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Commodity Futures Trading Commission Open Meeting

Commodity Futures Trading Commission

Open Meeting

Wednesday, October 16, 2019 

Key Topics & Takeaways

Opening Statements & Introduction

Chairman Heath P. Tarbert

In his opening statement, Commodity Futures Trading Commission (CFTC) Chairman Tarbert thanked his fellow commissioners as well as CFTC staff for their work on the two proposed rules under consideration. He stressed the significance of initial margin as an important safeguard against counterparty credit risk and the importance of regulatory deference in ensuring efficient market activity. Tarbert summarized the proposals, expressing his support for both, and stated his belief that each, in their own way, would serve to mitigate risk and promote stability, resiliency and growth in the global derivatives markets.

Commissioner Brian Quintenz

In his opening statement, Quintenz noted that these proposals both address one of the key post-crisis reforms, the margin framework for uncleared swaps. He voiced his support for the proposed rule governing the compliance schedule extension before outlining his dissent to the proposal excluding the European Stability Mechanism (ESM) from the CFTC’s margin requirements for uncleared swaps. Quintenz noted that while extending the compliance schedule for uncleared margin to September 1, 2021 is an important first step, the CFTC, U.S. banking regulators, the Securities and Exchange Commission (SEC) and international counterparts must continue to work to eliminate the cross-border discrepancies in the global derivatives market. Quintenz cited their European counterparts’ refusal to stand by or re-affirm their 2016 commitments to the common approach (CFTC-EC CCP Agreement) to the regulation of cross-border central counterparties (CCPs) as the reason for his opposition to granting ESM this exclusion.

Commissioner Dawn P. Stump

In her opening statement, Stump expressed support for both proposals under consideration. She noted that in their last meeting, the Global Markets Advisory Committee recommended the creation of a subcommittee to further examine Phase 5 implementation of margin requirements for uncleared swaps. In speaking about the ESM exclusion, Stump stressed the importance of regulatory reciprocity and that this rule is an expression of respect by the CFTC for their European counterparts. She stressed that she expects this deference to be returned in kind.

Commissioner Rostin Behnam & Commissioner Dan M. Berkovitz

Behnam and Berkovitz voiced their support for both proposals.

Presentation 1: Proposed Rule – Amendment to Regulation 23.161 – Compliance Schedule Extension

Presenters:

  • Joshua Sterling, Direct, Division of Swap Dealer and Intermediary Oversight, CFTC
  • Warren Gorlick, Associate Director, Division of Swap Dealer and Intermediary Oversight, CFTC
  • Carmen Moncada-Terry, Associate Director, Division of Swap Dealer and Intermediary Oversight, CFTC
  • Rafael Martinez, Senior Financial Risk Analyst, Division of Swap Dealer and Intermediary Oversight, CFTC

Sterling provided an overview of both proposed rules and stated that each proposal serves to reduce market disruption and provide certainty to market participants. Turning to the compliance schedule extension, Gorlick stated that this proposal would amend the CFTC’s margin rule to extend the compliance date from September 2020 to September 2021 for firms that have an average aggregate notional amount (AANA) of above $8 billion and below $50 billion. In summarizing the current compliance schedule, Gorlick stated that the phase-in compliance period and implementation have been staggered based on the notional amount of derivatives held by counterparties. Phases 1-4 maintained cut-offs based on this notional amount while Phase 5 would bring in an estimated 700 additional entities into scope. Gorlick noted that while this is a large number of entities, they only represent a total of three percent of total AANA across all phases. Gorlick recognized that significant challenges exist for Phase 5 counterparties when attempting to develop documentation and governance in order to meet phase-in requirements. He noted that these entities may struggle operationally because of these limitations and that this proposed rule is intended to alleviate the market disruption that is a consequence of operational time constraints. Gorlick concluded by stating that this proposal has already been approved by the Federal Deposit Insurance Corporation (FDIC) and Office of the Comptroller of the Currency (OCC) and is under consideration by the other prudential regulators.

Question & Answer

In response to an inquiry from Tarbet, Gorlick stated that all major jurisdictions agree that this compliance relief is necessary. Berkovitz and Stump asked about the number of entities that will be affected by the proposed rule. Gorlick responded that without relief, there would be roughly 700 entities included in Phase 5. If this proposed relief is adopted, 162 entities will still be in scope for the original September 2020 compliance date while the rest would come into scope during the new final date of September 2021. Stump noted that despite the attempt to balance the number of entities between Phase 5 and the new Phase 6, Phase 5 is still significantly larger than the total number of entities in Phases 1-4 (roughly 40 firms).

Behnam asked whether alternatives were considered in lieu of this proposed rulemaking. Gorlick stated that the International Swaps and Derivatives Association (ISDA) had proposed to completely exempt all entities under $100 billion AANA but after consideration and review, no international consensus could be established on this alternative. In response to Behnam’s question about possible risk in approving this proposal, Sterling noted that he does not anticipate any systemic risk or contagion effects as a result of adopting this proposed rule.

Quintenz noted that while extending initial margin to the uncleared derivatives space helps mitigate counterparty credit risk, it also increases liquidity risk, especially for entities that are most invested like insurance companies and pension plans. He stated that as this trade-off is imposed on firms, it will most likely force them to reduce their exposure in terms of their investment portfolios. Martinez responded that this is the exact reason why the final proposal, in response to comments from the insurance industry and pension funds, expanded the types of collateral that can be used. According to Martinez, this was done in the hopes of mitigating liquidity risk.

Final Vote

The CFTC Commissioners approved the proposed rule in a 5-0 unanimous vote.

Presentation 2: Proposed Rule – Amendments to the Margin Rules for Uncleared Swaps (European Stability Mechanism) – 23.151 & 23.157

Presenters:

  • Joshua Sterling, Direct, Division of Swap Dealer and Intermediary Oversight, CFTC
  • Warren Gorlick, Associate Director, Division of Swap Dealer and Intermediary Oversight, CFTC
  • Carmen Moncada-Terry, Associate Director, Division of Swap Dealer and Intermediary Oversight, CFTC
  • Rafael Martinez, Senior Financial Risk Analyst, Division of Swap Dealer and Intermediary Oversight, CFTC

Moncada-Terry stated that this proposal would amend the margin rules to add the ESM to the list of entities excluded from the definition of a financial end user. This proposed rule would codify a no action letter issued by the Division of Swap Dealer and Intermediary Oversight (DSIO) in 2017. She said that DSIO staff believes this exemption to be warranted because the ESM is an intragovernmental entity established by the European Union and that it maintains a credit profile that is similar to entities already excluded, such as multilateral development banks.

Question & Answer

Behnam asked the presenters to elaborate on how the prudential regulators treat the ESM. Moncada-Terry and Martinez stated that prudential regulators have not granted similar relief to ESM and that they are subject to margin requirements under current prudential rules. Behnam, Stump and Berkovitz all raised the importance of comity and reciprocity as it relates to this proposal. All three commissioners expressed the hope that their European colleagues consider this proposal as an effort to respect their jurisdiction and that the same respect is provided to U.S. regulators in turn.

Quintenz reiterated his opposition to this proposal. He stated that he would object to any relief for E.U. authorities until E.U. regulators reaffirm their 2016 commitments to the CFTC-EC CCP agreement governing the regulation of cross-border central counterparties.

Final Vote

The CFTC Commissioners approved the proposed rule in a 4-1 vote, with Quintenz opposing.

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