CFTC Open Meeting
Commodity Futures Trading Commission
Open Meeting
Thursday, September 8, 2016
Key Topics & Takeaways
- Final Votes: The final rules for
system safeguards testing requirements for both derivatives clearing organizations
(DCOs) and for designated contract markets, swap execution facilities and swap
data repositories were adopted unanimously. The Commission also approved the comparability determination for Japan regarding uncleared swap margin rules for substituted compliance purposes in a 2-1 vote, with Commissioner Bowen dissenting.
- Cybersecurity Testing: David Taylor, Associate Director of the Division of Market Oversight, explained that the central point of the final rules is the requirement for all DCOs, Designated Contract Markets (DCMs), Swap Execution Facilities (SEFs), and Swap Data Repositories (SDRs) regulated by the CFTC to conduct five types of cybersecurity testing: 1) Vulnerability testing; 2) Penetration testing; 3) Control testing; 4) Security incident response plan testing; and 5) Enterprise technology risk assessment testing.
- Margin Rule Implementation: Commissioner Giancarlo explained that due to the September 1 implementation deadline, Asian swap markets faced “chaos and confusion” due to the unsynchronized implementation of margin rules. He noted that many trades were rejected, and criticized that the disruption “could have been avoided.”
- EU Delay on Margin Requirements: Chairman Massad voiced his disappointment that the EU delayed their date for implementing margin requirements for uncleared swaps, but added that due to the U.S. pushing forward with its implementation date, the EU has been “further incentivized” to move forward.
Speakers
- Timothy G. Massad, CFTC Chairman
- Sharon Y. Bowen, CFTC Commissioner
- J. Christopher Giancarlo, CFTC Commissioner
- Staff from the Division of Market Oversight (DMO)
- Staff from the Division of Clearing and Risk (DCR)
- Staff from the Division of Swap Dealer and Intermediary Oversight (DSIO)
Opening Statements
In his opening statement, CFTC Chairman Timothy Massad stated that the two final rules enhancing cybersecurity and operational safeguards in the markets, as well as the comparability for Japan’s margin requirements for uncleared swaps, are “important measures.” He continued that cyber-attacks are the “single biggest threat to the integrity of the financial markets today” and is why the safeguard rules are “so important.” Regarding the comparability for Japan’s rules on margin for uncleared swaps, Massad explained that it illustrates the Commission’s commitment to international cooperation and harmonization, and is “critical” to building a strong regulatory framework.
In her first statement related to the system safeguard rules, Commissioner Sharon Bowen said that she would be voting yes on both rules, as cybersecurity is a “top concern” for American companies, especially financial services firms, and that the rules are a “good step forward” in addressing cybersecurity concerns.
However, Bowen dissented in her second statement related to the comparability for Japan’s margin requirements for uncleared swaps. She explained that she could not support the comparability since she believed it would introduce greater risk into the derivatives market due to “significant” divergence in rule sets. Bowen stressed that the differences in requirements, to include the treatment of collateral, between the U.S. and Japan would “open the door to regulatory arbitrage domestically.” Instead, she suggested that partial comparability determination would be the best way to “strike the right balance” between international harmonization and protecting American interest.
In his statement regarding system safeguards, Commissioner Christopher Giancarlo said that the final rules are “better balanced” than the original proposals, as they provide greater flexibility to market operators. However, he raised concern over the costs that would be imposed on smaller derivatives clearing organizations (DCOs).
Giancarlo then voiced his dissent to the rule on cross-border application for margin requirements for uncleared swaps, adding that the comparability framework is “overly complex and too narrow.” He continued that he previously warned the Commission of the liquidity crunch that would occur due to the September 1 cross-border margin rules when 21 of 24 overseas regulators delayed the requirements, and how he advised U.S. regulators to agree on a joint implementation deadline with overseas counterparts, but that his advice was unheard. Giancarlo explained that due to the September 1 implementation deadline, Asian swap markets faced “chaos and confusion” due to the unsynchronized implementation of margin rules, as many trades were rejected, and criticized that the disruption “could have been avoided.”
