CFTC Open Meeting

Commodity Futures Trading Commission (CFTC)

Open Meeting

Monday, March 25, 2019

Opening Statements

Chairman J. Christopher Giancarlo

Giancarlo explained that Brexit has created market uncertainty and that the CFTC has been working to bring clarity for market participants in the derivatives markets through actions and statements with global counterparts in London, Brussels, and Singapore. He discussed the joint statement between the U.S. and UK regarding the UK’s withdrawal from the EU and how there will continue to be clearing after the event. Giancarlo continued that the interim final rule will continue to bring regulatory certainty to the derivatives markets, preventing possible systemic risk, adding that there will be an opportunity for public comments. Regarding the final rule for a de minimis exception for swaps entered into by Insured Depository Institutions (IDIs) in connection with loans to customers, he noted the “strong public support” for such a narrowly tailored exception, adding that it will increase market efficiencies and reduce the regulatory burdens for small and midsize banks to enter into swaps. Giancarlo explained that these swaps are used to minimize and hedge risk, allowing businesses to focus on growing. He explained that three years after implementation, there will be a study to see how the market has responded under the rule and if any limitations are needed.

Commissioner Rostin Behnam

Behnam voiced his support for the interim final rule regarding Brexit, noting that of all the U.S. regulators, it seems the CFTC is best prepared due to Giancarlo’s leadership on the issue. Regarding the final rule on the IDI exclusion, he explained that he will not vote in favor because it raises too many uncertainties, could lead to systemic risk, and that the CFTC should have worked with the Securities and Exchange Commission (SEC) to jointly amend the exclusion to more accurately address the activities of IDIs.

Commissioner Dan M. Berkovitz

Berkovitz also voiced his support for the interim final rule on Brexit, but noted that he would vote against the final rule on the de minimis exception to the swap dealer definition for “substantive and procedural reasons,” echoing Behnam’s comments that the CFTC should have had a joint rulemaking on the issue with the SEC.

Interim Final Rule Regarding Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants in Light of Brexit

Jacob Chachkin from the Division of Swap Dealer and Intermediary Oversight (DSIO) explained that if the UK withdraws from the EU without an agreement, it will cause a no-deal Brexit and could have negative implications on the markets. Specifically, that market participants in the UK will not be able to rely on the EU regime (such as margin rules for swap dealers). He explained that the interim final rule would allow for legacy swaps in the EU or UK to maintain their legacy status if transferred solely as a result of a no-deal Brexit. Chachkin clarified that terms of the swap would not be able to be modified and that if there is a Brexit deal or Brexit does not occur; the interim final rule will not provide any relief.

Commissioner Brian Quintenz noted that prudential regulators took a similar action weeks ago, but their rule only permits transfers from the UK to an affiliate in the US or EU, while the CFTC’s proposal allows for the transfer to any margin affiliate, no matter the location. Chachkin replied that while the CFTC’s rule is broader, the prudential regulators may expand their relief with final rules that look more like the CFTC’s.

The interim final rule was unanimously agreed to.

 Final Rule Regarding the De Minimis Exception to the Swap Dealer Definition – Swaps Entered into by Insured Depository Institutions in Connection with Loans to Customers

Matt Kulkin, DSIO, discussed how the final rule will give small and midsize U.S. banks clarity regarding swap dealer registration requirements and that IDI end user loan customers will more easily be able to hedge their loan-related risk through their existing banking relationships. Amanda Olear, DSIO, emphasized cross-agency coordination, noting that DSIO consulted with the SEC and other prudential regulators on the issue, sharing multiple drafts and responding to comments received during the rulemaking process. Jeffrey Hasterok, DSIO, gave an overview of the detailed analysis of 2017 trade data, focused mainly on swaps activities by IDIs that would most likely be impacted by the amendment. Rajal Patel, DSIO, noted that the amendment would allow for people to engage in a de minimis amount of dealing without the cost of registering as a swap dealer, encouraging participation and competition.

Commissioner Quintenz asked about the coordination between regulators in finalizing the rule, to which Kulkin replied that they worked with the Federal Deposit Insurance Corporation (FDIC), Federal Reserve, Office of the Comptroller of the Currency (OCC), and SEC.

Commissioner Behnam stressed his opposition to the amendment, questioning the CFTC’s action conflicting with Congress’s intent which states that swaps activity related to loan origination from an IDI is not swap dealing, adding that the amendment forces IDI-related swaps activity into swap dealing. Kulkin replied that during the comment process they did not receive any comments from IDIs on potential regulatory burden, and instead heard from IDIs that this would be “easily implemented and easily complied with,” resulting in increased hedging to customers.

CFTC Statements

Commissioner Quintenz voiced his support for the final rule, noting that it will allow for end user borrowers to mitigate risk and allow small and midsize banks with more flexibility to serve customer needs, noting that the work was done with “full coordination” with the SEC and other prudential regulators. He added that the amendment is one of “many improvements” to the June 2018 de minimis threshold proposal that “needs to be finalized.”

Commissioner Behnam stated that while much of the proposal was created from “good data and facts” and speaking with stakeholders, he “does not think this is the way” to make changes to improve the rule set. He continued that the CFTC must uphold Congress’s intent and the statutory language, and that while there may be coordination statements, it “does not supplant harmonization and joint rulemaking.”

Commissioner Stump noted that while she previously gave the CFTC an “incomplete” grade for the de minimis threshold as more work needed to be done at the time, she now gives it a complete grade and supports the amendment.

Commissioner Berkovitz echoed Behnam’s comments, adding that the three-year study after implementation is “like opening the barn door today and in three years studying where the cows went.” He continued that while the rationale is to help small and midsize banks, this amendment will allow the larger banks to do the same which could lead to less competition in local markets. Berkovitz stated that while he is not opposed to “reasonable incremental changes to the IDI exclusion if it serves public policy goals and is adopted in a manner set forth by Congress…this doesn’t do that.”

The final vote was 3-2, with Commissioners Berkovitz and Behnam voting no.

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