Senate Agriculture Hearing on End -Users and Market Liquidity
Senate Agriculture Committee
“Regulatory Issues Impacting End-Users and Market Liquidity”
Thursday, May 14, 2015
Key Topics & Takeaways
- Cross-Border Coordination: CFTC Chair Massad said he had meetings in Brussels about clearinghouse recognition to explain why the CFTC’s methodology for margin is actually stronger than the European model. He added that the CFTC is prepared to develop a framework of substituted compliance if the margin methodology issues are resolved.
- Liquidity: Sen. Boozman (R-Ark.) asked Massad, as a member of the Financial Stability Oversight Council (FSOC), what is being done to ensure that any new regulatory proposals take into account impacts on market liquidity. Massad said liquidity issues has been raised in FSOC discussions on the supplementary leverage ratio, and that he wants to make sure the rule also achieves the goal of encouraging clearing.
- Leverage Ratio: Massad said that he recognizes the objective of having a leverage ratio, but that the rule that is “cutting against” the CFTC policy of encouraging clearing, which should be avoided.
- Rule 1.35: Massad said the CFTC has issued no-action relief for Rule 1.35 and that he believes this should be formalized with a rule that could exempt text messages from record keeping requirements and reduce burdens regarding how records are kept.
Speakers
- Timothy Massad, Chairman, Commodity Futures Trading Commission
- Terrance Duffy, Executive Chairman and President, CME Group
- Bruce Barber, General Manager, Archer Daniels Midland Company
- Jeffrey Walker, Senior Vice President and Chief Risk Officer, Alliance for Cooperative Energy Services
- Michael Bopp, Partner, Gibson, Dunn & Crutcher, LLP
- Sean Cota, Co-Founder, Commodity Markets Oversight Coalition
Opening Statements
In his opening statement, Chairman Pat Roberts (R-Kans.) said regulations stemming from the Dodd-Frank Act have had many impacts on end-users, and Congress has failed to address these burdens. He stressed that end-users did not cause the financial crisis and that Congress did not intend for them to be captured under Title VII. Roberts stated that reauthorization of the Commodity Futures Trading Commission (CFTC) is a priority and that he intends to work with the Committee to move a bill that addresses end-user concerns.
Roberts said another focus of the hearing would be market liquidity and the impact of Dodd-Frank rulemakings. He cited increased costs of clearing, consolidation of futures clearing merchants (FCMs) and lack of mutual territorial recognition as sources of concern that decrease market liquidity.
In her opening statement, Ranking Member Debbie Stabenow (D-Mich.) highlighted the CFTC as the “premiere global regulator” and said Congress must provide it with all the tools and resources it needs to protect taxpayers from risky practices. Rather than just keeping pace with evolving markets, she said, “we must strive to be ahead of them.”
Massad Testimony
Timothy Massad, Chairman, Commodity Futures Trading Commission, said in his testimony that end-users and market liquidity are at the core of the CFTC’s mission, and that regulators constantly ask themselves how markets are serving the needs of businesses. He said commercial end-users were not the cause of the crisis, and that he tries to be careful in ensuring that rules do not unduly burden them.
Massad said the CFTC is working in many areas to promote sufficient market liquidity. He highlighted that he travelled to Brussels the previous week to discuss cross-border harmonization of rules so that American firms are not disadvantaged in the global marketplace. He also mentioned that the CFTC is making changes to swap trading rules to enhance trading of swaps and attract participation and liquidity, while making sure that clearinghouses are resilient.
Question and Answer
End-User Relief
Roberts noted that end-users are not pleased with the CFTC’s proposed changes to the bona fide hedging definition, and questioned how end-users would be able to appropriately manage risk if the definition is too restrictive. Massad answered that the CFTC is very committed to making sure the final position limits rule provides for adequate bona fide hedging, and that it is spending significant time on the issue and talking to industry to collect comments. He declined to give a time frame for completion of the rule, saying the Commission wants to “make sure we get this right.”
Sen. David Perdue (R-Ga.) commented that it seems the U.S. has seen a number of situations where crises are responded to with “draconian overreach.” He then noted that the CFTC has provided no-action relief to end-users, but questioned whether this “really solves the problem.” Massad called no-action relief an important tool, but pointed out that the CFTC is looking at other ways to provide end-users with relief and exemptions from rules.
