs, and speed limits to the once dark and unregulated swaps roads.”
The first “critical component” of reform Gensler mentioned was market transparency, noting that “nearly $400 trillion in market facing swaps, representing 1.8 million separate transactions, are being reported into data repositories.” He explained that every derivative product must now be reported, without exception, and that market participants will benefit from enhanced pre-trade transparency and competition as swap execution facilities (SEFs) come on-line on October 2, 2013.
On SEFs, Gensler stated that “some have called for delays in these reforms or even that certain platforms for foreign currency, energy swaps or other commodities no have to come under oversight at all,” but explained that requiring these types of trading platforms to be overseen and registered was a central part of the Dodd-Frank Act. He noted that Congress “expressly repealed exemptions, for unregistered, multilateral swap trading platforms” and “provided that such exemptions would expire by July 2012.”
Gensler stated that the CFTC wants to work with market participants to “smooth this transition” and will be reviewing requests for “no-action relief on a case-by-case basis.”
Next, Gensler discussed the clearing of derivatives and noted that on October 9 “the guaranteed affiliates and branches of U.S. persons are required to come into central clearing” but that end-users can choose whether or not to clear swaps that “hedge or mitigate commercial risks.” He also mentioned that “as of mid-September […] 72 percent of new interest rate swaps were cleared.” He further explained that the CFTC has “been thoughtful” of end-users “in ensuring that most affiliate trades are exempt from both clearing and reporting requirements” and that staff has provided “relief to certain treasury affiliates entering into swaps on behalf of non-financial affiliates from the clearing requirement.”
On swap dealer oversight, Gensler said that there are currently 82 swap dealers and two major swap participants registered and explained that non-financial companies, other than “those genuinely making markets in swaps,” will not have to register with the CFTC. He also mentioned that the CFTC’s proposed rule on margin “provides that end-users will not have to post margin for uncleared swaps,” and that the Commission continues to advocate with global regulators for an approach consistent with that of the CFTC.”
On international coordination, Gensler said the CFTC “has been consistently coordinating with our international counterparts on swaps market reform” and that “Europe, Japan and the largest provinces in Canada all have made substantial progress.” He said that “risk knows no geographic border” and “when a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk crosses international borders.”
He noted that the CFTC completed guidance on the cross-border application of their swaps provisions and that the reforms cover “transactions between non-U.S. swap dealers and guaranteed affiliates of U.S. persons, as well as swaps between two guaranteed affiliates,” while embracing “the concept of substituted compliance where there are comparable and comprehensive rules.”
Next, the Chairman noted a recent enforcement action related to the London Inter Bank Offer Rate (LIBOR) to highlight international efforts to establish a benchmark interest rate that is “anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest.” He explained that an International Organization of Securities Commissions (IOSCO) task force “took an important step in announcing new principles” in July and that the Financial Stability Board (FSB) is initiating a review of alternatives.
Finally, Gensler mentioned that the CFTC is “currently an underfunded agency” and that their current level of funding is not sustainable to properly oversee their greatly expanded jurisdiction of the swaps and futures market. He mentioned that the agency is short of staff and technology and that more resources are needed to protect customer funds and the markets from bad actors.
Question and Answer
David Hirschmann, President & CEO, U.S. Chamber Center for Capital Markets Competitiveness, began the question and answer segment by asking about margin requirements for end-users and when non-financial entities will get clarity their exemption to post margin for derivatives activities.
Gensler replied “I think this will end up where you have asked” and explained that the CFTC will be “re-proposing” or re-opening the comment period, “by the end of this calendar year,” on the margin proposal they set forth two years ago with the hope to finalize a rule with the other regulators “next summer.”
Gensler was then asked about unintended consequences of regulatory reform and if the “real economy” was “drawn in” to these regulations. He replied that the previously unregulated nature of derivatives market was what drew in the real economy to this space and said lowering the risk of these markets through regulation would allow the economy to see a net benefit.
A member of the audience asked if the CFTC would be using “speed cameras” to conduct surveillance on the “roads” of the swaps market and what criminal liability exists for end users not fully complying with rules. Gensler replied that he does not think the CFTC has the budget for speed cameras, but that the thinks the agency may want to use surveillance in the future to detect market abuse and manipulation.
