The CFTC held a Global Markets Advisory Committee meeting that focused on issues relating to the mandatory clearing of FX non-deliverable forwards (“NDFs”) and the digital currency bitcoin.
In his opening statement, CFTC Chairman Timothy Massad stated that these topics of discussion are “both timely and important.” Chairman Massad discussed the importance of working out cross-border issues on clearinghouse regulation and supervision, commenting that Europe should recognize CFTC-registered clearinghouses (“CCP”) as equivalent, since they meet international standards. Regarding the CFTC’s interest in bitcoin, he stated, while the development of digital payment systems raises many issues outside the CFTC’s jurisdiction, one area within the CFTC’s responsibility is derivative contracts traded on SEFs or DCMs that are based on bitcoin.
CFTC Commissioner Mark Wetjen also spoke at the meeting. First commenting on discussions between the European Commission and the CFTC on equivalency determinations for CCPs, he highlighted the need for the CFTC and the European Commission to come to an agreement about which specific CFTC requirements will be satisfied when a CCP is following an EMIR-specific rule. Once equivalency determinations are settled, he explained, the CFTC and its global counterparts will be able to continue harmonization efforts in a number of other areas, including trading platforms.
Regarding a clearing mandate for NDF contracts, Commissioner Wetjen requested that the CFTC FX subcommittee prepare a written recommendation to address the settlement characteristics and standardization of NDF contracts and related market-structure issues involving clearinghouse, futures commission merchant (“FCM”) and service-provider risk management. He also stated that the implementation of any NDF mandate should be aligned with comparable mandates overseas.
Following Chairman Massad and Commissioner Wetjen’s remarks, the discussion about a potential mandatory clearing requirement for NDFs focused on the following issues:
- The contracts (i.e., currency pairs and tenors) that would be appropriate for mandatory clearing.
- The importance for the United States to have a mandate that is parallel with comparable (particularly European) foreign mandates given ESMA’s recent consultation release.
- The effect, following mandatory clearing, that a “made available to trade” determination in the U.S. would have on the global NDF market.
Lofchie Comment: It would be prudent for the regulators to examine the risks of central clearing before forcing more types of transactions into a central clearing system. Regulators should be particularly cautious about forcing NDFs into central clearing, given that such transactions have an inherent international element, and the U.S. and EU have not resolved their differences as to how central clearing should be regulated. Clearly, there is no consensus that such a mandate would make the world economy safer. Given the obvious risks of the proposed mandate, what’s the rush ?
See: CFTC Event Notice; Chair Massad’s Opening Statement; Commissioner Wetjen’s Statement.