House Agriculture Hearing on the CFTC Agenda
House Agriculture Committee
2015 Agenda for the Commodity Futures Trading Commission
Thursday, February 12, 2015
Key Topics & Takeaways
- CEA Reauthorization: CFTC Chairman Massad said that the CFTC has made a lot of changes since the passage of last year’s CEA bill particularly in making changes for end-users. He also said provisions that sought to change some of the processes at the Commission “could make it a lot harder for us to do our job.”
- Supplemental Leverage Ratio: Massad said that the treatment of this margin in the supplemental leverage ratio would have a “significant negative effect on clearing” because it would become more expensive for firms to engage in clearing, adding that he appreciates what the other regulators are trying to do, but that when it comes to margin, “legally segregated” funds should be treated differently
- Position Limits: Massad said the CFTC must craft its positing limits rule in a way that allows commercial participants to engage in bona fide hedging, noting that trading strategies are “often complex” and said the CFTC is taking the time to “get it right.”
- Cross Border: Massad replied that he “obviously” does not want to cause business to move out of the U.S., but said that a global framework is needed. He added that unless Congress wants to give the G20 power to write rules for the U.S. and the rest of the world, then rules will not all be the same.
- SEF White Paper: Massad said he welcomed the “thoughtful” white paper but is “not in favor of throwing out” the rules and “starting over,” rather he is open to looking at how to fine-tune and improve the SEF regime. He said the goals of creating pre-trade transparency should inform the CFTC’s judgment.
Witness
- Tim Massad, Chairman of the Commodity Futures Trading Commission
Opening Statements
Chairman K. Michael Conaway (R-Texas), in his opening statement, said that the Commodity Futures Trading Commission (CFTC) is entering a “new phase” in 2015, by “shifting from the breakneck race” of writing rules to a “more deliberative implementation” of these rules. He added that “it is inevitable” that Congress and the CFTC “made mistakes along the way” and said now is the time to “recognize improvements that can be made.”
Conaway said the Agriculture Committee, this year, will examine issues focusing on: 1) protecting end-users; 2) the rulemaking on position limits; 3) bona-fide hedging exemptions; 4) resolution of cross-border jurisdictional issues; and 5) data collection at the CFTC.
On the position limits rulemaking, Conaway said the CFTC must explain whether or not price movements in commodities are based on market forces and how position limits would “diminish, eliminate, or prevent market disruptions.” He also stressed that the bona-fide hedging exemption should remain board enough to allow commercial hedging to be “sheltered” from limits and noted the importance of resolving cross-border issues and to “rebuild the fractured swaps markets.”
Conaway explained that the Committee would be taking up reauthorization of the Commodity Exchange Act (CEA) “in the coming months” and will be looking for “broad input about how we can tailor and refine the law, to ensure the marketplace works for all participants.”
Ranking Member Colin Peterson (D-Minn.) said that while the rulemaking processes at the CFTC has “taken longer than some would like,” the agency has done a good job thus far. He agreed that one of the “top priorities” for the Committee is CEA reauthorization. He noted that last year the House passed a “good, bipartisan bill” and hoped the Committee could “build on” it and have it signed into law.
Witness Testimony
Tim Massad, Chairman of the CFTC, stated in his testimony that all the Commissioners at the CFTC are working together “in good faith to do the best job we can.” He noted that the swaps markets are critical for managing risk and that the regulatory framework, to work well, must promote transparency, competition, and innovation.
Massad said the goals of the CFTC moving forward include: 1) fine tuning rules for end-users; 2) continuing to bring the swaps market into central clearing; 3) improving rules on swaps trading to encourage trading on swap execution facilities (SEFs); 4) completing required rulemakings including rules for position limits and margin for uncleared swaps; and 5) continuing enforcement efforts.
He also stressed that cybersecurity will be a new challenge for the agency and said the CFTC must enhance the readiness of entities they regulate, such as clearing houses, to lower risks to financial stability.
He concluded stressing, “in all areas there is more we should be doing,” but said the CFTC is limited by resources as its funding level has not kept up with the growth of the markets.
Question & Answer
Market Fragmentation
Conaway began the discussion by asking if fragmentation in the derivatives market is a problem. Massad said that since rules are being implemented by different nations, they will be different from each other, which will “lead to some fragmentation in the short run.” He said this has lead some participants to trade outside of U.S. platforms to the extent they can, but stressed that he wants to harmonize rules internationally “as much as possible.”
