In response to the public’s concern about the economy in these “anxious times,” CFTC Chair Timothy M. Massad stated that uncertainty and volatility in markets are the “very reasons” that the derivatives markets exist. In remarks delivered at the FIA International Futures Industry Conference in Florida, he delineated five areas where there has been significant CFTC progress toward a stronger financial system.
Common Approach to Transatlantic CCPs. Chair Massad stated that the first action exemplifying the CFTC’s progress is the agreement reached with the EU that establishes a common approach to central clearing counterparties (“CCPs”). The agreement resolves issues surrounding Europe’s recognition of U.S. CCPs and the CFTC’s recognition of European CCPs, which is effected through “substituted compliance” that permits such CCPs to comply with U.S. rules by adhering to the corresponding EMIR requirements. Separately, Chair Massad announced that the CFTC will consider measures to enhance trading on and participation in swap execution facilities, including formalizing past “no-action” positions and considering whether the CFTC should play a greater role in the “made available to trade” determination process.
Clearinghouse Resiliency. CFTC Chair Massad outlined the work that international regulators are doing to promote recovery and resolution planning. Additionally, the CFTC, the FDIC and the U.S. Treasury Department met to “engage in an exercise” that explored how U.S. regulators might respond if a clearinghouse faced credit or liquidity shortfalls.
Promoting Customer Protection and a Robust Clearing Member Industry. The CFTC held a roundtable in the earlier part of March to discuss the “residual interest rule,” which addresses the conditions under which a futures commission merchant must cover a customer’s account if it becomes undermargined. He reported that the conclusion drawn by the roundtable was unanimous: “we should not accelerate the residual interest deadline because it would likely lead to operational difficulties.”
Addressing Emerging Threats to the Financial System. The fourth action demonstrating progress, he asserted, consists of the comment deadlines for two important proposed rules: (i) the deadline for the proposal to enhance cybersecurity protection in the markets and (ii) the deadline for the proposal on automated trading. Both proposals, he argued, show that the CFTC is looking ahead to address future cyber threats.
Reducing Burdens on Commercial End Users. The fifth action, he announced, emerged from the unanimous approval of a final rule on trade options, which recognizes that trade options are different from the swaps that were the focus of Dodd-Frank reforms. The proposal eliminates certain reporting and recordkeeping obligations for commercial end users. Concurrently with these changes, he stated, the CFTC agreed on proposed guidance regarding the treatment of peaking supply and capacity contracts. He explained that the proposal is intended to make it easier for entities to use such contracts to maintain reliable energy supplies.
Lofchie Comment: Chair Massad deserves credit for undoing some of the damage that would have been caused by the prior CFTC Chair’s overreach. That said, the faster and more aggressively that Chair Massad can pursue the so-called “fine-tuning” of past mistakes, the better it will be for the economy. On a less positive note, the problems with central clearing are not easily correctable, and the solution will require far more significant action than simply shoring up individual clearinghouses in the event of their failure. (Assuming, of course, that the government will never let a clearinghouse fail.)