Senate Agriculture Committee on CFTC Derivatives Regulation
Senate Agriculture Committee
“The Commodity Futures Trading Commission:
Effective Enforcement and the Future of Derivatives Regulation”
Wednesday, December 10, 2014
Key Topics & Takeaways
- Margin for Uncleared Swaps: Massad stressed the importance of the margin rule and implementing it in a “way that works” and does not disrupt the markets. He added that requests for a delay in the rule’s implementation will be looked at with “a good amount of skepticism” but that the Commission will try to come up with “a reasonable approach here.”
- Cybersecurity: Massad said there is “a lot of coordination” among government agencies on cybersecurity issues and specifically noted that he and Fed Governor Jerome Powell have met on the subject.
- Position Limits: Massad stressed the challenge in drawing a “bright line” that distinguishes between commercial users and speculators and said the CFTC is “proceeding on multiple tracks” for this “very complicated rule.”
- De-Guaranteed Affiliates: Massad said that de-guaranteeing foreign affiliate swaps transactions “may comply with our rules,” but that the question for the CFTC and banking regulators is whether there is still a risk posed to the U.S. financial system.
- Physical Commodities: Massad noted that the LME is “trying to reform some of its warehousing arrangements” and that the CFTC will look at “whether additional actions are needed” if LME’s reforms do not work. He added that an important issue to consider is “whether banks should even be in some of these businesses,” but noted that this question is under the banking regulators’ jurisdiction.
Witness:
- Tim Massad, Chairman, Commodity Futures Trading Commission
Opening Statements
Chair Debbie Stabenow (D-Mich.), in her opening remarks, stated the U.S. has “come a long way” since the financial crisis, noting there have been 59 consecutive months of job creation, but said there is “still a lot of work to do” to ensure that financial markets are “safe, transparent, and accountable.”
Stabenow highlighted that the CFTC was given new authorities since the crisis, but not new resources to go along with this increased responsibility. She mentioned that the omnibus spending bill under consideration includes only a “meager increase” to the CFTC’s budget and that the increase comes with conditions and “handcuffs” on the agency. Stabenow said the Dodd-Frank Act is being undermined each day that regulatory agencies go underfunded.
Stabenow expressed support for the CFTC’s actions to address concerns of end-users in the derivatives markets, stressing the importance of doing so, because “when these markets don’t work, consumers feel the pain.”
Witness Testimony
CFTC Chairman Tim Massad, in his testimony, noted that the CFTC has been “just as focused” on its traditional areas of responsibility in the futures and options markets as it has moved forward with its new authorities. He noted that the CFTC has increased oversight of key market participants and that trading of swaps on regulated platforms is increasing.
Massad said the priorities of the Commission include working with international counterparts to build a strong and global regulatory framework, focusing on data collection and analysis, dealing with swap trading issues, working on cybersecurity issues, and monitoring the increasing use of automated trading and the use of virtual currencies.
Massad stressed that the CFTC’s current budget “significantly limits” its ability to respond to problems and effectively monitor the markets. He said the agency is grateful that the omnibus bill includes an increase in funding, but said he is “convinced the need is far greater” than what was included.
Question and Answer
Resources
Stabenow began the discussion by asking if the CFTC has the needed resources to provide regulatory certainty and help market participants meet compliance deadlines. Massad said resource constraints makes it “very, very difficult” to meet deadlines, noting that the CFTC needs to get through 100 applications of swap dealers and 22 applications for swap execution facilities (SEFs) that are currently only provisionally registered.
Ranking Member Thad Cochran (R-Miss.) asked what a “fair level of appropriation” would be for the CFTC to maintain the staffing and quality to restore morale at the agency.
Massad said the President’s most recent budget request of $280 million “was entirely justified.”
Sen. Pat Roberts (R-Kan.) pointed out that the CFTC’s budget has increased 27 percent since 2010, adding that “somehow or other, we’re going to have to learn to live within our means.”
Sen. Robert Casey (D-Pa.) said he was troubled that the CFTC’s budget level in the omnibus is $30 billion the President’s request.