Hirschmann then asked how the CFTC will ensure that reforms will allow for a globally functioning system and expressed concern that some foreign trading platforms may “carve out” U.S. entities. Gensler replied that he agrees that the best situation would be to harmonize rules globally, but said “this is not where we will end up.” He then said that he encourages foreign platforms and jurisdictions to work with the CFTC to ensure there is transparency and properly regulated markets, but stressed that Congress did not want to exempt foreign boards of trade from their regulations.
When asked if there should be a push for more education to help people understand the derivative products they may be purchasing, Gensler said that while he thinks education is critical, the majority of participants are sophisticated institutional players who know what they are buying.
Next, Hirschmann asked if the CFTC will be going back and replacing no-action letters with more legally certain rule makings. Gensler replied yes, and that the Commission is open to taking such action moving forward to address issues that arise.
Hirschmann then asked how the CFTC will handle situations around the October 2, SEF compliance date if certain participants are not technologically ready to comply and expressed concern that there may be a perverse effect of creating darker markets if these platforms are not fully ready to function. Gensler replied that the CFTC has been listening to participants and separating out what is doable and what may take more time. He noted that in the past the Commission has separated out relief by things like asset class and that “reporting is one area we are looking closely at.”
In response to a question on international rules for data sharing from trade repositories, Gensler said that the CFTC is working closely with foreign counterparts to determine what data is allowed to be seen. He noted that lawyers are currently looking into what this requires.
Another member of the audience expressed concern that banks dealing with end users would have to hold more capital under new regulatory requirements, including the credit valuation adjustment (CVA), and said it could lead to wider credit spreads and make derivatives “prohibitively expensive.” Gensler replied that he did not know how this problem will ultimately get resolved as the issue of capital requirements falls under the jurisdiction of other regulators.
For more information on this event and to view a webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:Special Event,Publish Year:2013
AT SEPTEMBER 27TH’s US CHAMBER OF COMMERCE International Group of Treasury Associations event, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler spoke about the current state and future path of derivatives regulation.
In his remarks, Gensler noted that the swaps market “was at the center” of the financial crisis, five years ago and said that the regulatory shift to address this market “has taken place with a consistent eye toward ensuring these reforms work for end-users.” He added that the CFTC’s “61 final rules, orders and guidance have brought traffic lights, stop signs, and speed limits to the once dark and unregulated swaps roads.”
The first “critical component” of reform Gensler mentioned was market transparency, noting that “nearly $400 trillion in market facing swaps, representing 1.8 million separate transactions, are being reported into data repositories.” He explained that every derivative product must now be reported, without exception, and that market participants will benefit from enhanced pre-trade transparency and competition as swap execution facilities (SEFs) come on-line on October 2, 2013.
On SEFs, Gensler stated that “some have called for delays in these reforms or even that certain platforms for foreign currency, energy swaps or other commodities no have to come under oversight at all,” but explained that requiring these types of trading platforms to be overseen and registered was a central part of the Dodd-Frank Act. He noted that Congress “expressly repealed exemptions, for unregistered, multilateral swap trading platforms” and “provided that such exemptions would expire by July 2012.”
Gensler stated that the CFTC wants to work with market participants to “smooth this transition” and will be reviewing requests for “no-action relief on a case-by-case basis.”
Next, Gensler discussed the clearing of derivatives and noted that on October 9 “the guaranteed affiliates and branches of U.S. persons are required to come into central clearing” but that end-users can choose whether or not to clear swaps that “hedge or mitigate commercial risks.” He also mentioned that “as of mid-September […] 72 percent of new interest rate swaps were cleared.” He further explained that the CFTC has “been thoughtful” of end-users “in ensuring that most affiliate trades are exempt from both clearing and reporting requirements” and that staff has provided “relief to certain treasury affiliates entering into swaps on behalf of non-financial affiliates from the clearing requirement.”
On swap dealer oversight, Gensler said that there are currently 82 swap dealers and two major swap participants registered and explained that non-financial companies, other than “those genuinely making markets in swaps,” will not have to register with the CFTC. He also mentioned that the CFTC’s proposed rule on margin “provides that end-users will not have to post margin for uncleared swaps,” and that the Commission continues to advocate with global regulators for an approach consistent with that of the CFTC.”
