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Commodity Futures Trading Commission Open Meeting

Commodity Futures Trading Commission

Open Meeting

Tuesday, December 10, 2019

 

Opening Statements & Introduction

Chairman Heath P. Tarbert

After providing a brief overview of the agenda items, Tarbert noted his support for the changes under consideration and stressed the need for transparency when it comes to the work of the Commodity Futures Trading Commission (CFTC). He stated that the CFTC will continue to focus on three areas of concern when putting forth regulation: first, transparency in rulemaking; second, how the CFTC applies regulation; and third, how the CFTC enforces such regulation. On rulemaking, the Chairman emphasized that the Commission is taking steps to improve its rulemaking process by codifying the final rule on Part 13, as well as publishing a summary of the CFTC’s rulemaking process in plain English on their website. On application, Tarbert noted the importance of the notice and comment process and that staff relief, such as no-actions, interpretive guidance, and exemptive relief letters, should be used as a supplement to the Administrative Procedure Act (APA) rather than a substitute. Lastly, on enforcement, the Chairman stated that as of January 1, 2020 he will not present to the Commission any enforcement settlement or consent order that restricts the Commission or staff from publicly stating their views on the case.

Commissioner Brian Quintenz

Quintenz began his opening statement by noting his support for all three rulemakings before the Commission. Quintenz opined that swaps market reforms should be viewed together, rather than in isolation, as done by prior regulators. He stated that regulatory capital regimes implemented to respond to the last crisis need to respect the increased transparency and certainty which other reforms have already brought to the market. Quintenz then noted that if capital costs are too expensive, firms will restrict certain business activities, end unprofitable business lines, or possibly exit the swaps and futures markets, decreasing liquidity. Quintenz then addressed two key aspects of the proposal: (1) the eight percent risk margin amount; and (2) the model approval process. On the risk margin amount, he stated that he is interested in seeing data showing the capital costs of including proprietary positions in an futures Commission merchants’ (FCMs) risk margin amount, and whether it makes sense to remove the risk margin amount altogether for standalone swap dealers electing the net liquid asset approach, given the other minimum capital level requirements in the proposal.  On the model approval process, he noted he is interested in hearing commenters’ views on how the Commission or National Futures Association (NFA) should review or accept capital models that have already been approved by another regulator. Finally, on the amendments to the exemption from the swap clearing requirement for certain affiliated entities regarding alternative compliance frameworks for anti-evasionary measures, Quintenz indicated his support noting that the proposal would simplify the existing inter-affiliate exemption to reflect current market practices and eliminate complicated provisions that may never have received relief.

Commissioner Dawn D. Stump

Stump opened by thanking staff for their work on the proposal and emphasizing the importance of regulatory capital for swap dealers because swap dealers and other market participants that rely on their services need regulatory certainty. Stump noted that much has changed since the 2016 Capital Proposal and the CFTC will need to solicit a more contemporary snapshot of the issues.

Commissioner Dan M. Berkovitz

Berkovitz opened by noting his support for the Chairman’s announcement that he will not put before the Commission for a vote any settlement agreement or enforcement matter that constrains the Commission, Commissioners, and staff from making public statements about the matter. He continued by emphasizing his right to speak on all matters before the Commission, which was recently held up by the United States Court of Appeals, specifically referencing the Commodity Exchange Act. In addition to further defending the Commissioners’ right to make public statements on matters before the Commission, Berkovitz stated he believes that the Commission should formally recognize that the protections extend to both the Commission and staff.

Staff Presentation: Final Rule – Amendments to Part 13 of the Commission’s Regulations (Public Rulemaking Procedures)

Staff:

  • Daniel J. Davis, Office of General Counsel (OGC)
  • Herminio Castro, OGC

Castro stated that these final amendments would eliminate provisions in Part 13 of the Commission’s regulations and require that the Commission post a summary of the rulemaking process, in plain English, on the CFTC website. In providing background, Castro noted that Part 13 was originally promulgated in 1986 and was meant to track the rulemaking process of the APA. He continued that because the APA governs rulemaking, staff believes that Part 13 is now unnecessary. Further, he stated that the final rule would retain 13.2 that promulgates rulemaking via petition, a provision that is not included in the APA. Castro noted that in light of comments received, staff recommends that the CFTC allow the electronic submission of rulemaking as well as post the petitions on the CFTC website. Castro concluded that it is the Commission’s policy to make public ex-parte communications that provide significant material information regarding the proposed rule, including names and affiliations.

