On January 22, Timothy Massad, Chairman of the Commodity Futures Trading Commission (CFTC) spoke at the American Bar Association’s 2016 Derivatives and Futures Law Committee Meeting regarding the CFTC’s recent achievements as well as its focus for 2016.

CFTC Actions from 20151

Margin for Uncleared Swaps: Driven by Dodd-Frank, the CFTC adopted a strong margin requirements rule to safeguard against exposure to severe risk from uncleared swaps. “The rule requires swap dealers and major swap participants to post and collect margin with financial entities with whom they have significant exposures. It requires initial margin, which is designed to protect against potential future loss on a default, as well as variation margin, which serves as mark-to-market protection. It allows for the use of a broad range of types of collateral, but only with appropriate haircuts. It requires a greater level of margin than for cleared swaps, given that uncleared swaps are likely to be less liquid.”

Cybersecurity: Proposals are being finalized to promote heightened cybersecurity practices and testing standards are in place at the private companies operating the core infrastructure under the Commission’s authority (i.e., exchanges, clearinghouses). The Commission identified five types of testing it deemed to be critical to mitigate risk and have the ability to recover: vulnerability testing, penetration testing, controls testing, security incident response plan testing, and enterprise-wide assessment of technology risk.

Proposed Rule on Automated Trading: With the majority of trading being done through automated systems, the Commission has proposed pre-trade risk controls to set general requirements for exchange, clearing members, and trading firms. Covered under the rule will be the design, testing, and supervision of automated trading systems. This rule is to be finalized in 2016.

Improving Data Reporting: The CFTC is working on various initiatives to improve data reporting. Technical specifications for the reporting of over 100 priority data elements was proposed with the assistance of public input to identify key areas where standardization is most needed. The Commission has also put forth actions to clarify reporting obligations for cleared swaps, led international efforts on data harmonization, and taking on enforcement actions for participants to comply with reporting obligations.

De Minimis Threshold: The de mininis limit was set jointly by the CFTC and Securities and Exchange Commission to define swap dealers. At present, any entity dealing swaps with an excess of $8 billion dollars in notional amount of swaps over the year must register as a swap dealer under the CFTC. The rule states that two years from now the level will fall to $3 billion. Yet, that may be subject to change as the Commission continues to review reports and public feedback on what the proper level of the de minis threshold should be.

Focus for 2016 and Key Takeaways

Massad announced the permanent registrations for 18 swap execution facilities (SEF), representing progress towards implementing a new framework for trading on regulated platforms, as required by Dodd-Frank and G-20 leaders. The registrations provide an increase in clarity and integrity for better trading conditions. Massad noted that similar reforms have proved to be effective, as evidenced by the Bank of England who saw lower transactions costs and improved liquidity. Continuing actions this spring, the Commission will consider further enhancements to SEF trading and participation.

For 2016, Massad reiterated the CFTC’s emphasis on reducing excessive risk and stabilizing financial systems. To achieve these goals, the CFTC is undertaking efforts to stabilize clearinghouses, which includes domestic and international regulatory coordination to strengthen clearinghouses. The CFTC is also exploring standards for CCP (central counterparties) stress testing to help evaluate cross-border risk and developing standards for recovery and resolution planning for scenarios involving distressed CCPs.

With further works in cross-border application, the Commission aims to finalize the proposal for rules on margin for uncleared swaps. The proposal addresses risks occurring outside the CFTC’s jurisdictional borders which are detrimental to US financial stability and economy. The Commission believes the new rules will clarify when offshore risk should be taken into account.

References

  1. “Remarks of Chairman Timothy Massad Before the ABA Derivatives and Futures Law Committee, 2016 Winter Meeting.” January 22, 2015. Access at: http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-37

Newsletter Author:  Ana Medrano | Sal Cutrona | Nghi Pham

Newsletter Contact Person: Craig Unterseher

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