On international coordination, Gensler said the CFTC “has been consistently coordinating with our international counterparts on swaps market reform” and that “Europe, Japan and the largest provinces in Canada all have made substantial progress.” He said that “risk knows no geographic border” and “when a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk crosses international borders.”
He noted that the CFTC completed guidance on the cross-border application of their swaps provisions and that the reforms cover “transactions between non-U.S. swap dealers and guaranteed affiliates of U.S. persons, as well as swaps between two guaranteed affiliates,” while embracing “the concept of substituted compliance where there are comparable and comprehensive rules.”
Next, the Chairman noted a recent enforcement action related to the London Inter Bank Offer Rate (LIBOR) to highlight international efforts to establish a benchmark interest rate that is “anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest.” He explained that an International Organization of Securities Commissions (IOSCO) task force “took an important step in announcing new principles” in July and that the Financial Stability Board (FSB) is initiating a review of alternatives.
Finally, Gensler mentioned that the CFTC is “currently an underfunded agency” and that their current level of funding is not sustainable to properly oversee their greatly expanded jurisdiction of the swaps and futures market. He mentioned that the agency is short of staff and technology and that more resources are needed to protect customer funds and the markets from bad actors.
Question and Answer
David Hirschmann, President & CEO, U.S. Chamber Center for Capital Markets Competitiveness, began the question and answer segment by asking about margin requirements for end-users and when non-financial entities will get clarity their exemption to post margin for derivatives activities.
Gensler replied “I think this will end up where you have asked” and explained that the CFTC will be “re-proposing” or re-opening the comment period, “by the end of this calendar year,” on the margin proposal they set forth two years ago with the hope to finalize a rule with the other regulators “next summer.”
Gensler was then asked about unintended consequences of regulatory reform and if the “real economy” was “drawn in” to these regulations. He replied that the previously unregulated nature of derivatives market was what drew in the real economy to this space and said lowering the risk of these markets through regulation would allow the economy to see a net benefit.
A member of the audience asked if the CFTC would be using “speed cameras” to conduct surveillance on the “roads” of the swaps market and what criminal liability exists for end users not fully complying with rules. Gensler replied that he does not think the CFTC has the budget for speed cameras, but that the thinks the agency may want to use surveillance in the future to detect market abuse and manipulation.
Hirschmann then asked how the CFTC will ensure that reforms will allow for a globally functioning system and expressed concern that some foreign trading platforms may “carve out” U.S. entities. Gensler replied that he agrees that the best situation would be to harmonize rules globally, but said “this is not where we will end up.” He then said that he encourages foreign platforms and jurisdictions to work with the CFTC to ensure there is transparency and properly regulated markets, but stressed that Congress did not want to exempt foreign boards of trade from their regulations.
When asked if there should be a push for more education to help people understand the derivative products they may be purchasing, Gensler said that while he thinks education is critical, the majority of participants are sophisticated institutional players who know what they are buying.
Next, Hirschmann asked if the CFTC will be going back and replacing no-action letters with more legally certain rule makings. Gensler replied yes, and that the Commission is open to taking such action moving forward to address issues that arise.
Hirschmann then asked how the CFTC will handle situations around the October 2, SEF compliance date if certain participants are not technologically ready to comply and expressed concern that there may be a perverse effect of creating darker markets if these platforms are not fully ready to function. Gensler replied that the CFTC has been listening to participants and separating out what is doable and what may take more time. He noted that in the past the Commission has separated out relief by things like asset class and that “reporting is one area we are looking closely at.”
In response to a question on international rules for data sharing from trade repositories, Gensler said that the CFTC is working closely with foreign counterparts to determine what data is allowed to be seen. He noted that lawyers are currently looking into what this requires.
Another member of the audience expressed concern that banks dealing with end users would have to hold more capital under new regulatory requirements, including the credit valuation adjustment (CVA), and said it could lead to wider credit spreads and make derivatives “prohibitively expensive.” Gensler replied that he did not know how this problem will ultimately get resolved as the issue of capital requirements falls under the jurisdiction of other regulators.
For more information on this event and to view a webcast, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:Special Event,Publish Year:2013