Commodity Futures Trading Commission Market Risk Advisory Committee Meeting

Commodity Futures Trading Commission

Market Risk Advisory Committee Meeting (MRAC) Meeting

Tuesday, July 21, 2020

Opening Statements

Commissioner Rostin Behnam

In his opening statement, Behnam said that COVID-19 has altered our country, work experience, and pushed us down a path of economic crisis and social unrest which demands action from each and every one of us. He continued that the impact of COVID-19 on the markets and on climate progress has solidified the view that financial regulators need to prepare for climate impact on the market and the need to work together to create a better prepared financial infrastructure. He noted that ECMI, CEPS, and ISDA published a paper highlighting the derivatives markets and how firms can hedge risks related to the environment, social, and governance (ESG) factors.

Behnam said that the pandemic has not slowed the collaborative efforts of the AARC and MRAC in regards to cross border efforts and has pushed forward to the end of LIBOR. He continued that t7e pandemic has highlighted the resilience of robust reference rates, including SOFR, and highlighted that ISDA plans to publish a supplement to the 2006 ISDA Definitions and a protocol to allow firms to incorporate fallbacks that would apply to covered derivatives referencing LIBOR following permanent cessation of the benchmark or a “non-representative” pre cessation date, whatever occurs first, into new and legacy derivatives. He noted the new protocol is voluntary, but important.

Behnam explained that the ARRC, the Commission and DSIO issued No-Action relief to swaps referencing IBORs, revising existing relief to better align with current market changes. He said the Commission believes transitioning away from LIBOR should be market driven, and market participants are encouraged to focus on and invest resources in the transition away from LIBOR.

Chairman Heath P. Tarbert

In his opening statement, Tarbert said that significant market volatility was witnessed in the derivatives market in the early months of the year, as well as a historic drop in the May futures contract for West Texas Intermediate Crude, which traded negative for the first time ever. He continued that to help markets prepare for events like this, the Commission issued a joint Staff Advisory to remind market participants of their responsibility to prepare for contracts that may continue to experience low liquidity, extreme market volatility, and possibly negative trading.

Tarbert noted that the derivatives market has performed well and acted as a shock absorber during this time, adding that the CFTC has employed tools to help with internalizing the impact of market swings. He said derivative markets have been resilient in part because the CFTC employed tools to help prevent financial contagion and the agency has focused on responding to the impact of COVID-19 on the financial markets by continuing to monitor closely the agriculture and energy markets, issuing targeted, temporary relief to market participants, and by bolstering the CFTC’s customer education efforts.

Commissioner Dan M. Berkovitz

In his opening statement, Berkovitz said the Commission has tried to stay informed by market participants in order to keep up with significant market events. He noted that due to social distancing the work of the Commission could not be as effective as when in person, as they are unable to travel throughout the country and world to learn from markets participants firsthand.


Report from the Interest Rate Benchmark Reform Subcommittee


  • Thomas Wipf, Subcommittee Chairman, Vice Chairman, Institutional Securities, Morgan Stanley

The subcommittee held a tabletop exercise on CCP Discounting Transition in June of 2020 and have created a report from their discussion. They noted that there have been a number of important developments involving the LIBOR transition, including the FSB and Basel report on the supervisory issues around the benchmark transition, FFIEC’s statement around risks resulting from discontinuation of LIBOR, U.S. Treasury’s request for comments exploring the possibility of issuing a SOFR floating index rate, the UK government’s amendments to benchmark regulation to ensure FCA has the powers needed to oversee the transition from LIBOR, FCA’s and BoE’s statement noting the year end 2020 deadline persists, ISDA’s new fallback language, among others.

Areas identified by the tabletop exercise that could strengthen the current discounting transition proposals:

  1. Processes at both CCPs go according to plan;
  2. Failed auction for discounting risk swaps;
  3. Operation failure;
  4. Member default;
  5. FCM not operationally prepared for CCP discounting transition;
  6. Prefunding needs/risk limits;
  7. COVID-19 related interruptions.

Key issues identified by the tabletop:

  1. Gaps in understanding among the market in timing of transition milestones as well as option processes;
  2. Auction where some or all of discounting risk swaps are not liquidated despite end users election to offload, potentially disrupting the pricing and liquidity of SOFR instruments;
  3. Lack of congruency between CCP-mandated dates by which market participants finalize elections to offload discounting risk swap compensation may create confusion or perceived advantages for certain market participants;
  4. Differences between CCP plans may create significant operational and market risk for participants over the discounting transition period.