Conaway followed up asking if some of the CFTC’s rules will need “tweaking” to address this fragmentation. Massad replied that there is “certainly some fine tuning and tweaking we want to do,” noting that the CFTC is focusing on cooperative supervision arrangements for clearing houses. He added that the market grew to be global due to dual registration.
Conaway asked Massad what he thought about fellow Commissioner Giancarlo’s white paper on SEF reform and noted that Congressional statute says that swaps trading could be done through “any means of interstate commerce” but SEFs only allow for two means.
Massad said he welcomed the “thoughtful” white paper and said he appreciates the time that his fellow Commissioner spent on it. Massad said he is “not in favor of throwing out” the rules and “starting over” but is open to looking at how to fine-tune and improve the SEF regime. He said the goals of creating pre-trade transparency should inform the CFTC’s judgment. When asked what other sections he was interested in, Massad noted that he is looking at sections of the white paper dealing with trading errors, and if the CFTC should be more flexible with errors, as well as the idea of licensing swap traders.
Data
Conaway asked how the CFTC will use the market data it collects and if the benefits warrant the costs associated with collecting this information. Massad highlighted the vast improvements in data on swaps activity since the financial crisis, but noted that collecting data on global markets is a “massive effort.” He stressed the need to have appropriate resources to build out these capabilities as well as the need for market participants to provide harmonized data. He noted that the CFTC is working to improve its rules to “give clear guidance” on data standards.
Clearing House Risk
Peterson asked if risk is now being concentrated in clearing houses and what the CFTC is doing to monitor this risk. Massad replied that it was a god decision to mandate the clearing of standard products, but noted that central clearing “does not eliminate risk,” so the CFTC must be vigilant in monitoring clearing houses’ exposures. He said it is important to remember that clearing houses “are not banks” and that they mutualize the risk among its members.
Criminal Charges
Peterson said his constituents are upset that “nobody as gone to jail” for actions that led to the financial crisis and that fines imposed on large financial institutions may just be a cost of doing business. Massad replied that he “couldn’t agree more” and that while the CFTC does not have criminal authority, the staff knows that they should consider if there are any criminal aspects to a case under investigation. He said that sending people to jail is the “strongest deterrent” to bad behavior and cited a couple of cases in which the offender was sentenced to jail time.
Rep. David Scott (D-Ga.) agreed that the best way to restore confidence in the markets is to “put some of these crooks in jail.”
Rep. Randy Neugebauer (R-Texas) said there is concern about the CFTC rigidly defining what a “bona fide” hedge will be and said this may lead to confusion about the ability for producers and commercial entities to hedge risk. He asked what the CFTC is doing to make sure these activities are still allowed.
Massad said the CFTC must craft its rule in a way that allows commercial participants to engage in bona fide hedging, noting that trading strategies are “often complex” and the CFTC is taking the time to “get it right.” Neugebauer followed up saying that the CFTC should make sure there is enough liquidity on both sides of a trade in the market.
Rep. Austin Scott (D-Ga.) said that the CFTC’s previous rule for bona fide hedge exemptions was working and asked why the CFTC wants to change it. Massad replied that the CFTC is doing what it was directed to by Congress.
Rep. Rodney Davis (R-Ill.) asked how the conditional limits under the position limits rule could impact physically delivered markets and create volatility. Massad said this is one of the areas where the CFTC is seeking comment because agency actions can impact different participants in different ways.
Rep. Alma Adams (D-N.C.) asked what data the CFTC will use in its position limits rulemaking. Massad said that the CFTC invites data and comment for all market participants and the public and that it will also use surveillance data.
Cybersecurity
Neugebauer said that protecting personal and proprietary information is important. He asked what the CFTC is focusing on and if there should be “major private market participation.” Massad said that cybersecurity issues will require the private sector to “do a lot of the heavy lifting” in creating cyber defenses and noted that the CFTC included this in its core principles. He said that CFTC does not have the budget to conduct independent testing, but will focus examiners’ efforts on ensuring that firms are testing systems properly, adding “that is the proper role for an agency like ours.”
Rep. Brad Ashford (D-Neb.) asked how a farmer would be impacted by a cyber attack on an exchange. Massad said that an attack could cause market outages that would hurt the ability for market participants to hedge their risk.