Question & Answer

In response to a question from Berkovitz, Castro reaffirmed that it is the Commission’s policy to include all ex-parte communications that provide significant material information on the CFTC website and on the official record.

Staff Presentation: Proposed Rule – Capital Requirements for Swap Dealers and Major Swap Participants (Reopening the Comment Period and Requesting Additional Comment)

Staff:

  • Joshua B. Sterling, Division of Swap Dealer and Intermediary Oversight (DSIO)
  • Thomas J. Smith, DSIO
  • Jennifer Bauer, DSIO
  • Paul Schlichting, OGC
  • Joshua J. Beal, DSIO
  • Rafael Martinez, DSIO

Sterling provided a summary of the proposed rule and stated that this would be the last substantive rule that would be adopted with respect to swap dealers. He continued that after this rulemaking, swap dealers would have full registration, a capstone event of the Dodd-Frank regulatory regime. Sterling said that it is appropriate to take notice of events that have transpired since the original 2016 proposal, specifically noting the adoption of the capital proposal by the Securities and Exchange Commission (SEC). Sterling recommended that the Commission take notice of what the SEC has done and consider it. He concluded that reopening the comment period on the proposal will grant the Commission the ability to receive and aggregate quality feedback with respect to a recommendation on capital.

Beale stated that DSIO staff provided the SEC, as well as the prudential regulators, the opportunity to comment on this proposed rule. He continued that there are currently 107 provisionally registered swap dealers with 54 being subject to CFTC capital and margin rules and 53 being subject to prudential capital rules. Beale said that a notice of re-opening would help address issues such as the 8 percent risk margin calculation, how the 2016 proposal treats FCMs, as well as the tangible net worth approach. Beale concluded by emphasizing the importance of using models and the model approval process.

Question & Answer

Berkovitz noted his concern with the proposal and asked whether this proposed rule is intended to serve as the basis for a final rule. Sterling responded that this proposal and comments will better inform the 2016 proposal and serve as the basis for an eventual final rule. Berkovitz continued by questioning the eight percent risk margin amount, specifically whether the CFTC has the necessary information to propose an exact number. Staff responded that the 2016 proposal put forward the eight percent amount and that by reopening the comment period, the CFTC will be able to gauge whether this number was correct or whether it needs further revision. Bauer specifically noted that the floor of margin is something that was proposed across the board and the core concept is not being alerted. She stated that this proposal is directed towards calibrating the percentage. Berkovitz emphasized the need for a notice and comment process, stating that if the CFTC is asking commenters to support a different approach from what was originally proposed and such commenters provide data and feedback that would suggest a different approach, the Commission cannot go final and would have to re-propose at that point in time. He concluded by reiterating that harmonization should not be pursued for harmonization’s sake and that it should be independently supported. Ultimately, Commissioner Berkovitz noted his dissent.

Behnam asked whether the goal is to get to the same place on the backend when using three different methodologies (Basel Method, Futures Commission Merchants/Broker-Dealer Method, and the Tangible Net Worth Method). Beale responded that each method requires capital and the 2016 proposal acknowledged the fact that diversity in methodology was needed due to the diverse nature of the registrant pool and the fact that some registrants are already subject to capital rules because of their parent organization. He noted that while each will likely result in different conclusion, all are intended to cover entity level risk. In response to an inquiry from Behnam regarding the NFA’s model review process, Martinez echoed Beale in stating that while the three alternative models are structured differently, all are intended to eliminate the risk of the overall portfolio as well as the risk of the specific relationship with a counterparty. He continued that they plan to use the Basel Method because following the global standard will allow the CFTC to tap into the pool of experts that have experience in this field. He concluded that this will be a big challenge, in terms of both approving and monitoring, and that the CFTC will be relying heavily on the NFA in this effort.