The key insights taken away from the tabletop were:

  1. Enhanced education regarding discount transition among all market participants;
  2. Risk mitigation strategies ahead of discounting transition should be considered;
  3. Internal preparations by all impacted stakeholders.

The report also entails actional recommendations for CCPs, FCMs, buy-side firms, and regulators. Next steps to improve education, risk management and internal preparation include:

  1. Consider implications of part 43 and other global real time swaps, reporting or not reporting transactions intended to give effect to cash compensation component;
  2. Consider hedging option related exposures;
  3. Consider other areas for no action interpretive relief that will facilitate belief on transition and belief in unclear market situations.


Nadia Zakir, MRAC Chair, asked if Thomas Wipf believes the LIBOR transition has been impacted by COVID-19. Wipf responded that he is aware and respectful of the challenges everyone is facing and is optimistic work has continued despite these challenges. Because of the deadline, he said they have not seen resources shifted away from this work and the industry has broadly continued this work in earnest.

Sujatha Srinivasan, Goldman Sachs, asked what a successful protocol for a smooth transition away from LIBOR looks like. Wipf answered that a successful protocol includes an active discussion with CFTC to get relief. He continued that dialogue between the AARC and CFTC has been productive over this period, as has the robust dialogue for new and continuing relief by DSIO and DCR for relief for IBOR transition mechanisms.

Stephen Berger, Citadel, encouraged further scrutiny of the suggestion that post trade transparency should be lifted in regards to upcoming auctions, which one CCP, if not both, have indicated they will request. He noted the transition to SOFR is predicated upon a greater need for transparency benchmarks and a principle of transparency should apply to the transition steps being taken. He continued that there is going to be an active secondary market in the same base of swaps, subject to post trade transparency before, during, and after the auction, which raises concerns of information asymmetry. The exemption from post trade transparency is notably not contemplated from CCP default management option, for parallel comparison. He stated that the area needs more scrutiny.

The report was adopted and approved by MRAC to recommend the Commission consider adopting the report’s suggestions.

Report from the Climate-Related Market Risk Subcommittee


  • Bob Litterman, Subcommittee Chairman, Founding Partner and Risk Committee Chairman, Kepos Capital

Litterman said that while the pandemic has slowed the subcommittee down, they are still in the process of finalizing their report which will be a comprehensive roadmap for managing growing climate-related risk facing financial markets, participation, and regulators and cover the role in guiding climate responses of the U.S. financial community. He continued that it will be presented to the CFTC and will include recommendations regarding existing and emerging risk that climate change poses for the soundness and stability of the U.S. financial system.

Litterman explained that the recommendations seek to serve the public in managing engaging country specific threats. He said the report pays close attention to the unique circumstances of the U.S. system of financial regulation and legislation, as well as the central role the private sector plays in the financial system.

The report focuses on two challenges:

  1. How to safeguard the financial system in face of climate change, manage climate risk responsibility, and protect the financial system to serve American public;
  2. How the financial system can facilitate the transition to a low-carbon climate with a resilient economy.

He noted that climate risk is different from market and credit risk, as climate change does not have a long history from which to learn. The financial impacts of climate change are recent and to date the impact has been small, but is expected to grow significantly over time. He said that models and data analytics are only just beginning to be developed, and U.S. financial regulation must recognize that climate change poses serious emerging risk and should move urgently to address these risks.


Zakir asked if Litterman would share his thoughts of the impact of COVID-19 as it pertains to climate-related risk in the midst of the pandemic. He responded that the differences between the pandemic and climate change are that the pandemic will have an effect for a few years while climate change will play out over decades, but both are global risk management challenges and a delay in responding to risk can be devastating, adding that every year of delay in response of climate change leads to higher temperatures and irreversible catastrophic damages.

Report from the Market Structure Subcommittee


  • Lisa Shemie, Subcommittee Co-Chairman, Associate General Counsel, Chief Legal Officer – Cboe FX Markets and Cboe SEF, Cboe Global Markets
  • Stephen Berger, Subcommittee Co-Chairman, Managing Director and Global Head of Government & Regulatory Policy, Citadel

Lisa Shemie, Market Structure Subcommittee Co-Chairman, recounted that during December’s MRAC meeting the Market Structure Subcommittee established three potential rubrics for consideration which included trading, clearing, and reporting. Shemie noted that the Subcommittee formed working groups to study these topics in greater detail and is working toward developing forward looking recommendations for the MRAC to consider.