Staff Presentations
Final Rule – System Safeguards Testing Requirements and System Safeguards Testing Requirements for Derivatives Clearing Organizations
David Taylor, Associate Director of the Division of Market Oversight (DMO), explained that the final system safeguards clarify existing CFTC rule provisions related to cybersecurity testing and system safeguards risk analysis, and include new provisions concerning certain aspects of cybersecurity testing. He continued that the central point of the final rules is the requirement for all DCOs, designated contract markets (DCMs), swap execution facilities (SEFs), and swap data repositories (SDRs) regulated by the CFTC to conduct five types of cybersecurity testing: 1) Vulnerability testing; 2) Penetration testing; 3) Control testing; 4) Security incident response plan testing; and 5) Enterprise technology risk assessment testing.
Julie Mohr, Deputy Director of the Division of Clearing and Risk (DCR), described the five types of cybersecurity testing. She explained that vulnerability testing would scan systems for weaknesses, and that existing software would continue to be tested and probed, because if the organization can discover vulnerabilities before attackers do, they can be fixed before exploitation. Regarding penetration testing, Mohr continued that there would be simulated attacks on the system to discover and exploit weaknesses both internally and externally. Taylor then described that control testing would consist of countermeasures to protect the reliability, security, and capacity of automated systems, as well as the confidentiality, integrity and availability of data and information. Security incident response plan (SIRP) testing, she continued, would allow DCMs, SEFs, SDRs and DCOs to identify, respond to, mitigate and recover from security incidents, through checklists, tabletop exercises, simulations, and other forms. Lastly, Taylor explained that enterprise technology risk assessment testing would be a written assessment of identifying and analyzing threats and vulnerabilities within the system.
Both final rules were adopted in 3-0 votes.
Comparability Determination for Japan Uncleared Swap Margin Rules for Substituted Compliance Purposes
Frank Fisanich, Associate Director of the Division of Swap Dealer and Intermediary Oversight (DSIO) encouraged the Commission to adopt the comparability determination for Japan regarding margin requirements for uncleared swaps, as the margin rules between the Commission and Japan Financial Services Agency (JFSA) have a “similar scope and objective.” He continued that while much of Japan’s uncleared margin rules are comparable to the U.S., they “do not have to be identical or comparable in every aspect.” Fisanich explained that the rules by the JFSA are either “essentially identical or substantially similar” in all material respects, to include methodologies for calculating amounts of margin, permitted margin thresholds, and the process and standards for approving margin models.
He continued that there is a broad scope Memoranda of Understanding (MOU) between the U.S. and JFSA and that there has been a “close working relationship” with the JFSA for many years, which is why the Commission staff believes the JFSA will be able to supervise, investigate and discipline the margin rules. Fisanich noted that under Commission regulations, all books and records of Commission registrants are open to inspection by Commission staff and the Department of Justice, and that the comparability determination will not change such requirements.
Massad voiced his support for the comparability determination, adding that it will “strengthen the relationship with JFSA.” Regarding the timing of margin implementation concerns that Giancarlo raised, he explained that the CFTC chose to go forward with the September 1 implementation date due to an agreement 18 months ago, and that while the EU announced a delay in their implementation, they have told their firms to continue preparing to comply. Massad voiced his disappointment that the EU delayed their implementation date, but added that due to the U.S. pushing forward with its implementation date, the EU has been “further incentivized” to move forward. He concluded that the goal is to build a strong international framework that is as sensible and consistent as possible, but acknowledged that “it is going to take time” due to different regulatory approaches.
Bowen noted that under CFTC rules, initial margin must be with an unaffiliated third party, and any cash collateral must be reinvested by the counterparty in another eligible instrument, and asked the staff how it was determined that Japanese law was comparable to U.S. Fisanich explained that the laws do not have to be identical, but that they are “substantially similar.”
Bowen then asked if prudential regulators expressed concern about this determination, and Fisanich acknowledged that the prudential regulators, such as the Federal Reserve Board of Governors, raised many issues.
The Commission voted to approve the comparability determination for Japan regarding uncleared swap margin rules for substituted compliance purposes in a 2-1 vote, with Bowen dissenting.
Closing Statement
Massad closed the meeting by explaining the CFTC’s priorities for the rest of the year, which included: 1) working with international regulators on cross-border harmonization issues; 2) a supplemental proposal on issues related to regulation automated trading (Reg AT); 3) a reproposal of capital requirements for swap dealers and major swap participants; 4) fine tuning trading and data rules; as well as 5) finalizing position limits.
For more information on this meeting, please click here.