Sen. Kristen Gillibrand (D-N.Y.) said that the increase for the CFTC is still “inadequate” and added “there may be restrictions on this money.” She also asked if the CFTC has considered different funding mechanisms such as a user-fee based on the size of the market actor, making sure it does not harm liquidity.
Massad said he would be happy to work with the Committee on this topic, noting that the CFTC is one of the few financial regulators that does not have a separate fee. He noted that presidents “ever since and including Ronald Reagan” have suggested that fees be used, and said “they can be done in a way that works… obviously being mindful of impact on market liquidity.” However, he said this is a decision for Congress to make.
PhysicalCommodities
Stabenow asked about aluminum prices in the London Metal Exchange (LME) and what the CFTC is doing to resolve problems in this market, noting that the LME’s registration status as a foreign board of trade (FBOT) is pending.
Massad said he shares Stabenow’s concern with this situation and that he has met personally with the Aluminum Users Group, as well as the LME and its regulator in the United Kingdom. He noted that the CFTC has indirect authority over the LME, given its FBOT application, but that its primary regulator is in the UK and the CFTC does not have direct jurisdiction over the warehouses in the U.S. “which are at issue here.” He assured Stabenow that the CFTC “will continue to follow this situation very closely.”
Stabenow followed up by asking if the CFTC has authority to prevent fraud and manipulation in these markets. Massad replied that “we always have authority to go after fraud and manipulation.” He noted that LME is “looking at trying to reform some of its warehousing arrangements” and that the CFTC will look at “whether additional actions are needed” if LME’s reforms do not work.
Sen. Sherrod Brown (D-Ohio) asked if the CFTC’s authority is limited in addressing issues in the physical commodities market to address fraud and manipulation.
Massad said the CFTC has authority to address fraud and manipulation but noted that its powers with respect to LME’s FBOT status are different than those for direct registrants. He said an important issue to consider is “whether banks should even be in some of these businesses,” but noted that this question is under the banking regulators’ jurisdiction.
Brown followed up saying that “time is of the essence” and added that “even though they say there’s a wall” between trading desks and the operations that own the physical commodities, “somewhere at the top of that firm, somebody knows something.” He continued that this situation “causes a clearly unfair market” and hoped the CFTC will be “as aggressive as [it] can.”
Enforcement
Stabenow asked Massad to explain the resources and technology the CFTC used to bring cases against market manipulation in foreign exchange markets and the London Inter Bank Offer Rate (LIBOR).
Massad said these are “very intensive” investigations and that the CFTC is also pursuing “all sorts of other matters” in its enforcement division, including Ponzi schemes, commodity pool fraud, and spoofing. He said that due to resource constraints, “it is essentially a triage operation” and that additional resources are a “good investment” for the economy and the American people.
Casey asked what factors are driving the increase in monetary sanctions from the CFTC, to which Massad said “unfortunately, there is still a lot of fraud out there.”
Clearing Houses
Sen. Michael Bennet (D-Colo.) said that lawmakers, when writing Dodd-Frank, did not want clearing houses to become a source of systemic risk. He asked how concentrated the clearing process has become and how many clearing houses are being used in the markets today.
Massad said the mandate to clear transactions was “very good policy” and noted the CFTC is “paying a lot of attention” to clearing house risk. He explained that clearing houses “do not eliminate the risk” and that the CFTC is focusing on assessing clearing houses’ financial resources, operational resources, systems for margining, risk measurement, and cybersecurity. He added that the CFTC is working with the Federal Reserve (Fed) on these issues, noting the Fed has designated a couple clearing houses as systemically important.
FCMs
Roberts asked Massad if he was concerned about consolidation among small and medium-sized futures commission merchants (FCMs) that primarily serve agricultural producers, noting that their numbers have declined by 30 percent over the last ten years.
Massad said he shared Roberts’s concern with this trend, and that the CFTC wants to make sure there is a “strong and diverse” FCM sector that allows smaller FCMs to operate effectively. He said the trend of concentration is driven by “a number of things” including the low interest rate environment. Massad explained that the CFTC has taken steps to ease the burden on these small FCMs, noting changes made to residual interest requirements.