Upon meeting after the December MRAC meeting, the Market Structure Subcommittee decided to focus on two main issues: (1) topics affecting the “swap dealer landscape”; and (2) the made available to trade (MAT) process. However, for today’s meeting the Subcommittee invited presenters to discuss the effects the pandemic has had on market conditions to inform the Commission on how markets performed and whether any market structure issues arose.


Zakir asked how the Subcommittee picked their two main issues to focus on. Shemie responded that the two issues were the result of discussions amongst the Subcommittee. Specifically, the Subcommittee had many conversations about the concentration and scope of swap dealers generally, and that the floor trader exemption may have had an effect. On the MAT process, Stephen Berger, Market Structure Subcommittee Co-Chairman, noted that there have not been any new MAT process filings since late 2013 and that raises certain questions about the MAT process. Specifically, the Subcommittee will focus on (1) the MAT process criteria; (2) who can initial filings; and (3) the process for public comment when a filing comes forward.

Market Function and Performance During the Early Months of COVID-19


  • Lisa Shemie, Subcommittee Co-Chairman, Associate General Counsel, Chief Legal Officer – Cboe FX Markets and Cboe SEF, Cboe Global Markets
  • Stephen Berger, Subcommittee Co-Chairman, Managing Director and Global Head of Government & Regulatory Policy, Citadel


  • Chris Barnes, Clarus Financial Technology
  • Adam Peralta, Head of Rates Electronic Trading, Bloomberg LP
  • Elizabeth Kirby, Head of Rates Product and Strategy, Tradeweb

Chris Barnes, Clarus Financial Technology, presented certain findings based on analytics, data and research for derivatives markets (specifically rates OTC derivatives markets) during the COVID-19 related volatility. On market volumes, Barnes stated that March 2020 set a new all-time record for cleared volumes at CCPs across all Rates OTC derivatives products (globally). He noted that 96 percent of fixed-float swaps were cleared in March 2020, and that generally, market participants actively continued to choose to clear their risks. He noted that 45 percent of the global USD IRS market was reported to SDRs in March. In his opinion, transparency was a benefit to market participants because it proved that markets were not “seizing up”, it removed certain rumours from the market, and price and volume information were key to removing information asymmetry.

On SEFs, Barnes stated that there were record volumes in USD IRS that were transacted on SEF, and that the dealer to customer (D2C) SEFs were particularly successful. Other observations with respect to SEFs included the following: (i) block trading worked well for the D2C SEFs; (ii) transparency requirements from SEFs mean we know the exact size of block trades transacted on SEF; (iii) block trade volumes were a record number during March 2020; (iv) 43 percent of USD IRS volume was transacted as a block. Finally, he noted that it is still a bit unclear what happened in uncleared markets, and they should be studied as well.

Adam Peralta, Head of Rates Electronic Trading, Bloomberg LP, began his presentation by emphasizing that Bloomberg SEF (BSEF) experienced YTD highs in gross notional and DV01 executed on platform due to the increase in market volatility. BSEF observed an increase in hit rate as DV01 increased per trade, indicating BSEF participants were able to effectively transfer risk over the platform. BSEF experienced peak trading volumes and increases when compared to March 2019 (Gross notional +16%; DV01 +16%; Tickets +42%) and noted that RFQ was the preferred method of execution with an increase in the number of LPs in comp. Based on their observations, as DV01 increased, accepted trades increased, implying strong platform performance for large size trades, according to Peralta. BSEF observed a slight increase in “passed” trades, as expected during times of market uncertainty.

Elizabeth Kirby, Head of Rates Product and Strategy, Tradeweb, presented data from Tradeweb’s analysis of the COVID crisis. Specifically, the presentation focused on the TW SEF operated by Tradeweb which is an RFQ execution type, used by both buy and sell side.