David Scott asked Massad for the status of regulatory harmonization negations with Europe and how an agreement, once reached, would be enforced. Massad said that on clearing house regulation, the CFTC and Europe are working to formalize an arrangement that the two sides have been following on a practical basis “for years” and that part of this will include a requirement for Europe to recognize U.S. clearing houses. On trading rules, Massad explained that the CFTC has implemented its rules but that most other jurisdictions have not, so these rules are on a “slightly longer track.”
David Scott then noted that the CFTC has extended “no-action relief” for non-U.S. swap dealers from certain transaction requirements. He said that this “no-action” was good, as it allows the CFTC to gather more information, but asked where the CFTC should “draw the line” in determining who is subject to CFTC oversight and if the Commission anticipates formally revisiting these rules. He also asked if the CFTC’s “extra-territorial approach” creates incentives for U.S. businesses to move jobs overseas, to avoid regulatory burdens.
Massad replied that he “obviously” does not want to cause business to move out of the U.S., but said that a global framework is needed. He added that the CFTC is looking at issues where U.S. rules are in place but comparable rules in other jurisdictions are not. Massad noted that the CFTC did not take a position on how its rule on margin for uncleared swaps will apply in the cross-border context and that the agency is reviewing comments. He added the CFTC could use a cross-border framework similar to the bank regulators’, similar to their past guidance, or a “third variation.”
Rep. Frank Lucas (R-Okla.) said that use of no-action letters is challenging for the industry and stressed the need for the CFTC to have an effective process to avoid market fragmentation. He asked if the CFTC will move away from a process of no-action letters to a “real regulatory framework” that includes public notice and input. Massad said he is “very committed” to the rulemaking process and that the public comment process is “very helpful”
Lucas then directly asked if there are real fragmentation issues in the markets. Massad replied that he did not want to minimize fragmentation and loss of liquidity, but “at the same time” the CFTC has to implement the laws of the U.S. He added that unless Congress wants to give the G20 power to write rules for the U.S. and the rest of the world, then rules will not all be the same.
Rep. Tom Emmer (R-Minn.) asked what the CFTC is doing regarding the June deadline for European recognition of U.S. clearing houses. Massad said that European regulatory staff has said they can extend the deadline again. He also noted that he was been speaking and “working hard” with European Commission Commissioner Lord Hill on the matter.
Lucas noted that the supplemental leverage ratio put forth by U.S. banking regulators requires margin held at futures commission merchants (FCMs) to be counted toward an institutions ratio for setting capital levels. He worried that having to hold additional capital for this activity may increase costs and asked Massad what his thoughts are on the issue.
Massad said he shared Lucas’s concern that the treatment of this margin in the supplemental leverage ratio would have a “significant negative effect on clearing” because it would become more expensive for firms to engage in clearing. He said he has spoken with Thomas Curry, Comptroller of the Currency, Martin Gruenberg, Chairman of the Federal Deposit Insurance Corporation, as well as people at the Federal Reserve about this issue and that they agreed discuss it further at the staff level. He added that he appreciates what the other regulators are trying to do, but that when it comes to margin, “legally segregated” funds should be treated differently.
Rep. Jim McGovern (D-Mass.) said that the Committee “should be careful” with its CEA reauthorization efforts and take into account the work the CFTC has done since the last year’s legislation (H.R. 4413) was passed. He stressed that the CFTC has been working on cross-border issues and said he would not want the Committee to “hamstring” this “crucial process.” He asked Massad for advice on what to include in the CEA.
Massad agreed that the CFTC has made a lot of changes since the passage of last year’s bill. He noted that there were a “number of provisions” related to end-users, but said that these issues are better handled through regulation. He also said provisions that sought to change some of the processes of the Commission “could make it a lot harder for us to do our job.”
Swap Dealer De Minimis Threshold
Austin Scott asked when the de minimis level for swap dealer activity will automatically drop from $8 billion to $3 billion and if the CFTC expects to seek comment before this occurs. He also asked if this is something that should be addressed in CEA reauthorization.
Massad said the de minimis level is set to lower in 2017 and that the Commission will look at “good data and analysis” on the threshold being lowered. He added “I don’t know if it needs to be addressed” in the CEA reauthorization.
Rep. Rick Allen (R-Ga.) asked if companies leave the business when the de minimis level is lowered, thus causing consolidation in the industry. Massad said the CFTC will be looking at the staff study to see what the effects of lowering the threshold will be.