No-Action Letters
Roberts expressed concern that the CFTC has issued about 140 staff level “no-action letters” that “delayed or replaced rulemakings” by the Commission, “with little or no oversight and zero transparency.”
Sen. John Thune (R-S.D.) expressed concern with staff guidance letters that are not subject to the Administrative Procedures Act and that these letters have “the same regulatory effect as rulemaking.”
Relocating Business / Cross-Border Concerns
Roberts asked if Massad was worried about foreign businesses choosing to relocate their business and capital away from the U.S.
Massad said he is “very mindful” of these cross-border issues and that the CFTC is “making good progress” in its attempts to harmonize rules internationally.
Sen. Mike Johanns (R-Neb.) said that capital tends to flow to “the areas of least resistance from a regulatory standpoint” and noted that the U.S. cannot pass laws that bind other countries. He said it is incumbent on Massad to let Congress know “when we’ve gone too far.”
Massad replied that he shares concerns that capital is highly mobile in the global market, but said “we also have our responsibilities under the law to implement the reforms.” He noted that the U.S. has moved faster than other jurisdictions but that he is “very committed” to working out any issues. He added that he and the new European financial services commissioner, Lord Jonathan Hill, are “off to a good start.”
Push-Out Provision
Brown said “a number of us” are not happy with the appropriations process, and its inclusion of a provision to amend Section 716 of the Dodd-Frank Act. He said amending this language in an appropriations bill undermines the process and the Committee and “undoubtedly puts taxpayers at risk.”
De-Guaranteed Affiliates
Brown noted that the CFTC is consulting with other regulators to assess actions by some banks to de-guarantee foreign affiliates. He asked what the CFTC is doing to protect the U.S. financial system with regard to these actions and if its findings will be made public.
Massad said the CFTC is “very concerned about this” and noted that his agency “got some answers” from banks in response to a staff examination of the actions, adding that this information was shared with banking regulators. He said “now, it may comply with our rules,” but the question for the CFTC and banking regulators is whether there is still a risk posed to the U.S. if an un-guaranteed affiliate engages in these transactions.
PositionLimits/Bona Fide Hedging
Johanns noted that the agriculture industry has expressed concern with the CFTC’s position limits proposal, and said these market players need liquidity to manage their risk. He asked whether their concerns are valid and where they may be missing the point.
Massad said the CFTC is “very mindful” of these comments and that position limits are a “very important tool” to address excessive speculation in the market. He noted, however, that the CFTC has to ensure it still allows bona fide hedging, but noted the challenge in drawing a “bright line” rule that distinguishes between commercial users and speculators. He noted that resource constraints make this work more difficult.
Sen. Joe Donnelly (D-Ind.) said he has had concerns about excessive speculation and its effect on prices in the market. He asked if the CFTC is still committed to finalizing a “good position limits rule in a timely manner.”
Massad replied “absolutely” and noted that the CFTC re-opened comments on deliverable supply issues after they came up at an Agricultural Advisory Committee meeting. He said the CFTC is “proceeding on multiple tracks” for this “very complicated rule.”
Thune said the CFTC’s proposed rule excludes certain legitimate hedging activities used by agricultural businesses and asked what the Commission is doing to ensure legitimate activities are included in the bona fide hedging exemption.
Sen. Amy Klobuchar (D-Minn.) also asked how the CFTC will ensure that agricultural transactions are bona fide hedges.
Massad said the CFTC recognizes that “hedging strategies are often very complex” and stressed the challenge in writing a “bight line rule” in a situation where the CFTC cannot look at the intent of market participants.
Sen. John Boozman (R-Ark.) asked if the CFTC is addressing cybersecurity independently or with other agencies.
Massad said there is “actually a lot of coordination” among government agencies and highlighted that he is actively coordinating with the Fed on these concerns. He specifically noted that he and Fed Governor Jerome Powell have met and their staffs have been in coordination on these issues.
Gillibrand asked how the CFTC is working with market participants to address cyber threats and what obstacles stand in the way of its work.
Massad noted that the CFTC does not have enough money to do independent testing, but that it conducts examinations to see if institutions are sufficiently focused on cybersecurity issues, both at the board level and in their risk committees.