Sen. Heidi Heitkamp (D-N.D.) asked about Rule 1.35, commenting that she has heard from constituents that keeping records of all communications can be difficult. Massad said the CFTC has issued no-action relief and that he believes this should be formalized with a rule that could exempt text messages from record keeping requirements and reduce burdens regarding how records are kept.
Marginfor Cleared Derivatives
Roberts said that customer margin posted for cleared derivatives should be treated as belonging to the customer and asked why banking regulators are acting as if this segregated margin can be used by banks as leverage, which he said seems to contradict CFTC requirements. Massad replied that he is very concerned by this issue and has expressed this to the banking regulators. He commented that he recognizes the objective of having a leverage ratio, but that a rule that is “cutting against” the CFTC policy of encouraging clearing and should be avoided.
Roberts asked Massed to elaborate on recent efforts to make sure U.S. markets remain competitive and liquid. Massad discussed his trip to Brussels, where he said he had meetings about clearinghouse recognition to explain why the CFTC’s methodology for margin is actually stronger than the European model. He added that the CFTC is prepared to develop a framework of substituted compliance if the margin methodology issues are resolved.
Stabenow asked Massad to elaborate further on his trip to Europe. Massad reiterated that the focus of conversation was the margin methodology. He explained that the Europeans believe their system to be stronger, but the CFTC analysis shows the U.S. system collecting and posting more margin to the clearinghouses. He said discussions were mostly limited to technical issues to minimize differences in the two regimes.
Sen. John Thune (R-S.D.) stated that during debates over the passage of Dodd-Frank, many expressed concern about global regulatory confusion that would grow out of the lack of coordination. He commented that these warnings now “seem to be realized.” Massad explained that the CFTC is very focused on trying to harmonize rules, but deadlines in Dodd-Frank made that difficult when other jurisdictions have not completed work on their own rules.
Sen. John Boozman (R-Ark.) asked Massad, as a member of the Financial Stability Oversight Council (FSOC), what is being done to ensure that any new regulatory proposals take into account impacts on market liquidity. Massad said the FSOC is helpful in establishing relationships among regulators. He commented that the liquidity topic has been raised in discussions on the supplementary leverage ratio, and that he wants to make sure the rule also achieves the goal of encouraging clearing.
Boozman asked if the “significant consolidation” of FCMs since Dodd-Frank’s passage has had an impact on liquidity for end-users. Massad replied that he has asked staff to “do a deep dive and look at this.” He noted, however, that the downward trend for FCMs dates back to before the Dodd-Frank Act and that overall volume in the market has increased.
Data Security
Sen. Amy Klobuchar (D-Minn.) asked if clearinghouses are taking the issue of data security seriously. Massad responded that he believes the clearinghouses and exchanges are taking the issue very seriously because it is an area of “huge concern for everyone.” He commented that the CFTC does not have the resources to conduct testing itself, but wants to ensure that clearinghouses are testing on their own.
Panel II Testimony
Terrance Duffy, Executive Chairman and President, CME Group, in his testimony, applauded the CFTC under Massad for “appropriately reforming” several regulations in the interests of end-users, but suggested other Dodd-Frank provisions must still be reexamined. He endorsed more flexible hedging treatment, a continuation of the CFTC’s practice of permitting exchanges to administer hedge exemptions consistent with the needs of end-users, setting limits based on current deliverable supply data, and efforts towards European recognition of U.S. clearinghouses.
Duffy was also critical of the supplementary leverage ratio rule, arguing that it will permit bank regulators to impose punitive capital charges on clearing firms that support the activities of end-users and make it difficult for small end-users to find a clearing firm.
In his testimony, Bruce Barber, General Manager, Archer Daniels Midland Company said hedgers today are worse off than before Dodd-Frank because of “substantially” higher compliance costs. He asked the Committee to focus on contrasts between congressional intent in Title VII and its implementation as it goes through the reauthorization process. He listed five areas for Congress to address: 1) reporting requirements under Rule 1.35; 2) updating deliverable supply estimates that serve as a baseline for position limits determinations; 3) getting the bona fide hedging definition right; 4) addressing the automatic drop in the swap dealer de minimis threshold; and 5) the resolution of international regulatory issues.