Outdated Regulations
Rep. Glen Thompson (R-Pa.) asked if there are any obligations mandated by Congress that have “outlived their usefulness” and could be eliminated to help cut back on agency costs. Massad said the CFTC is currently conducting a regulatory review to determine if there are any rules or requirements that they can amend or eliminate and said he would follow up with the Congressman when the results are available.
Insurance Fund for Derivatives
Thompson asked if an insurance fund is a viable option for derivatives products. Massad replied that an entity like the Securities Investor Protection Corporation (SIPC) is something he would be happy to consider, but that he had no view on it at this time.
Cost Benefit Analysis
Rep. Suzan DelBene (D-Wash.) explained that she offered an amendment to last year’s CEA reauthorization which stated that a court shall affirm the CFTC’s assessment of the costs and benefits of a rule and provides an exception in the case of an abuse of discretion by the Commission. She asked Massad for his thoughts on the amendment.
Massad said that this is the general standard that applies to the CFTC’s actions and that he thinks it is an appropriate standard. He added that it is important not to get too specific with legislative language as it may cause unintended consequences that could make the CFTC’s job more difficult when fine tuning its rules.
Hedge Funds
Rep. Stacey Plaskett (D-V.I.) noted there are many hedge funds in the Virgin Islands and asked if there is a way to incentivize others to enter the market and increase competition. She also asked whether the CFTC would consider a rulemaking in this area. Massad said that these entities typically do not fall under the category of those that need to register with the CFTC and that there will not likely be action “any time soon” from the CFTC in this space.
Public Utilities
Rep. Doug LaMalfa (R-Calif.) noted that his legislation granting relief from CFTC requirements for publically owned utilities passed the House unanimously and that the CFTC issued a no-action letter providing similar relief. He asked if the CFTC’s actions helped in the marketplace. Massad noted that the CFTC addressed their rules in this regard and that they have heard no complaints since.
LaMalfa said he heard that the change helped tremendously and asked if this action should be codified in law. Massad said that, as a general matter, regulatory actions should not be codified into law, because the markets can change so quickly and a regulator may need to adjust rules in response.
Indemnification
Rep. Rick Crawford (R-Ark.) asked how the indemnification requirements in Dodd-Frank have impacted the CFTC’s relationships with foreign regulators and its ability to mitigate risk. He also asked if legislation to remove this requirement would be beneficial. Massad said that removing this requirement would be beneficial and help improve the sharing of information across jurisdictions.
Oil Prices
Rep. Michelle Lujan Grisham (D-N.M.) cited a Bank of International Settlements report that said the drop in oil prices could be partly due to reluctance of swap dealers to offer products to entities in the energy sector. She asked if the CFTC is looking into this. Massad said the CFTC is looking very closely at the dramatic price movements in the oil market and explained that supply and demand forces have changed dramatically with the production boom in the U.S.
Illiquid Markets
Davis thanked Massad for the CFTC’s no-action relief from real-time reporting of swap information for certain illiquid swaps for commercial end-users who were being negatively impacted. Massad said the CFTC’s actions reflect the fact that the goal of transparency should not make it harder for companies to hedge and that the agency will continue to be mindful of these issues.
SmartCheck
Davis asked how much SmartCheck, a program to help investors protect themselves from financial fraud, cost the CFTC. Massad said “a few million dollars, I believe.”
Davis said this is a “minimal investment for good benefits” and that he would like to work with the CFTC to increase access to this information for senior citizens.
Massad’s Priorities
Rep. Jim Costa (D-Calif.) asked what Massad’s priorities are for his tenure at the CFTC. Massad said that obtaining full funding and continuing strong surveillance and enforcement are his goals.
Volcker Covered Funds
Rep. David Rouzer (R-N.C.) said he is concerned about the Volcker Rule’s impact on market participants in markets for securitizations, covered bonds, and certain exchange traded products and how these firms will determine the “covered fund” status of products for which their firms are market makers under the rule. He asked, in light of an upcoming July deadline, if Massad has a view on how or when the relevant regulators will respond to a request from the industry for guidance.
Massad said the CFTC is coordinating with the other regulators and that it is “critical we all try to work together.” He said that he would get back to the Congressman on where the regulators are on the request for guidance.
CFTC Footprint
Rep. Pete Aguilar asked if the CFTC needs to expand its footprint to carry out its mission. Massad said he would not expand the CFTC’s footprint as the current setup “works well.”