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Commodity Futures Trading Commission
Open Meeting
Thursday, September 8, 2016
Key Topics & Takeaways
- Final Votes: The final rules for
system safeguards testing requirements for both derivatives clearing organizations
(DCOs) and for designated contract markets, swap execution facilities and swap
data repositories were adopted unanimously. The Commission also approved the comparability determination for Japan regarding uncleared swap margin rules for substituted compliance purposes in a 2-1 vote, with Commissioner Bowen dissenting. - Cybersecurity Testing: David Taylor, Associate Director of the Division of Market Oversight, explained that the central point of the final rules is the requirement for all DCOs, Designated Contract Markets (DCMs), Swap Execution Facilities (SEFs), and Swap Data Repositories (SDRs) regulated by the CFTC to conduct five types of cybersecurity testing: 1) Vulnerability testing; 2) Penetration testing; 3) Control testing; 4) Security incident response plan testing; and 5) Enterprise technology risk assessment testing.
- Margin Rule Implementation: Commissioner Giancarlo explained that due to the September 1 implementation deadline, Asian swap markets faced “chaos and confusion” due to the unsynchronized implementation of margin rules. He noted that many trades were rejected, and criticized that the disruption “could have been avoided.”
- EU Delay on Margin Requirements: Chairman Massad voiced his disappointment that the EU delayed their date for implementing margin requirements for uncleared swaps, but added that due to the U.S. pushing forward with its implementation date, the EU has been “further incentivized” to move forward.
Speakers
- Timothy G. Massad, CFTC Chairman
- Sharon Y. Bowen, CFTC Commissioner
- J. Christopher Giancarlo, CFTC Commissioner
- Staff from the Division of Market Oversight (DMO)
- Staff from the Division of Clearing and Risk (DCR)
- Staff from the Division of Swap Dealer and Intermediary Oversight (DSIO)
Opening Statements
In his opening statement, CFTC Chairman Timothy Massad stated that the two final rules enhancing cybersecurity and operational safeguards in the markets, as well as the comparability for Japan’s margin requirements for uncleared swaps, are “important measures.” He continued that cyber-attacks are the “single biggest threat to the integrity of the financial markets today” and is why the safeguard rules are “so important.” Regarding the comparability for Japan’s rules on margin for uncleared swaps, Massad explained that it illustrates the Commission’s commitment to international cooperation and harmonization, and is “critical” to building a strong regulatory framework.
In her first statement related to the system safeguard rules, Commissioner Sharon Bowen said that she would be voting yes on both rules, as cybersecurity is a “top concern” for American companies, especially financial services firms, and that the rules are a “good step forward” in addressing cybersecurity concerns.
However, Bowen dissented in her second statement related to the comparability for Japan’s margin requirements for uncleared swaps. She explained that she could not support the comparability since she believed it would introduce greater risk into the derivatives market due to “significant” divergence in rule sets. Bowen stressed that the differences in requirements, to include the treatment of collateral, between the U.S. and Japan would “open the door to regulatory arbitrage domestically.” Instead, she suggested that partial comparability determination would be the best way to “strike the right balance” between international harmonization and protecting American interest.
In his statement regarding system safeguards, Commissioner Christopher Giancarlo said that the final rules are “better balanced” than the original proposals, as they provide greater flexibility to market operators. However, he raised concern over the costs that would be imposed on smaller derivatives clearing organizations (DCOs).
Giancarlo then voiced his dissent to the rule on cross-border application for margin requirements for uncleared swaps, adding that the comparability framework is “overly complex and too narrow.” He continued that he previously warned the Commission of the liquidity crunch that would occur due to the September 1 cross-border margin rules when 21 of 24 overseas regulators delayed the requirements, and how he advised U.S. regulators to agree on a joint implementation deadline with overseas counterparts, but that his advice was unheard. Giancarlo explained that due to the September 1 implementation deadline, Asian swap markets faced “chaos and confusion” due to the unsynchronized implementation of margin rules, as many trades were rejected, and criticized that the disruption “could have been avoided.”