MarginRule
Thune noted that the CFTC recently put out a rule on margin for uncleared swaps that would take effect in December 2015. He noted that the timeline was set by a group of international regulators but asked if it is realistic for the industry and its clients to implement “massive systems changes” in time to meet this deadline.
Sen. John Hoeven (R-N.D) also asked about the timeline to implement the margin rule and if the industry will meet this compliance deadline.
Massad stressed the importance of the margin rule and implementing it in a “way that works” and that does not disrupt the market. He explained that most firms are already taking margin for these transactions and that the CFTC’s rule has a delayed implementation schedule. He also noted that the rule does not apply to end-users and that the CFTC is coordinating internationally to avoid “a situation of regulatory arbitrage.”
Thune asked if other international regulators are contemplating a longer implementation schedule.
Massad said “there is discussion currently, that we’re also part of” and added that the CFTC has received comments from the industry saying a delay is needed. He said the CFTC has to look at these proposals for delay with “a good amount of skepticism” but that the Commission will try to come up with “a reasonable approach here.”
Hoeven asked how the rule mitigates systemic and product risk and if the CFTC will monitor industry trading positions to anticipate the effects so if one firm “goes down” it will not create a domino effect. Massad said the rule formalizes the practice of evaluating mark-to-market risk and taking margin to cover that risk. He added that the CFTC is conducting overall market surveillance to look at where systemic risk may build up.
Hoeven then asked if exempting end-users prevents them from taking up a substantial cost for implementation of the new rule, which Massad said was correct.
HFT
Gillibrand said high frequency trading (HFT) poses a dual risk by creating a mechanism for bad actors to manipulate markets and creating the “propensity to negatively affect market stability.” She asked what role the CFTC plays internationally and domestically in “institutionalizing best practices” with the goal of avoiding regulatory arbitrage and a “race to the bottom.”
Massad said the CFTC is looking at automated trading and HFT from policy, regulatory, and enforcement standpoints, noting that the agency has made an indictment on spoofing and issued a concept release on HFT practices.
For more information on this hearing, please click here.
,Blog Tags:,Blog Categories:,Blog TrackBack:,Blog Pingback:No,Hearing Summaries Issues:Derivatives,Hearing Summaries Agency:Senate Agriculture Committee,Publish Year:2014
Senate Agriculture Committee
“The Commodity Futures Trading Commission:
Effective Enforcement and the Future of Derivatives Regulation”
Wednesday, December 10, 2014
Key Topics & Takeaways
- Margin for Uncleared Swaps: Massad stressed the importance of the margin rule and implementing it in a “way that works” and does not disrupt the markets. He added that requests for a delay in the rule’s implementation will be looked at with “a good amount of skepticism” but that the Commission will try to come up with “a reasonable approach here.”
- Cybersecurity: Massad said there is “a lot of coordination” among government agencies on cybersecurity issues and specifically noted that he and Fed Governor Jerome Powell have met on the subject.
- Position Limits: Massad stressed the challenge in drawing a “bright line” that distinguishes between commercial users and speculators and said the CFTC is “proceeding on multiple tracks” for this “very complicated rule.”
- De-Guaranteed Affiliates: Massad said that de-guaranteeing foreign affiliate swaps transactions “may comply with our rules,” but that the question for the CFTC and banking regulators is whether there is still a risk posed to the U.S. financial system.
- Physical Commodities: Massad noted that the LME is “trying to reform some of its warehousing arrangements” and that the CFTC will look at “whether additional actions are needed” if LME’s reforms do not work. He added that an important issue to consider is “whether banks should even be in some of these businesses,” but noted that this question is under the banking regulators’ jurisdiction.
Witness:
- Tim Massad, Chairman, Commodity Futures Trading Commission
Opening Statements
Chair Debbie Stabenow (D-Mich.), in her opening remarks, stated the U.S. has “come a long way” since the financial crisis, noting there have been 59 consecutive months of job creation, but said there is “still a lot of work to do” to ensure that financial markets are “safe, transparent, and accountable.”
Stabenow highlighted that the CFTC was given new authorities since the crisis, but not new resources to go along with this increased responsibility. She mentioned that the omnibus spending bill under consideration includes only a “meager increase” to the CFTC’s budget and that the increase comes with conditions and “handcuffs” on the agency. Stabenow said the Dodd-Frank Act is being undermined each day that regulatory agencies go underfunded.
