CFTC Roundtable on CPMI/IOSCO Guidance

Commodity Futures Trading Commission

Public Roundtable on CPMI-IOSCO Guidance on CCP Resilience and Recovery

Thursday, October 6, 2016 

Key Topics & Takeaways

  • Massad Remarks: CFTC Chairman Massad highlighted the ongoing international and domestic efforts focused on CCP resiliency, recovery and resolution, and that these issues are a top priority at the Commission.
  • Liquidity Concerns: Panelists discussed concerns regarding liquidity and pro-cyclical impacts, in addition to impacts of other banking regulations, such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, and limitations as to what is considered a “high quality liquid asset”.
  • CCP Governance: Panelists noted more clarity was needed regarding CCP governance board responsibilities, arguing that while “oversight” may be appropriate, interpretations requiring responsibility for “day-to-day” activities were concerning.


Opening Remarks

Timothy Massad, Chair, Commodity Futures Trading Commission

In his opening remarks, Commodity Futures Trading Commission (CFTC) Chairman Massad highlighted the ongoing international and domestic efforts focused on central counterparty (CCP) resiliency, recovery and resolution, including the proposed Committee on Payments and Market Infrastructures (CPMI)/International Organization of Securities Commissions (IOSCO) Guidance on Clearinghouse Resiliency and Recovery (CPMI/IOSCO Guidance) and the Financial Stability Board work streams. Massad noted that the Commission was active in domestic efforts complimenting these international work streams, and went on to state that CCP issues are a top priority at the CFTC. 

Jeffrey Bandman, Acting Director, Division of Clearing & Risk

Bandman clarified that the roundtable would focus on the CPMI/IOSCO Guidance, in the context of the CFTC Derivatives Clearing Organization (DCO) regime. He explained that the Commission was interested in hearing views some of the more granular risk management standards and issues, including those relating to stress testing, margin, transparency, contribution losses and recovery tools. Bandman next highlighted the importance of CCPs and risk management, noting that CCPs hold $300 billion in capital globally. 

Robert Wasserman, Chief Counsel, Division of Clearing & Risk

Wasserman explained that while the eventual final CPMI/IOSCO Guidance would serve an important purpose, it would then be up to individual jurisdictions to implement their own standards in a consistent manner. He noted that in the CFTC’s case, this could take the form of additional guidance to existing CFTC rulemaking in the area, our additional proposals subject to notice and comment. 

Panel One: Stress Testing

Panelists began with a discussion of issues surrounding stress testing. One panelist expressed concern regarding CCPs moving away from the traditional waterfall, “defaulter pays” model and standards should facilitate portability when possible. Others argued that regulators should take care to avoid setting standards which create a pro-cyclical effects during times of market stress, straining clearing members and clients in circumstances where liquidity is already tightened. 

Wasserman queried panelists on the viability of unsynchronized stress testing. Panelists noted the difficulties associated with such testing, however one noted that given the differences in structures and approaches in for certain CCPs in different markets and jurisdictions, it may be beneficial. The panelist went on to note that while there is a perception that the “Cover 2” standard is sufficient, it may be beneficially to consider it as a “minimum,” and the CCPs should have the responsibility to cover beyond that in certain instances. Another panelist cautioned that there are differences in approach to the “Cover 2” standard in the EU versus the US, which must be considered. 

In response to panelist discussion regarding difficulties with intraday stress testing, Wasserman noted that as it unknown when a default would occur, it is not guaranteed that a default would occur at the end of the day. 

A panelist next cautioned that CCPs must consider the impact of taking liquidity away from market participants, which could serve to increase systemic risk. The panelist went on to highlight the need for market participants to have the ability to convert securities into cash in order to increase liquidity, which may be needed for purposes outside of the CCP. It was further noted that consideration of the impact of other banking regulations on liquidity, such as the Liquidity Coverage Ratio and Net Stable Funding Ratio, and limitations as to what is considered a “high quality liquid asset”. 

Panelists next discussed the importance of transparency, with several holding the view that clearing members have access to CCP stress test results, and some further arguing that such results be interpreted and analyzed. Others, however, wondered whether stress tests results should be made public, as the results may be difficult to interpret, given differences in situations amongst CCPs. Instead, a panelist suggested that CCPs only be required to attest that certain standards are met. 

Panel Two: Margin Methodology

Margin Period of Risk

Participants generally agreed that guidance on margin period of risk would be helpful, but that prescriptive standards could lead to “undershooting or overshooting” of margin in different circumstances. It was suggested that regulators and the industry should have a process to discuss the issue, but that a blanket standard is not effective because margin period is a function of a product’s risk profile, with many qualitative and quantitative inputs. 

Risk Management and Pro-Cyclicality:

There was agreement among the participants that any prudent risk management system must take pro-cyclicality into account, but that regulators must not be too prescriptive and that requiring specific approaches actually promotes cyclicality and systemic risk. It was argued that any guidance in this area must be principles-based. 


Several participants raised concerns about the transparency of margin requirements, commenting that more predictability for calculating initial is necessary to forecast calls. They stressed that market participants needed to be able to predict margin costs, and that more certainty would add confidence to the market that all positions are being appropriately margined. 

Panel Three: Governance, Transparency, CCP Contributions to Losses & Recovery

Wasserman opened the panel clarifying that language in the CPMI/IOSCO Guidance was meant to recommend that CCP governance boards have responsibility for the oversight of risk management procedures, not necessarily responsibility for “day-to-day” management. Panelists remarked that if this was the intention, it should be clarified, in addition to more clarification regarding the responsibility of risk committees. Several panelists agreed that while general oversight of risk management by a CCP governance board was appropriate, they should not be responsible for the “day-to-day” management. 

A panelist next recommended that industry stakeholders should have channels to engage in dialogue with governance boards, separate from risk committees, to ensure minority feedback is take into account in decision making, whether via formal working groups or consultations. 

On transparency, a panelist explained that an appropriate balance on sharing information about CCP risk management mechanisms must be found, as too much information may allow for market participants to take advantage of situations, or lead to lesser risk management as all CCPs coalesce around the same risk models and procedures. Diversity, it was suggested, is better as it fosters continued improvements and prevents common errors that create global risk issues. 

Regarding “skin in the game,” several panelists suggested that CCP’s may be incentivized to develop more effective risk management protocols, if they are required to post more of their own capital. Certain panelists representing CCPs disagreed. 

In regards to CCP recovery, several buy side panelists expressed significant concern with the use of variation margin gains haircutting as a recovery tool. In regards to auctions, a panelist argued that clearing members are sufficiently incentivized to participate and avoid CCP failures, as they wish to avoid contracts being torn up or taking losses on variation margin gains. 

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