Jeffrey Walker, Senior Vice President and Chief Risk Officer, Alliance for Cooperative Energy Services, said in his testimony that “vague and ambiguous” regulations are costly for end-users and consumers. He specifically pointed to the rule for speculative position limits and narrow bona fide hedge exemptions as increasing costs. He said that while he supports the CFTC’s reauthorization, he asked that the Commission narrow the scope of their rules to the benefit of end-users.
In his testimony, Michael Bopp, Partner, Gibson, Dunn & Crutcher, LLP, highlighted three areas where congressional action could help address unnecessary costs: 1) capital and liquidity requirements; 2) cross-border market fragmentation and the lack of consistent data and reporting requirements; and 3) the use of centralized treasury units by non-financial end-users to reduce risk.
Sean Cota, Co-Founder, Commodity Markets Oversight Coalition, said in his testimony that the Committee should use the reauthorization process to strengthen protections for hedgers. He said three things especially can be done to this end: 1) fully fund the CFTC; 2) increase the cap on penalties for fraud and manipulation; and 3) reinforce congressional intent that end-users should not be captured in financial regulations.
Question and Answer
Roberts asked about the costs and burdens of recordkeeping rules. Walkers said retention periods for recordkeeping last for the life of a transaction plus five years, which could mean as long as 25 years for some transactions. Barber said the amount of material that appears to be required is “well beyond” anything that had to be held before, and that it is hard to distinguish between pre-trade communications and ordinary conversations that do not need to be retained. He further commented that IT groups have a tremendous struggle with the quantity of records that must be stored, and questioned the purpose of holding so much information.
Sen. John Hoeven (R-N.D.) asked what the most important issues to deal with in reauthorization are. Duffy stressed that a bill must let end-users continue to do their own business, repeating that end-users did not cause the financial crisis. Barber asked the Committee to examine the gap between the intent of Dodd-Frank and its implementation, saying there has been a “serious overrun of regulatory reach.”
For more information on this hearing, please click here.
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Senate Agriculture Committee
“Regulatory Issues Impacting End-Users and Market Liquidity”
Thursday, May 14, 2015
Key Topics & Takeaways
- Cross-Border Coordination: CFTC Chair Massad said he had meetings in Brussels about clearinghouse recognition to explain why the CFTC’s methodology for margin is actually stronger than the European model. He added that the CFTC is prepared to develop a framework of substituted compliance if the margin methodology issues are resolved.
- Liquidity: Sen. Boozman (R-Ark.) asked Massad, as a member of the Financial Stability Oversight Council (FSOC), what is being done to ensure that any new regulatory proposals take into account impacts on market liquidity. Massad said liquidity issues has been raised in FSOC discussions on the supplementary leverage ratio, and that he wants to make sure the rule also achieves the goal of encouraging clearing.
- Leverage Ratio: Massad said that he recognizes the objective of having a leverage ratio, but that the rule that is “cutting against” the CFTC policy of encouraging clearing, which should be avoided.
- Rule 1.35: Massad said the CFTC has issued no-action relief for Rule 1.35 and that he believes this should be formalized with a rule that could exempt text messages from record keeping requirements and reduce burdens regarding how records are kept.
Speakers
- Timothy Massad, Chairman, Commodity Futures Trading Commission
- Terrance Duffy, Executive Chairman and President, CME Group
- Bruce Barber, General Manager, Archer Daniels Midland Company
- Jeffrey Walker, Senior Vice President and Chief Risk Officer, Alliance for Cooperative Energy Services
- Michael Bopp, Partner, Gibson, Dunn & Crutcher, LLP
- Sean Cota, Co-Founder, Commodity Markets Oversight Coalition
Opening Statements
In his opening statement, Chairman Pat Roberts (R-Kans.) said regulations stemming from the Dodd-Frank Act have had many impacts on end-users, and Congress has failed to address these burdens. He stressed that end-users did not cause the financial crisis and that Congress did not intend for them to be captured under Title VII. Roberts stated that reauthorization of the Commodity Futures Trading Commission (CFTC) is a priority and that he intends to work with the Committee to move a bill that addresses end-user concerns.