Behnam then outlined his opposition to this proposed rule. He specifically noted that he believes that inviting comment on matters tangential to the 2016 Capital Proposal as opposed to a thoughtful re-proposal sacrifices discipline for expediency and runs afoul of proper process for notice and comment. He concluded that this proposed rule is simply a reopening of the comment period and a request for comment, rather than a true proposal, and that the 2016 measure will remain the only concrete indictor of the Commission’s thinking on this matter.

Both Tarbert and Quintenz voiced their support for this proposed rule.

Staff Presentation: Proposed Rule – Amendments to the Swap Clearing Requirement Exemption for Inter-Affiliate Swaps

Staff:

  • Clark Hutchison, Division of Clearing and Risk (DCR)
  • Sarah E. Josephson, DCR
  • Melissa D’Arcy, DCR

D’Arcy provided a summary of the proposed rule which would reinstate the expired alternative compliance frameworks for the inter-affiliate swaps clearing exemption, with minor revisions to reflect the current variation margining practices of affiliated counterparties electing the exemption. She noted that this proposal would codify the relief provided by DCR staff no-action letters and would make the two alternative compliance frameworks available to affiliated entities permanent. She continued that this measure would also streamline the rule and ensure that any superfluous provisions, which may result in unnecessary burden, are deleted. She noted that this proposed rule has a 60-day comment period following publication in the Federal Register and that they are seeking comments from market participants on all aspects of this proposed rule. D’Arcy made it clear that the Commission is willing to review any provision that is deemed to be unnecessary in this proposed rulemaking if a market participant views such a provision as important. She stated that this proposed measure is intended to reflect the Commission’s dedication to sound regulation and that staff believes that the time is right to propose such amendments. She concluded that this proposal will simplify the existing inter-affiliate exemption to reflect current market practices.

Question & Answer

Tarbert voiced his support for this proposal as well as the official codification of no-action letters as a general practice.

Quintenz asked about what types of entities typically elect this exemption. Josephson responded that they are typically financial entities that are registered with the Commission, or they are affiliates of entities that are registered with the Commission. She continued that this pool of entities has remained relatively consistent over the years.

In response to a question from Behnam, D’Arcy responded that in putting forward this proposed rule, Commission staff recognized that central clearing is the best way to mitigate risk but the practice of doing so is not necessarily workable for entities operating outside of the U.S.. She stated that these entities should not be put at a market disadvantage just because of the jurisdiction they are located in. As such, staff view the collection of variation margin as the next best way to mitigate risk. Behnam continued that he is comfortable with supporting this proposal because the CFTC has a number of powers that will allow the Commission to both identify and monitor the entities that are electing this exemption as well as how they are electing it.

However, in his concurrence, Behnam stated that there was one significant aspect of the proposal that gave him pause. He continued that in the preamble to the 2013 rule, and similarly in the preamble in the proposed rule, the Commission stated that the Alternative Compliance Framework provided for the Outward-Facing Swaps Condition is “not equivalent to clearing and would not mitigate potential losses between swap counterparties in the same manner that clearing would.” He took issue with the Commission proposing to exempt certain transactions from central clearing under the theory that variation margin mitigates counterparty credit risk as he is not absolutely certain that we are not injecting unnecessary risk into the system by exempting these transactions from central clearing in the name of focusing on the easiest, cheapest risk management tool.

Berkovitz and Stump both voiced support for the proposed rulemaking. Berkovitz asked whether foreign affiliates would still have to comply with ‘home-country’ regulations and clearing requirements. Josephson responded that this proposal does not exempt such non-U.S. affiliates and they will still most likely have to clear their outward facing swaps.

Final Vote (Final Rule – Amendments to Part 13 of the Commission’s Regulations (Public Rulemaking Process))

The final rule was approved in a 5-0 unanimous vote.

Final Vote (Proposed Rule – Capital Requirements for Swap Dealers and Major Swap Participants (Reopening the Comment Period and Requesting Additional Comment))

The final rule was approved in a 3-2 vote, with Berkovitz and Behnam opposing.

Final Vote (Proposed Rule – Amendments to the Swap Clearing Requirements Exemption for Inter-Affiliate Swaps)

The final rule was approved in a 5-0 unanimous vote.

For more information on this event, please click here.

For an archive of past SIFMA hearing coverage, please click here.