She explained that during the crisis, the platform recorded record volumes across IRS and CDS. There was increased volatility that led to record volumes across many asset classes. The IRS trade counts and volumes increased sharply in March across the board on the TW SEF, however, non-competitive block trades saw a disproportionate increase. The overall number of trades on TW SEF increased 77 percent in March, and the number of non-competitive blocks increased 285 percent relative to the prior month. Hit rates and quote rates on Tradeweb and TW SEF both decreased in March, however rebounded to near pre-crisis levels in April. Bid/offer spreads widened out on TW SEF, particularly for less liquid instruments, however came quickly back in line with platform averages. Kirby concluded that there was constrained liquidity, but despite market stress and increased volatility derivatives markets and SEFs operated as intended.

MRAC Member Comments

Dr. Sam Priyadarshi, Vanguard, provided Vanguard’s perspective on market performance in other asset classes. Priyadarshi stated that during mid-March fixed income markets were dysfunctional with limited liquidity and very high volatility and trading in rates, credit, and FX markets were challenging until the Fed intervened. With respect to futures and cash treasury markets, Priyadarshi stated that liquidity conditions became fragmented and it was challenging to trade risks in meaningful size. A simultaneous demand for liquidity, alongside money fund redemptions, corporate borrowings, and FX reserve manager sellings exhausted dealer balance sheets. Priyadarshi then discussed specific metrics from the cash treasury markets and credit markets. Overall, he stated, functioning of the credit markets have largely been restored, though liquidity has not fully returned to prior levels. He believes the futures and cash treasury and corporate bond markets still remain vulnerable to shocks. At the peak of the liquidity crisis, however, he stated that it was easier to trade listed futures and SEF traded IRS and CDX swaps than their cash counterparts, and he agreed with Chairman Tarbert that the derivatives markets remained resilient and worked the way they were intended.

Lee Betsill, CME Group, began by stating that exchange traded markets during March demonstrated that the ability to manage exposures and conduct transactions in larger than normal size was there. Bestill then noted a few observations from CME’s perspective, including: (i) average daily volume for Q1 on CME markets was 27 million contracts per day; (ii) half of that volume came from the interest rate derivatives complex; and, (iii) the statistics show that the ability to transact in large size was there.

Biswarup Chatterjee, Citigroup, stated some observations from Citigroup’s perspective. He noted that while the flexibility of trading protocols on SEFs really helped move larger block trades, traders had trouble with trades that were just below the block size. There were some challenges with executing long duration trades (15-20 year). The lack of liquidity in the treasury market hurt swaps traders trying to hedge and compounded the lack of liquidity in the swaps market. Finally, he noted that volumes and liquidity did pick back up over time after the Fed action.

Robert Mangrelli, Chatham Financial, noted that from his perspective there were some instances where dealer liquidity providers failed to respond to RFQs, and that there was a widening of the bid/offer spread.

Craig Messinger, Virtu Financial, began by complimenting the unprecedented amount of good activity undertaken by the government. While focusing on equities, Messinger noted the increased amount of retail participation in certain markets. On CCPs, he noted that there was a phenomenon where they did what they are mandated to do, but many of those concepts were developed during a different time when the sort of concentration, and other issues were not considered.

Eileen Kiely, Blackrock, echoed the comments of Dr. Priyadarshi, noting specifically that her firm had issues with trades just under the block size and the RFQ to 3 requirement. Kiely commented that there needs to be flexibility for these rules, and the block size calibration, in times of market volatility and stress.

Report from the CCP Risk and Governance Subcommittee


  • Alicia Crighton, Subcommittee Co-Chairman, Global Co-Head of Futures and Head of OTC and Prime Clearing Businesses, Goldman Sachs
  • Lee Betsill, Subcommittee Co-Chairman, Managing Director and Chief Risk Officer, CME Group

Lee Betsill, CCP Risk and Governance Subcommittee Co-Chair, discussed the five workstreams and various topics that the Subcommittee will be considering.

Specifically, the Subcommittee will be considering: (1) Margin at CCPs; (2) Default Management Practices; (3) Governance and Transparency; (4) Stress Testing and Liquidity Frameworks at CCPs; and (5) CCP Capital and Skin-in-the-game.

With respect to margin, the Subcommittee will be discussing the importance of pricing and fees, margin period of risk in CCP IM models, margin and volatility floors in times of low volatility, and best practices around intraday margin calls. On default management practices, the Subcommittee will be reviewing recommendations made in 2015-2016 and provide updates on progress made toward those recommendations.