Roberts said another focus of the hearing would be market liquidity and the impact of Dodd-Frank rulemakings. He cited increased costs of clearing, consolidation of futures clearing merchants (FCMs) and lack of mutual territorial recognition as sources of concern that decrease market liquidity.
In her opening statement, Ranking Member Debbie Stabenow (D-Mich.) highlighted the CFTC as the “premiere global regulator” and said Congress must provide it with all the tools and resources it needs to protect taxpayers from risky practices. Rather than just keeping pace with evolving markets, she said, “we must strive to be ahead of them.”
Massad Testimony
Timothy Massad, Chairman, Commodity Futures Trading Commission, said in his testimony that end-users and market liquidity are at the core of the CFTC’s mission, and that regulators constantly ask themselves how markets are serving the needs of businesses. He said commercial end-users were not the cause of the crisis, and that he tries to be careful in ensuring that rules do not unduly burden them.
Massad said the CFTC is working in many areas to promote sufficient market liquidity. He highlighted that he travelled to Brussels the previous week to discuss cross-border harmonization of rules so that American firms are not disadvantaged in the global marketplace. He also mentioned that the CFTC is making changes to swap trading rules to enhance trading of swaps and attract participation and liquidity, while making sure that clearinghouses are resilient.
Question and Answer
End-User Relief
Roberts noted that end-users are not pleased with the CFTC’s proposed changes to the bona fide hedging definition, and questioned how end-users would be able to appropriately manage risk if the definition is too restrictive. Massad answered that the CFTC is very committed to making sure the final position limits rule provides for adequate bona fide hedging, and that it is spending significant time on the issue and talking to industry to collect comments. He declined to give a time frame for completion of the rule, saying the Commission wants to “make sure we get this right.”
Sen. David Perdue (R-Ga.) commented that it seems the U.S. has seen a number of situations where crises are responded to with “draconian overreach.” He then noted that the CFTC has provided no-action relief to end-users, but questioned whether this “really solves the problem.” Massad called no-action relief an important tool, but pointed out that the CFTC is looking at other ways to provide end-users with relief and exemptions from rules.
Sen. Heidi Heitkamp (D-N.D.) asked about Rule 1.35, commenting that she has heard from constituents that keeping records of all communications can be difficult. Massad said the CFTC has issued no-action relief and that he believes this should be formalized with a rule that could exempt text messages from record keeping requirements and reduce burdens regarding how records are kept.
Marginfor Cleared Derivatives
Roberts said that customer margin posted for cleared derivatives should be treated as belonging to the customer and asked why banking regulators are acting as if this segregated margin can be used by banks as leverage, which he said seems to contradict CFTC requirements. Massad replied that he is very concerned by this issue and has expressed this to the banking regulators. He commented that he recognizes the objective of having a leverage ratio, but that a rule that is “cutting against” the CFTC policy of encouraging clearing and should be avoided.
Roberts asked Massed to elaborate on recent efforts to make sure U.S. markets remain competitive and liquid. Massad discussed his trip to Brussels, where he said he had meetings about clearinghouse recognition to explain why the CFTC’s methodology for margin is actually stronger than the European model. He added that the CFTC is prepared to develop a framework of substituted compliance if the margin methodology issues are resolved.
Stabenow asked Massad to elaborate further on his trip to Europe. Massad reiterated that the focus of conversation was the margin methodology. He explained that the Europeans believe their system to be stronger, but the CFTC analysis shows the U.S. system collecting and posting more margin to the clearinghouses. He said discussions were mostly limited to technical issues to minimize differences in the two regimes.
Sen. John Thune (R-S.D.) stated that during debates over the passage of Dodd-Frank, many expressed concern about global regulatory confusion that would grow out of the lack of coordination. He commented that these warnings now “seem to be realized.” Massad explained that the CFTC is very focused on trying to harmonize rules, but deadlines in Dodd-Frank made that difficult when other jurisdictions have not completed work on their own rules.
