Commodity Futures Trading Commission Open Meeting
Commodity Futures Trading Commission
Monday, November 2, 2020
- The CFTC approved the Final Rule: Amendments to Part 50 Clearing Requirement Exemptions for Central Banks, Sovereigns, IFIs, Bank Holding Companies, and CDFIs.
Chairman Heath P. Tarbert
Tarbert opened by stating his support for the Final Rule and noting the practical implications of the Final Rule on the engines of the real economy. Tarbert explained that as we manage the fallout of the COVID-19 crisis, it is important to regulate derivatives markets to support the interest of all Americans. Further, Tarbert stated that the Final Rule reflects the CFTC’s commitment to international comity and deference. In addition to the final rule, Tarbert made two other announcements. First, the CFTC approved an amended order that exempts eight Recognized Market Operators authorized within Singapore from CFTC SEF registration requirements. Second, the CFTC expanded its Part 30 exemptive program of international cooperation by issuing orders to the Bombay Stock Exchange, the National Stock Exchange International Financial Service Centre Limited, the Montreal Exchange, NZX Limited, and UBS AG.
Final Rule: Amendments to Part 50 Clearing Requirement Exemptions for Central Banks, Sovereigns, IFIs, Bank Holding Companies, and CDFIs
Clark Hutchinson, the Director of the Division of Clearing and Risk presented the Final Rule to the Commission. The Final Rule adopts amendments to the CFTC’s regulations governing which swaps are exempt from the clearing requirement set forth in section 2(h)(1) of the Commodity Exchange Act (CEA). These amendments exempt from the clearing requirement swaps entered into by certain central banks, sovereign entities, international financial institutions (IFI), bank holding companies, savings and loan holding companies, and community development financial institutions (CDFI). Specifically, the Final Rule made certain restructuring amendments to Part 50.
The Final Rule adds new Subpart D which consists of five new regulations that codify current margin practice. In response to comments submitted to the Commission, staff made one important modification in the Final Rule. Staff clarified that exemptions from swaps entered into by sovereign entities and IFIs are not contingent on them being reported to a swap data repository (SDR). Hutchinson outlined that this was meant to address comments regarding a potential interpretation of the rule as it was proposed. Aside from this change, staff recommended the Commission adopt the rules largely as proposed, in keeping with principles of international comity.
Question & Answer
Commissioner Quintenz asked Hutchinson to discuss the meaning of the sovereign entity used in the proposal. Hutchinson stated that staff is recommending that the definition of entities exempt in the rule remain consistent with the status quo of the last couple of years. Specifically, staff stated that the definition of sovereign entity is consistent with the Commission’s current understanding of the term and would not be extended to include states, reflecting the language in CEA Section 2(h)(7). In addition, staff outlined that the Final Rule requires the Commission to continually reassess what entities qualify as a sovereign entity based on geopolitical events and whether these entities maintain certain standards.
Commissioner Quintenz also asked Hutchinson about the general volume of the activity the Commission is exempting. Hutchinson stated the following data points: (1) during 2018 16 IFIs elected not to clear swaps resulting in 2,500 uncleared swaps with an aggregate notional amount of $250M; (2) during 2018 CDFIs activity had an aggregate notional amount of $84M; and (3) during 2018 11 bank holding companies executed about 18 uncleared swaps resulting in about $152M of exposure. Commissioner Quintenz supported the Final Rule and stated that these notional amounts are a “drop in the bucket” in comparison to the swaps industry.
Commissioner Behnam opened by agreeing with Commissioner Quintenz in terms of scope and size of the transactions exempted by the Final Rule. Behnam then asked Hutchinson to discuss the importance of exempting these transactions from a risk perspective. Hutchinson explained that the entities involved in the transactions work to accomplish a greater good, and that from a risk perspective, they do not pose the same counterparty risk as other entities.
Commissioner Berkovitz supported the Final Rule and stated that the exemptions are consistent with longstanding Commission policies. Berkovitz then asked Hutchinson to explain some of the benefits of the Final Rule. Hutchinson explained that these entities help rural communities and work toward community development. Commissioner Berkovitz stated that the Final Rule represents a reasonable approach given the factors discussed including the scope and size of the transactions, the lower counterparty risk, the beneficial purpose of these entities, and the added protection of the uncleared margin requirements.
The Commission approved the final rule in a unanimous 5-0 vote.
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