For more information on this hearing and to view a webcast, please click here.
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House Agriculture Committee
2015 Agenda for the Commodity Futures Trading Commission
Thursday, February 12, 2015
Key Topics & Takeaways
- CEA Reauthorization: CFTC Chairman Massad said that the CFTC has made a lot of changes since the passage of last year’s CEA bill particularly in making changes for end-users. He also said provisions that sought to change some of the processes at the Commission “could make it a lot harder for us to do our job.”
- Supplemental Leverage Ratio: Massad said that the treatment of this margin in the supplemental leverage ratio would have a “significant negative effect on clearing” because it would become more expensive for firms to engage in clearing, adding that he appreciates what the other regulators are trying to do, but that when it comes to margin, “legally segregated” funds should be treated differently
- Position Limits: Massad said the CFTC must craft its positing limits rule in a way that allows commercial participants to engage in bona fide hedging, noting that trading strategies are “often complex” and said the CFTC is taking the time to “get it right.”
- Cross Border: Massad replied that he “obviously” does not want to cause business to move out of the U.S., but said that a global framework is needed. He added that unless Congress wants to give the G20 power to write rules for the U.S. and the rest of the world, then rules will not all be the same.
- SEF White Paper: Massad said he welcomed the “thoughtful” white paper but is “not in favor of throwing out” the rules and “starting over,” rather he is open to looking at how to fine-tune and improve the SEF regime. He said the goals of creating pre-trade transparency should inform the CFTC’s judgment.
Witness
- Tim Massad, Chairman of the Commodity Futures Trading Commission
Opening Statements
Chairman K. Michael Conaway (R-Texas), in his opening statement, said that the Commodity Futures Trading Commission (CFTC) is entering a “new phase” in 2015, by “shifting from the breakneck race” of writing rules to a “more deliberative implementation” of these rules. He added that “it is inevitable” that Congress and the CFTC “made mistakes along the way” and said now is the time to “recognize improvements that can be made.”
Conaway said the Agriculture Committee, this year, will examine issues focusing on: 1) protecting end-users; 2) the rulemaking on position limits; 3) bona-fide hedging exemptions; 4) resolution of cross-border jurisdictional issues; and 5) data collection at the CFTC.
On the position limits rulemaking, Conaway said the CFTC must explain whether or not price movements in commodities are based on market forces and how position limits would “diminish, eliminate, or prevent market disruptions.” He also stressed that the bona-fide hedging exemption should remain board enough to allow commercial hedging to be “sheltered” from limits and noted the importance of resolving cross-border issues and to “rebuild the fractured swaps markets.”
Conaway explained that the Committee would be taking up reauthorization of the Commodity Exchange Act (CEA) “in the coming months” and will be looking for “broad input about how we can tailor and refine the law, to ensure the marketplace works for all participants.”
Ranking Member Colin Peterson (D-Minn.) said that while the rulemaking processes at the CFTC has “taken longer than some would like,” the agency has done a good job thus far. He agreed that one of the “top priorities” for the Committee is CEA reauthorization. He noted that last year the House passed a “good, bipartisan bill” and hoped the Committee could “build on” it and have it signed into law.
Witness Testimony
Tim Massad, Chairman of the CFTC, stated in his testimony that all the Commissioners at the CFTC are working together “in good faith to do the best job we can.” He noted that the swaps markets are critical for managing risk and that the regulatory framework, to work well, must promote transparency, competition, and innovation.
Massad said the goals of the CFTC moving forward include: 1) fine tuning rules for end-users; 2) continuing to bring the swaps market into central clearing; 3) improving rules on swaps trading to encourage trading on swap execution facilities (SEFs); 4) completing required rulemakings including rules for position limits and margin for uncleared swaps; and 5) continuing enforcement efforts.
He also stressed that cybersecurity will be a new challenge for the agency and said the CFTC must enhance the readiness of entities they regulate, such as clearing houses, to lower risks to financial stability.
He concluded stressing, “in all areas there is more we should be doing,” but said the CFTC is limited by resources as its funding level has not kept up with the growth of the markets.
Question & Answer
Market Fragmentation
Conaway began the discussion by asking if fragmentation in the derivatives market is a problem. Massad said that since rules are being implemented by different nations, they will be different from each other, which will “lead to some fragmentation in the short run.” He said this has lead some participants to trade outside of U.S. platforms to the extent they can, but stressed that he wants to harmonize rules internationally “as much as possible.”