Stabenow expressed support for the CFTC’s actions to address concerns of end-users in the derivatives markets, stressing the importance of doing so, because “when these markets don’t work, consumers feel the pain.”
Witness Testimony
CFTC Chairman Tim Massad, in his testimony, noted that the CFTC has been “just as focused” on its traditional areas of responsibility in the futures and options markets as it has moved forward with its new authorities. He noted that the CFTC has increased oversight of key market participants and that trading of swaps on regulated platforms is increasing.
Massad said the priorities of the Commission include working with international counterparts to build a strong and global regulatory framework, focusing on data collection and analysis, dealing with swap trading issues, working on cybersecurity issues, and monitoring the increasing use of automated trading and the use of virtual currencies.
Massad stressed that the CFTC’s current budget “significantly limits” its ability to respond to problems and effectively monitor the markets. He said the agency is grateful that the omnibus bill includes an increase in funding, but said he is “convinced the need is far greater” than what was included.
Question and Answer
Resources
Stabenow began the discussion by asking if the CFTC has the needed resources to provide regulatory certainty and help market participants meet compliance deadlines. Massad said resource constraints makes it “very, very difficult” to meet deadlines, noting that the CFTC needs to get through 100 applications of swap dealers and 22 applications for swap execution facilities (SEFs) that are currently only provisionally registered.
Ranking Member Thad Cochran (R-Miss.) asked what a “fair level of appropriation” would be for the CFTC to maintain the staffing and quality to restore morale at the agency.
Massad said the President’s most recent budget request of $280 million “was entirely justified.”
Sen. Pat Roberts (R-Kan.) pointed out that the CFTC’s budget has increased 27 percent since 2010, adding that “somehow or other, we’re going to have to learn to live within our means.”
Sen. Robert Casey (D-Pa.) said he was troubled that the CFTC’s budget level in the omnibus is $30 billion the President’s request.
Sen. Kristen Gillibrand (D-N.Y.) said that the increase for the CFTC is still “inadequate” and added “there may be restrictions on this money.” She also asked if the CFTC has considered different funding mechanisms such as a user-fee based on the size of the market actor, making sure it does not harm liquidity.
Massad said he would be happy to work with the Committee on this topic, noting that the CFTC is one of the few financial regulators that does not have a separate fee. He noted that presidents “ever since and including Ronald Reagan” have suggested that fees be used, and said “they can be done in a way that works… obviously being mindful of impact on market liquidity.” However, he said this is a decision for Congress to make.
PhysicalCommodities
Stabenow asked about aluminum prices in the London Metal Exchange (LME) and what the CFTC is doing to resolve problems in this market, noting that the LME’s registration status as a foreign board of trade (FBOT) is pending.
Massad said he shares Stabenow’s concern with this situation and that he has met personally with the Aluminum Users Group, as well as the LME and its regulator in the United Kingdom. He noted that the CFTC has indirect authority over the LME, given its FBOT application, but that its primary regulator is in the UK and the CFTC does not have direct jurisdiction over the warehouses in the U.S. “which are at issue here.” He assured Stabenow that the CFTC “will continue to follow this situation very closely.”
Stabenow followed up by asking if the CFTC has authority to prevent fraud and manipulation in these markets. Massad replied that “we always have authority to go after fraud and manipulation.” He noted that LME is “looking at trying to reform some of its warehousing arrangements” and that the CFTC will look at “whether additional actions are needed” if LME’s reforms do not work.
Sen. Sherrod Brown (D-Ohio) asked if the CFTC’s authority is limited in addressing issues in the physical commodities market to address fraud and manipulation.
Massad said the CFTC has authority to address fraud and manipulation but noted that its powers with respect to LME’s FBOT status are different than those for direct registrants. He said an important issue to consider is “whether banks should even be in some of these businesses,” but noted that this question is under the banking regulators’ jurisdiction.