Sen. John Boozman (R-Ark.) asked Massad, as a member of the Financial Stability Oversight Council (FSOC), what is being done to ensure that any new regulatory proposals take into account impacts on market liquidity. Massad said the FSOC is helpful in establishing relationships among regulators. He commented that the liquidity topic has been raised in discussions on the supplementary leverage ratio, and that he wants to make sure the rule also achieves the goal of encouraging clearing.
Boozman asked if the “significant consolidation” of FCMs since Dodd-Frank’s passage has had an impact on liquidity for end-users. Massad replied that he has asked staff to “do a deep dive and look at this.” He noted, however, that the downward trend for FCMs dates back to before the Dodd-Frank Act and that overall volume in the market has increased.
Data Security
Sen. Amy Klobuchar (D-Minn.) asked if clearinghouses are taking the issue of data security seriously. Massad responded that he believes the clearinghouses and exchanges are taking the issue very seriously because it is an area of “huge concern for everyone.” He commented that the CFTC does not have the resources to conduct testing itself, but wants to ensure that clearinghouses are testing on their own.
Panel II Testimony
Terrance Duffy, Executive Chairman and President, CME Group, in his testimony, applauded the CFTC under Massad for “appropriately reforming” several regulations in the interests of end-users, but suggested other Dodd-Frank provisions must still be reexamined. He endorsed more flexible hedging treatment, a continuation of the CFTC’s practice of permitting exchanges to administer hedge exemptions consistent with the needs of end-users, setting limits based on current deliverable supply data, and efforts towards European recognition of U.S. clearinghouses.
Duffy was also critical of the supplementary leverage ratio rule, arguing that it will permit bank regulators to impose punitive capital charges on clearing firms that support the activities of end-users and make it difficult for small end-users to find a clearing firm.
In his testimony, Bruce Barber, General Manager, Archer Daniels Midland Company said hedgers today are worse off than before Dodd-Frank because of “substantially” higher compliance costs. He asked the Committee to focus on contrasts between congressional intent in Title VII and its implementation as it goes through the reauthorization process. He listed five areas for Congress to address: 1) reporting requirements under Rule 1.35; 2) updating deliverable supply estimates that serve as a baseline for position limits determinations; 3) getting the bona fide hedging definition right; 4) addressing the automatic drop in the swap dealer de minimis threshold; and 5) the resolution of international regulatory issues.
Jeffrey Walker, Senior Vice President and Chief Risk Officer, Alliance for Cooperative Energy Services, said in his testimony that “vague and ambiguous” regulations are costly for end-users and consumers. He specifically pointed to the rule for speculative position limits and narrow bona fide hedge exemptions as increasing costs. He said that while he supports the CFTC’s reauthorization, he asked that the Commission narrow the scope of their rules to the benefit of end-users.
In his testimony, Michael Bopp, Partner, Gibson, Dunn & Crutcher, LLP, highlighted three areas where congressional action could help address unnecessary costs: 1) capital and liquidity requirements; 2) cross-border market fragmentation and the lack of consistent data and reporting requirements; and 3) the use of centralized treasury units by non-financial end-users to reduce risk.
Sean Cota, Co-Founder, Commodity Markets Oversight Coalition, said in his testimony that the Committee should use the reauthorization process to strengthen protections for hedgers. He said three things especially can be done to this end: 1) fully fund the CFTC; 2) increase the cap on penalties for fraud and manipulation; and 3) reinforce congressional intent that end-users should not be captured in financial regulations.
Question and Answer
Roberts asked about the costs and burdens of recordkeeping rules. Walkers said retention periods for recordkeeping last for the life of a transaction plus five years, which could mean as long as 25 years for some transactions. Barber said the amount of material that appears to be required is “well beyond” anything that had to be held before, and that it is hard to distinguish between pre-trade communications and ordinary conversations that do not need to be retained. He further commented that IT groups have a tremendous struggle with the quantity of records that must be stored, and questioned the purpose of holding so much information.
Sen. John Hoeven (R-N.D.) asked what the most important issues to deal with in reauthorization are. Duffy stressed that a bill must let end-users continue to do their own business, repeating that end-users did not cause the financial crisis. Barber asked the Committee to examine the gap between the intent of Dodd-Frank and its implementation, saying there has been a “serious overrun of regulatory reach.”
For more information on this hearing, please click here.