Conaway followed up asking if some of the CFTC’s rules will need “tweaking” to address this fragmentation. Massad replied that there is “certainly some fine tuning and tweaking we want to do,” noting that the CFTC is focusing on cooperative supervision arrangements for clearing houses. He added that the market grew to be global due to dual registration.
Conaway asked Massad what he thought about fellow Commissioner Giancarlo’s white paper on SEF reform and noted that Congressional statute says that swaps trading could be done through “any means of interstate commerce” but SEFs only allow for two means.
Massad said he welcomed the “thoughtful” white paper and said he appreciates the time that his fellow Commissioner spent on it. Massad said he is “not in favor of throwing out” the rules and “starting over” but is open to looking at how to fine-tune and improve the SEF regime. He said the goals of creating pre-trade transparency should inform the CFTC’s judgment. When asked what other sections he was interested in, Massad noted that he is looking at sections of the white paper dealing with trading errors, and if the CFTC should be more flexible with errors, as well as the idea of licensing swap traders.
Data
Conaway asked how the CFTC will use the market data it collects and if the benefits warrant the costs associated with collecting this information. Massad highlighted the vast improvements in data on swaps activity since the financial crisis, but noted that collecting data on global markets is a “massive effort.” He stressed the need to have appropriate resources to build out these capabilities as well as the need for market participants to provide harmonized data. He noted that the CFTC is working to improve its rules to “give clear guidance” on data standards.
Clearing House Risk
Peterson asked if risk is now being concentrated in clearing houses and what the CFTC is doing to monitor this risk. Massad replied that it was a god decision to mandate the clearing of standard products, but noted that central clearing “does not eliminate risk,” so the CFTC must be vigilant in monitoring clearing houses’ exposures. He said it is important to remember that clearing houses “are not banks” and that they mutualize the risk among its members.
Criminal Charges
Peterson said his constituents are upset that “nobody as gone to jail” for actions that led to the financial crisis and that fines imposed on large financial institutions may just be a cost of doing business. Massad replied that he “couldn’t agree more” and that while the CFTC does not have criminal authority, the staff knows that they should consider if there are any criminal aspects to a case under investigation. He said that sending people to jail is the “strongest deterrent” to bad behavior and cited a couple of cases in which the offender was sentenced to jail time.
Rep. David Scott (D-Ga.) agreed that the best way to restore confidence in the markets is to “put some of these crooks in jail.”
Rep. Randy Neugebauer (R-Texas) said there is concern about the CFTC rigidly defining what a “bona fide” hedge will be and said this may lead to confusion about the ability for producers and commercial entities to hedge risk. He asked what the CFTC is doing to make sure these activities are still allowed.
Massad said the CFTC must craft its rule in a way that allows commercial participants to engage in bona fide hedging, noting that trading strategies are “often complex” and the CFTC is taking the time to “get it right.” Neugebauer followed up saying that the CFTC should make sure there is enough liquidity on both sides of a trade in the market.
Rep. Austin Scott (D-Ga.) said that the CFTC’s previous rule for bona fide hedge exemptions was working and asked why the CFTC wants to change it. Massad replied that the CFTC is doing what it was directed to by Congress.
Rep. Rodney Davis (R-Ill.) asked how the conditional limits under the position limits rule could impact physically delivered markets and create volatility. Massad said this is one of the areas where the CFTC is seeking comment because agency actions can impact different participants in different ways.
Rep. Alma Adams (D-N.C.) asked what data the CFTC will use in its position limits rulemaking. Massad said that the CFTC invites data and comment for all market participants and the public and that it will also use surveillance data.
Cybersecurity
Neugebauer said that protecting personal and proprietary information is important. He asked what the CFTC is focusing on and if there should be “major private market participation.” Massad said that cybersecurity issues will require the private sector to “do a lot of the heavy lifting” in creating cyber defenses and noted that the CFTC included this in its core principles. He said that CFTC does not have the budget to conduct independent testing, but will focus examiners’ efforts on ensuring that firms are testing systems properly, adding “that is the proper role for an agency like ours.”
Rep. Brad Ashford (D-Neb.) asked how a farmer would be impacted by a cyber attack on an exchange. Massad said that an attack could cause market outages that would hurt the ability for market participants to hedge their risk.