Brown followed up saying that “time is of the essence” and added that “even though they say there’s a wall” between trading desks and the operations that own the physical commodities, “somewhere at the top of that firm, somebody knows something.” He continued that this situation “causes a clearly unfair market” and hoped the CFTC will be “as aggressive as [it] can.”
Enforcement
Stabenow asked Massad to explain the resources and technology the CFTC used to bring cases against market manipulation in foreign exchange markets and the London Inter Bank Offer Rate (LIBOR).
Massad said these are “very intensive” investigations and that the CFTC is also pursuing “all sorts of other matters” in its enforcement division, including Ponzi schemes, commodity pool fraud, and spoofing. He said that due to resource constraints, “it is essentially a triage operation” and that additional resources are a “good investment” for the economy and the American people.
Casey asked what factors are driving the increase in monetary sanctions from the CFTC, to which Massad said “unfortunately, there is still a lot of fraud out there.”
Clearing Houses
Sen. Michael Bennet (D-Colo.) said that lawmakers, when writing Dodd-Frank, did not want clearing houses to become a source of systemic risk. He asked how concentrated the clearing process has become and how many clearing houses are being used in the markets today.
Massad said the mandate to clear transactions was “very good policy” and noted the CFTC is “paying a lot of attention” to clearing house risk. He explained that clearing houses “do not eliminate the risk” and that the CFTC is focusing on assessing clearing houses’ financial resources, operational resources, systems for margining, risk measurement, and cybersecurity. He added that the CFTC is working with the Federal Reserve (Fed) on these issues, noting the Fed has designated a couple clearing houses as systemically important.
FCMs
Roberts asked Massad if he was concerned about consolidation among small and medium-sized futures commission merchants (FCMs) that primarily serve agricultural producers, noting that their numbers have declined by 30 percent over the last ten years.
Massad said he shared Roberts’s concern with this trend, and that the CFTC wants to make sure there is a “strong and diverse” FCM sector that allows smaller FCMs to operate effectively. He said the trend of concentration is driven by “a number of things” including the low interest rate environment. Massad explained that the CFTC has taken steps to ease the burden on these small FCMs, noting changes made to residual interest requirements.
No-Action Letters
Roberts expressed concern that the CFTC has issued about 140 staff level “no-action letters” that “delayed or replaced rulemakings” by the Commission, “with little or no oversight and zero transparency.”
Sen. John Thune (R-S.D.) expressed concern with staff guidance letters that are not subject to the Administrative Procedures Act and that these letters have “the same regulatory effect as rulemaking.”
Relocating Business / Cross-Border Concerns
Roberts asked if Massad was worried about foreign businesses choosing to relocate their business and capital away from the U.S.
Massad said he is “very mindful” of these cross-border issues and that the CFTC is “making good progress” in its attempts to harmonize rules internationally.
Sen. Mike Johanns (R-Neb.) said that capital tends to flow to “the areas of least resistance from a regulatory standpoint” and noted that the U.S. cannot pass laws that bind other countries. He said it is incumbent on Massad to let Congress know “when we’ve gone too far.”
Massad replied that he shares concerns that capital is highly mobile in the global market, but said “we also have our responsibilities under the law to implement the reforms.” He noted that the U.S. has moved faster than other jurisdictions but that he is “very committed” to working out any issues. He added that he and the new European financial services commissioner, Lord Jonathan Hill, are “off to a good start.”
Push-Out Provision
Brown said “a number of us” are not happy with the appropriations process, and its inclusion of a provision to amend Section 716 of the Dodd-Frank Act. He said amending this language in an appropriations bill undermines the process and the Committee and “undoubtedly puts taxpayers at risk.”
De-Guaranteed Affiliates
Brown noted that the CFTC is consulting with other regulators to assess actions by some banks to de-guarantee foreign affiliates. He asked what the CFTC is doing to protect the U.S. financial system with regard to these actions and if its findings will be made public.
Massad said the CFTC is “very concerned about this” and noted that his agency “got some answers” from banks in response to a staff examination of the actions, adding that this information was shared with banking regulators. He said “now, it may comply with our rules,” but the question for the CFTC and banking regulators is whether there is still a risk posed to the U.S. if an un-guaranteed affiliate engages in these transactions.
