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CFTC Energy and Environmental Markets Advisory Committee Meeting

Commodity Futures Trading Commission

Energy and Environmental Markets Advisory Committee Meeting

Tuesday, March 24, 2020

Key Topics & Takeaways

  • Position Limits: Berkovitz stated that the EEMAC will address position limits in early May.
  • Issuance of Relief: Tarbert encouraged all market participants and members of the public to continue to engage with the Commission as it relates to relief requests. He added that the Commission relies on this dialogue in order to illustrate and refine their decision-making process.
  • Market Operations: Gunewardena stated that while the markets are currently facing historic amounts of volatility and lower liquidity, the derivatives markets continue to appear resilient in terms of price discovery and transparency.

Opening Statements & Introduction

Commissioner Dan M. Berkovitz

Berkovitz opened by summarizing the meeting agenda and noting the challenges currently facing the financial markets due to the spread of COVID-19. He highlighted the importance of ensuring a reliable supply of energy in times of emergency as well as the ongoing work of the Commission in ensuring market access, market transparency and well-functioning price discovery mechanisms. He concluded that the Energy and Environmental Markets Advisory Committee (EEMAC) will address position limits in early May.

Chairman Heath P. Tarbert

Tarbert acknowledged that while energy markets are facing unprecedented turbulence, he believes that these markets and systems are still functioning as they should. He noted that the recent standoff between Saudi Arabia and Russia in the crude market has only exacerbated the volatility wrought by the spread of COVID-19. He highlighted the series of no-action letters and relief recently issued by the Commission as just one example of the Commission’s work in assisting market participants throughout this turbulent period. He encouraged all market participants and members of the public to continue to engage with the Commission as it relates to relief requests. He concluded that the Commission relies on this dialogue in order to illustrate and refine their decision-making process.

Commissioner Brian D. Quintenz

Quintenz outlined his belief that the financial markets are resilient enough to address the COVID-19 crisis. He specifically noted the strong business continuity plans developed in the wake of 9/11, the strength of the financial system, as well as the integrity, visibility and transparency of the derivatives markets.

Commissioner Rostin Behnam

Behnam stated that he expects additional relief and no-action letters to be issued in the coming weeks. He emphasized the importance of the Commission focusing on the critical needs of the markets as it relates to structure and resiliency. He continued that the Commission must be flexible and adaptive throughout this process as new issues arise each and every day.

Commissioner Dawn D. Stump

Stump praised her fellow commissioners for their ongoing cooperation and work in these difficult times. She stated that the Commission is dedicated to providing the necessary tools to allow members of the public and market participants to cope in these difficult times.

Staff Presentation: Market Intelligence Branch (Division of Market Oversight): Update on Recent Development in the Financial and Energy Derivatives Markets

Staff:

  • Mel Gunewardena, Chief Market Intelligence Officer, DMO MIB
  • Christopher Goodenow, Market Analyst, DMO MIB
  • Michael Nouri Mesbahi, Market Analyst, DMO MIB

Gunewardena acknowledged that the velocity of the COVD-19 market sell-off is one of the most extreme in equity markets over the past 100 years. He continued that the equity volatility of the COVID-19 crisis is the highest observed in the past 30 years, that U.S. government bond yields reached their lowest levels in history, and that the international demand for U.S. dollars affected cross-currency basis spreads with demand widening considerably. He then addressed liquidity concerns, noting that futures liquidity and top-of-book depth have declined, that swap spreads have widened while liquidity has diminished, and that MIB has observed heavy activity in credit derivatives swaps with wider spreads. Gunewardena added that all exchange traded contracts have performed well and that the observed widening, in addition to the other observed trends, is consistent with the enormous amount of activity currently taking place. He then addressed the four recent level-one market-wide circuit break halts, stating that MIB is actively monitoring these developments. Turning to crude oil, Gunewardena echoed Chairman Tarbert’s comments that crude oil three-month implied volatility spiked to its highest level in more than a decade due to the COVID-19 crisis which was then compounded by the breakdown of Organization of the Petroleum Exporting Countries (OPEC) negotiations and the Saudi-Russia stand-off. Gunewardena and Mesbahi continued by outlining the impact of the COVID-19 crisis on the credit markets, the high yield corporate bond market, the leveraged loan market, as well private credit markets, specifically highlighting the impact on the airline, leisure and hotel sectors. Gunewardena concluded by stating that while the markets are currently facing historic amounts of volatility and lower liquidity, the derivatives markets continue to appear resilient in terms of price discovery and transparency.

Goodenow provided additional insight into current trends taking place in the energy markets, specifically focusing on crude oil and gasoline. He specifically noted that COVID-19 and the ensuing global “lockdown” have all but removed demand for oil and that any increase in barrels from Saudi Arabia, U.A.E., and Russia will only exacerbate the global supply glut in a currently oversupplied market. He concluded that as Asia’s largest importers continue to recover from COVID-19, he expects demand to remain low in the next quarter. Turning to gasoline, Goodenow acknowledged that prices hit an all-time low yesterday and that they are not expected to increase materially until the end of 2020. In addressing natural gas volatility, he specifically highlighted that while it has doubled in the past two months, this increase pales in comparison to previous weather-related events and that he expects the U.S. to remain well-supplied in terms of natural gas.

Question & Answer

Jim Allison, JCA Advisory Services, asked about the challenges facing clearinghouses and if there are any limitations on the ability of the Federal Reserve to intervene in order to release liquidity constraints as it relates to the clearing business. Gunewardena stated that MIB is comfortable with the systems and controls currently in place that support the financial clearing of contracts.

In response to a question from Delia Patterson, American Public Power Association, Gunewardena stated that agriculture markets are not demonstrating the same amount of volatility that MIB is observing in the financial markets.

Tyson Slocum, Public Citizen, inquired about the recent no-action letters issued by the Commission,  specifically asking whether the relief issued to the unnamed financial entity with significant loan and swap exposure in the oil and gas sectors should be granted for shorter than six months. Tarbert responded that this relief was issued because the Commission wanted to avoid a situation where a financial institution does not hedge their exposure because they are concerned about triggering major swap participant registration requirements. Tarbert then encouraged market participants to communicate with the Commission on a one-off basis as it relates to requested relief and that the Commission is constantly thinking about structuring the correct timeframe for no-action relief.

Slocum asked whether the Commission is examining putting in place requirements for firms to include additional redundancies in their systems in order to better facilitate the remote operation of their platforms. Berkovitz responded that when this crisis is over, there will be many lessons learned in terms of operational readiness and resiliency. He concluded that the Commission intends to look at all options moving forward.

In response to a question from Rob Creamer, FIA PTG, Tarbert stated that the Commission is committed to ensuring that bank capital rules do not provide disincentives to supply liquidity during this period, specifically as it relates to market makers. He continued that the Commission is examining whether the banking regulators can complete the transition away from the current exposure method earlier than next month.

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