With respect to governance and transparency, the group will focus on each separately, and more specifically, current CFTC rules 40.5, 40.6, and 40.10. Concurrently, a separate subgroup will review a number of reference materials in the workstream including best practices for stress testing, CFTC supervisory stress tests, and other papers including stress testing frameworks published in December 2019.

Finally, the Subcommittee will establish a subgroup to review CCP capital regulations, recent developments in the EU under EMIR 2.2, and will be working to define commonly used terms (for example, CCP capital v. skin-in-the-game).

COVID-19’s Impact on Margin, Processing and Operational Health in Cleared Derivatives


  • Robert Steigerwald, Senior Policy Advisor, Financial Markets, Federal Reserve Bank of Chicago

Key Speakers:

  • Richard Haynes, Supervisory Risk Analyst and Sayee Srinivasan, Deputy Director, Risk Surveillance Branch, Division of Clearing & Risk, CFTC
  • Alicia Cirghton, Subcommittee Co-Chairman, Global Co-Head of Futures and Head of OTC and Prime Clearing Businesses, Goldman Sachs, representing the Futures Industry Association
  • Lee Betsill, Subcommittee Co-Chairman, Managing Director and Chief Risk Officer, CME Group

Richard Haynes, Risk Surveillance Branch, CFTC, presented high level observations from the derivatives markets over the last few months. According to the CFTC, initial margin levels increased, in the aggregate, 40 percent during Q1 2020 and have remained high since then. Variation margin hit their highest levels in March, and there was a strong relationship between variation margin levels and the volatility index (VIX). However, Haynes noted that given the differences between certain derivatives products, they should not be considered a homogenous bucket of assets when conducting an analysis. Haynes then presented data on the aggregate change in IM requirements for IRS customer accounts in Q1, noting that the aggregate change was much higher for entities like Insurance companies and pensions, compared to asset managers and hedge funds.

Alicia Crighton, Goldman Sachs, representing the Futures Industry Association (FIA), presented the results of an FIA industry survey conducted in June 2020. According to the survey, the number of futures and options traded on US exchanges reached 1.43 billion contracts in March, the highest volume on record. Crighton noted that this led to many FCMs requesting clearing window extensions. The survey also found that there was a record setting increase in customer funds in March. US FCMs collected an additional $136 billion in collateral in March, which, as Crighton noted, was more than ever, including the 2008 crisis. With respect to margin, initial margin requirements for many widely-used futures contracts rose dramatically in the first quarter. Crighton concluded by listing certain key themes and takeaways from the FIA survey, including the need to improve guidelines around workflows, limiting the impact on reactivity to volatility changes, and addressing unpredictable changes in margin.

Lee Betsill, CME Group, presented  data drawn from a paper produced by CCP-12 earlier this month. According to the paper, CCPs successfully demonstrated their resilience during the past and present crisis. Specifically, CCPs managed market and operational risks and mitigated credit and liquidity risks, fulfilling their purpose as designed, despite extraordinary volumes and high volatility. Betsill then noted the following observations on market volatility during the COVID-19 crisis: (i) the nine largest dollar moves in the history of the S&P 500, the ten largest for the Dow Industrial Average, and the seven largest for the Nasdaq 100 occurred in March and April; (ii) WTI Crude saw its two largest price and percentage moves ever and went negative for the first time; and (iii) US Treasury yields saw their largest daily percentage shifts and lowest absolute levels ever, with the entire yield curve dropping below 1% for the first time in history. Betsill also noted that exchange traded derivatives volumes increased extraordinarily.

With respect to operational resilience, most CCPs implemented their business continuity plans and despite these measures and significant increase in volumes, core systems at CCPs remained resilient. On Margin, Betsill stated that across the board IM increases were observed during the crisis, consistent with the design of margin models which are intended to reflect price movements at a certain confidence interval. Betsill concluded that the data suggests that the anti-procyclical characteristics of CCP margin models worked and maintained appropriate coverage.

Robert Steigerwald,, Federal Reserve Bank of Chicago, asked MRAC members about the operational resilience of the financial system during the crisis. Lee Betsill responded that CCPs were resilient. Emphasizing that with almost 100 percent of CME’s employees working from home, their default management process was able to conduct an auction and liquidation event of a clearing member all through web-based tools. Further, he commented that he believes the industry has done a very good job of adapting and as such, we were able to cope with the crisis.

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