PositionLimits/Bona Fide Hedging
Johanns noted that the agriculture industry has expressed concern with the CFTC’s position limits proposal, and said these market players need liquidity to manage their risk. He asked whether their concerns are valid and where they may be missing the point.
Massad said the CFTC is “very mindful” of these comments and that position limits are a “very important tool” to address excessive speculation in the market. He noted, however, that the CFTC has to ensure it still allows bona fide hedging, but noted the challenge in drawing a “bright line” rule that distinguishes between commercial users and speculators. He noted that resource constraints make this work more difficult.
Sen. Joe Donnelly (D-Ind.) said he has had concerns about excessive speculation and its effect on prices in the market. He asked if the CFTC is still committed to finalizing a “good position limits rule in a timely manner.”
Massad replied “absolutely” and noted that the CFTC re-opened comments on deliverable supply issues after they came up at an Agricultural Advisory Committee meeting. He said the CFTC is “proceeding on multiple tracks” for this “very complicated rule.”
Thune said the CFTC’s proposed rule excludes certain legitimate hedging activities used by agricultural businesses and asked what the Commission is doing to ensure legitimate activities are included in the bona fide hedging exemption.
Sen. Amy Klobuchar (D-Minn.) also asked how the CFTC will ensure that agricultural transactions are bona fide hedges.
Massad said the CFTC recognizes that “hedging strategies are often very complex” and stressed the challenge in writing a “bight line rule” in a situation where the CFTC cannot look at the intent of market participants.
Sen. John Boozman (R-Ark.) asked if the CFTC is addressing cybersecurity independently or with other agencies.
Massad said there is “actually a lot of coordination” among government agencies and highlighted that he is actively coordinating with the Fed on these concerns. He specifically noted that he and Fed Governor Jerome Powell have met and their staffs have been in coordination on these issues.
Gillibrand asked how the CFTC is working with market participants to address cyber threats and what obstacles stand in the way of its work.
Massad noted that the CFTC does not have enough money to do independent testing, but that it conducts examinations to see if institutions are sufficiently focused on cybersecurity issues, both at the board level and in their risk committees.
MarginRule
Thune noted that the CFTC recently put out a rule on margin for uncleared swaps that would take effect in December 2015. He noted that the timeline was set by a group of international regulators but asked if it is realistic for the industry and its clients to implement “massive systems changes” in time to meet this deadline.
Sen. John Hoeven (R-N.D) also asked about the timeline to implement the margin rule and if the industry will meet this compliance deadline.
Massad stressed the importance of the margin rule and implementing it in a “way that works” and that does not disrupt the market. He explained that most firms are already taking margin for these transactions and that the CFTC’s rule has a delayed implementation schedule. He also noted that the rule does not apply to end-users and that the CFTC is coordinating internationally to avoid “a situation of regulatory arbitrage.”
Thune asked if other international regulators are contemplating a longer implementation schedule.
Massad said “there is discussion currently, that we’re also part of” and added that the CFTC has received comments from the industry saying a delay is needed. He said the CFTC has to look at these proposals for delay with “a good amount of skepticism” but that the Commission will try to come up with “a reasonable approach here.”
Hoeven asked how the rule mitigates systemic and product risk and if the CFTC will monitor industry trading positions to anticipate the effects so if one firm “goes down” it will not create a domino effect. Massad said the rule formalizes the practice of evaluating mark-to-market risk and taking margin to cover that risk. He added that the CFTC is conducting overall market surveillance to look at where systemic risk may build up.
Hoeven then asked if exempting end-users prevents them from taking up a substantial cost for implementation of the new rule, which Massad said was correct.
HFT
Gillibrand said high frequency trading (HFT) poses a dual risk by creating a mechanism for bad actors to manipulate markets and creating the “propensity to negatively affect market stability.” She asked what role the CFTC plays internationally and domestically in “institutionalizing best practices” with the goal of avoiding regulatory arbitrage and a “race to the bottom.”
Massad said the CFTC is looking at automated trading and HFT from policy, regulatory, and enforcement standpoints, noting that the agency has made an indictment on spoofing and issued a concept release on HFT practices.
For more information on this hearing, please click here.