David Scott asked Massad for the status of regulatory harmonization negations with Europe and how an agreement, once reached, would be enforced. Massad said that on clearing house regulation, the CFTC and Europe are working to formalize an arrangement that the two sides have been following on a practical basis “for years” and that part of this will include a requirement for Europe to recognize U.S. clearing houses. On trading rules, Massad explained that the CFTC has implemented its rules but that most other jurisdictions have not, so these rules are on a “slightly longer track.”
David Scott then noted that the CFTC has extended “no-action relief” for non-U.S. swap dealers from certain transaction requirements. He said that this “no-action” was good, as it allows the CFTC to gather more information, but asked where the CFTC should “draw the line” in determining who is subject to CFTC oversight and if the Commission anticipates formally revisiting these rules. He also asked if the CFTC’s “extra-territorial approach” creates incentives for U.S. businesses to move jobs overseas, to avoid regulatory burdens.
Massad replied that he “obviously” does not want to cause business to move out of the U.S., but said that a global framework is needed. He added that the CFTC is looking at issues where U.S. rules are in place but comparable rules in other jurisdictions are not. Massad noted that the CFTC did not take a position on how its rule on margin for uncleared swaps will apply in the cross-border context and that the agency is reviewing comments. He added the CFTC could use a cross-border framework similar to the bank regulators’, similar to their past guidance, or a “third variation.”
Rep. Frank Lucas (R-Okla.) said that use of no-action letters is challenging for the industry and stressed the need for the CFTC to have an effective process to avoid market fragmentation. He asked if the CFTC will move away from a process of no-action letters to a “real regulatory framework” that includes public notice and input. Massad said he is “very committed” to the rulemaking process and that the public comment process is “very helpful”
Lucas then directly asked if there are real fragmentation issues in the markets. Massad replied that he did not want to minimize fragmentation and loss of liquidity, but “at the same time” the CFTC has to implement the laws of the U.S. He added that unless Congress wants to give the G20 power to write rules for the U.S. and the rest of the world, then rules will not all be the same.
Rep. Tom Emmer (R-Minn.) asked what the CFTC is doing regarding the June deadline for European recognition of U.S. clearing houses. Massad said that European regulatory staff has said they can extend the deadline again. He also noted that he was been speaking and “working hard” with European Commission Commissioner Lord Hill on the matter.
Lucas noted that the supplemental leverage ratio put forth by U.S. banking regulators requires margin held at futures commission merchants (FCMs) to be counted toward an institutions ratio for setting capital levels. He worried that having to hold additional capital for this activity may increase costs and asked Massad what his thoughts are on the issue.
Massad said he shared Lucas’s concern that the treatment of this margin in the supplemental leverage ratio would have a “significant negative effect on clearing” because it would become more expensive for firms to engage in clearing. He said he has spoken with Thomas Curry, Comptroller of the Currency, Martin Gruenberg, Chairman of the Federal Deposit Insurance Corporation, as well as people at the Federal Reserve about this issue and that they agreed discuss it further at the staff level. He added that he appreciates what the other regulators are trying to do, but that when it comes to margin, “legally segregated” funds should be treated differently.
Rep. Jim McGovern (D-Mass.) said that the Committee “should be careful” with its CEA reauthorization efforts and take into account the work the CFTC has done since the last year’s legislation (H.R. 4413) was passed. He stressed that the CFTC has been working on cross-border issues and said he would not want the Committee to “hamstring” this “crucial process.” He asked Massad for advice on what to include in the CEA.
Massad agreed that the CFTC has made a lot of changes since the passage of last year’s bill. He noted that there were a “number of provisions” related to end-users, but said that these issues are better handled through regulation. He also said provisions that sought to change some of the processes of the Commission “could make it a lot harder for us to do our job.”
Swap Dealer De Minimis Threshold
Austin Scott asked when the de minimis level for swap dealer activity will automatically drop from $8 billion to $3 billion and if the CFTC expects to seek comment before this occurs. He also asked if this is something that should be addressed in CEA reauthorization.
Massad said the de minimis level is set to lower in 2017 and that the Commission will look at “good data and analysis” on the threshold being lowered. He added “I don’t know if it needs to be addressed” in the CEA reauthorization.
Rep. Rick Allen (R-Ga.) asked if companies leave the business when the de minimis level is lowered, thus causing consolidation in the industry. Massad said the CFTC will be looking at the staff study to see what the effects of lowering the threshold will be.