Staff Presentations
Final Rule – System Safeguards Testing Requirements and System Safeguards Testing Requirements for Derivatives Clearing Organizations
David Taylor, Associate Director of the Division of Market Oversight (DMO), explained that the final system safeguards clarify existing CFTC rule provisions related to cybersecurity testing and system safeguards risk analysis, and include new provisions concerning certain aspects of cybersecurity testing. He continued that the central point of the final rules is the requirement for all DCOs, designated contract markets (DCMs), swap execution facilities (SEFs), and swap data repositories (SDRs) regulated by the CFTC to conduct five types of cybersecurity testing: 1) Vulnerability testing; 2) Penetration testing; 3) Control testing; 4) Security incident response plan testing; and 5) Enterprise technology risk assessment testing.
Julie Mohr, Deputy Director of the Division of Clearing and Risk (DCR), described the five types of cybersecurity testing. She explained that vulnerability testing would scan systems for weaknesses, and that existing software would continue to be tested and probed, because if the organization can discover vulnerabilities before attackers do, they can be fixed before exploitation. Regarding penetration testing, Mohr continued that there would be simulated attacks on the system to discover and exploit weaknesses both internally and externally. Taylor then described that control testing would consist of countermeasures to protect the reliability, security, and capacity of automated systems, as well as the confidentiality, integrity and availability of data and information. Security incident response plan (SIRP) testing, she continued, would allow DCMs, SEFs, SDRs and DCOs to identify, respond to, mitigate and recover from security incidents, through checklists, tabletop exercises, simulations, and other forms. Lastly, Taylor explained that enterprise technology risk assessment testing would be a written assessment of identifying and analyzing threats and vulnerabilities within the system.
Both final rules were adopted in 3-0 votes.
Comparability Determination for Japan Uncleared Swap Margin Rules for Substituted Compliance Purposes
Frank Fisanich, Associate Director of the Division of Swap Dealer and Intermediary Oversight (DSIO) encouraged the Commission to adopt the comparability determination for Japan regarding margin requirements for uncleared swaps, as the margin rules between the Commission and Japan Financial Services Agency (JFSA) have a “similar scope and objective.” He continued that while much of Japan’s uncleared margin rules are comparable to the U.S., they “do not have to be identical or comparable in every aspect.” Fisanich explained that the rules by the JFSA are either “essentially identical or substantially similar” in all material respects, to include methodologies for calculating amounts of margin, permitted margin thresholds, and the process and standards for approving margin models.
He continued that there is a broad scope Memoranda of Understanding (MOU) between the U.S. and JFSA and that there has been a “close working relationship” with the JFSA for many years, which is why the Commission staff believes the JFSA will be able to supervise, investigate and discipline the margin rules. Fisanich noted that under Commission regulations, all books and records of Commission registrants are open to inspection by Commission staff and the Department of Justice, and that the comparability determination will not change such requirements.
Massad voiced his support for the comparability determination, adding that it will “strengthen the relationship with JFSA.” Regarding the timing of margin implementation concerns that Giancarlo raised, he explained that the CFTC chose to go forward with the September 1 implementation date due to an agreement 18 months ago, and that while the EU announced a delay in their implementation, they have told their firms to continue preparing to comply. Massad voiced his disappointment that the EU delayed their implementation date, but added that due to the U.S. pushing forward with its implementation date, the EU has been “further incentivized” to move forward. He concluded that the goal is to build a strong international framework that is as sensible and consistent as possible, but acknowledged that “it is going to take time” due to different regulatory approaches.
Bowen noted that under CFTC rules, initial margin must be with an unaffiliated third party, and any cash collateral must be reinvested by the counterparty in another eligible instrument, and asked the staff how it was determined that Japanese law was comparable to U.S. Fisanich explained that the laws do not have to be identical, but that they are “substantially similar.”
Bowen then asked if prudential regulators expressed concern about this determination, and Fisanich acknowledged that the prudential regulators, such as the Federal Reserve Board of Governors, raised many issues.
The Commission voted to approve the comparability determination for Japan regarding uncleared swap margin rules for substituted compliance purposes in a 2-1 vote, with Bowen dissenting.
Closing Statement
Massad closed the meeting by explaining the CFTC’s priorities for the rest of the year, which included: 1) working with international regulators on cross-border harmonization issues; 2) a supplemental proposal on issues related to regulation automated trading (Reg AT); 3) a reproposal of capital requirements for swap dealers and major swap participants; 4) fine tuning trading and data rules; as well as 5) finalizing position limits.
For more information on this meeting, please click here.