Outdated Regulations
Rep. Glen Thompson (R-Pa.) asked if there are any obligations mandated by Congress that have “outlived their usefulness” and could be eliminated to help cut back on agency costs. Massad said the CFTC is currently conducting a regulatory review to determine if there are any rules or requirements that they can amend or eliminate and said he would follow up with the Congressman when the results are available.
Insurance Fund for Derivatives
Thompson asked if an insurance fund is a viable option for derivatives products. Massad replied that an entity like the Securities Investor Protection Corporation (SIPC) is something he would be happy to consider, but that he had no view on it at this time.
Cost Benefit Analysis
Rep. Suzan DelBene (D-Wash.) explained that she offered an amendment to last year’s CEA reauthorization which stated that a court shall affirm the CFTC’s assessment of the costs and benefits of a rule and provides an exception in the case of an abuse of discretion by the Commission. She asked Massad for his thoughts on the amendment.
Massad said that this is the general standard that applies to the CFTC’s actions and that he thinks it is an appropriate standard. He added that it is important not to get too specific with legislative language as it may cause unintended consequences that could make the CFTC’s job more difficult when fine tuning its rules.
Hedge Funds
Rep. Stacey Plaskett (D-V.I.) noted there are many hedge funds in the Virgin Islands and asked if there is a way to incentivize others to enter the market and increase competition. She also asked whether the CFTC would consider a rulemaking in this area. Massad said that these entities typically do not fall under the category of those that need to register with the CFTC and that there will not likely be action “any time soon” from the CFTC in this space.
Public Utilities
Rep. Doug LaMalfa (R-Calif.) noted that his legislation granting relief from CFTC requirements for publically owned utilities passed the House unanimously and that the CFTC issued a no-action letter providing similar relief. He asked if the CFTC’s actions helped in the marketplace. Massad noted that the CFTC addressed their rules in this regard and that they have heard no complaints since.
LaMalfa said he heard that the change helped tremendously and asked if this action should be codified in law. Massad said that, as a general matter, regulatory actions should not be codified into law, because the markets can change so quickly and a regulator may need to adjust rules in response.
Indemnification
Rep. Rick Crawford (R-Ark.) asked how the indemnification requirements in Dodd-Frank have impacted the CFTC’s relationships with foreign regulators and its ability to mitigate risk. He also asked if legislation to remove this requirement would be beneficial. Massad said that removing this requirement would be beneficial and help improve the sharing of information across jurisdictions.
Oil Prices
Rep. Michelle Lujan Grisham (D-N.M.) cited a Bank of International Settlements report that said the drop in oil prices could be partly due to reluctance of swap dealers to offer products to entities in the energy sector. She asked if the CFTC is looking into this. Massad said the CFTC is looking very closely at the dramatic price movements in the oil market and explained that supply and demand forces have changed dramatically with the production boom in the U.S.
Illiquid Markets
Davis thanked Massad for the CFTC’s no-action relief from real-time reporting of swap information for certain illiquid swaps for commercial end-users who were being negatively impacted. Massad said the CFTC’s actions reflect the fact that the goal of transparency should not make it harder for companies to hedge and that the agency will continue to be mindful of these issues.
SmartCheck
Davis asked how much SmartCheck, a program to help investors protect themselves from financial fraud, cost the CFTC. Massad said “a few million dollars, I believe.”
Davis said this is a “minimal investment for good benefits” and that he would like to work with the CFTC to increase access to this information for senior citizens.
Massad’s Priorities
Rep. Jim Costa (D-Calif.) asked what Massad’s priorities are for his tenure at the CFTC. Massad said that obtaining full funding and continuing strong surveillance and enforcement are his goals.
Volcker Covered Funds
Rep. David Rouzer (R-N.C.) said he is concerned about the Volcker Rule’s impact on market participants in markets for securitizations, covered bonds, and certain exchange traded products and how these firms will determine the “covered fund” status of products for which their firms are market makers under the rule. He asked, in light of an upcoming July deadline, if Massad has a view on how or when the relevant regulators will respond to a request from the industry for guidance.
Massad said the CFTC is coordinating with the other regulators and that it is “critical we all try to work together.” He said that he would get back to the Congressman on where the regulators are on the request for guidance.
CFTC Footprint
Rep. Pete Aguilar asked if the CFTC needs to expand its footprint to carry out its mission. Massad said he would not expand the CFTC’s footprint as the current setup “works well.”
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