CFTC Commissioner Behnam Evaluates Implementation of Derivatives Reforms

Commissioner Rostin Behnam identified four key reform priorities: mandatory clearing, exchange trading of standardized swaps, swap data reporting, and capital and margin requirements for non-centrally cleared swaps.

In remarks at the Georgetown Center for Financial Markets and Policy, Commissioner Behnam expressed support for the “broad policy objectives” in Title VII of Dodd-Frank and said that the CFTC acted as a “leader” in implementing over-the-counter derivatives reforms in the wake of the 2008 financial crisis. He acknowledged that these changes have come with “costs and unintended consequences,” and expressed support for ongoing regulatory adjustments.

Commissioner Behnam identified four key reform priorities:

  • Mandatory clearing of swaps: Commissioner Behnam said that the clearing mandate has been largely successful, but questioned the size and interconnectedness of clearinghouses, and whether the clearing mandate and higher capital and margin requirements for uncleared swaps have “disincentivized risk management.” He said that the CFTC will evaluate the potential systemic effects of the clearing mandate, and that he will seek to bolster regulations to promote a safer clearing ecosystem.
  • Exchange trading of standardized swaps: Mr. Behnam noted the unintended consequences of the CFTC’s trading rules that have caused concerns as to market fragmentation and liquidity.
  • Swap data reporting: Mr. Behnam argued that the CFTC needs to develop requirements that establish “clear parameters” for data collection and submission, including when data must be submitted, as well as what form the data must take. He stressed the need for data set uniformity, both across the CFTC and with international regulators.
  • Capital and margin requirements for non-centrally cleared swaps: Noting that the CFTC has yet to adopt capital requirements for swap dealers, Mr. Behnam urged the CFTC to develop tools to monitor market resiliency, safety and liquidity in times of stress.

Mr. Behnam also highlighted three ongoing issues at the CFTC: enforcement, international cooperation and technology. In each case, he expressed general support for ongoing initiatives. As sponsor of the Market Risk Advisory Committee, Commissioner Behnam said he will engage in a “listening tour” to hear perspectives on risk management from market participants, regulators and other interested parties.

Lofchie Comment: Commissioner Behnam’s first published speech covers a lot of ground, but does not suggest that there are new initiatives that he will spearhead or that there are current initiatives that he opposes. Instead, Mr. Behnam indicates he will be in observation mode for the first part of his tenure.

In many ways, Mr. Behnam’s speech is similar to the speech given by CFTC Chair J. Christopher Giancarlo on Monday. Both Mr. Giancarlo and Mr. Behnam expressed broad support for the policy aims of Title VII of Dodd-Frank while noting a number of ways in which the current derivatives regulatory framework can be upgraded (including a handful of shared takes). One important difference may be that Chair Giancarlo believes that there were substantial problems with the CFTC’s prior rulemakings. Commissioner Benham’s remarks seem to suggest a position closer to those of former CFTC Chair Timothy Massad, who referenced the need only to “fine tune” the CFTC Title VII rules. Chair Massad never conceded the existence of material issues or attempted any significant revisions to existing rules. Given that Commissioner Benham was last in the office of Senator Stabenow (D. from Michigan), it is reasonable to expect that Chair Giancarlo intends a more ambitious clean-up of the CFTC’s rules than former Chair Massad attempted or than Commissioner Benham may be willing to support.

OFAC Updates FAQs on Venezuelan Economic Sanctions

The U.S. Treasury Department (“Treasury”) Office of Foreign Assets Control (“OFAC”) published two Frequently Asked Questions (“FAQs”) related to economic sanctions against Venezuela.

The first FAQ (No. 547) discusses U.S. person participation in meetings concerning the restructuring of Venezuelan and Petroleos de Venezuela, S.A. (“PdVSA”) debt that existed prior to the effective date of Executive Order 13808 (“E.O. 13808”). The second FAQ (No. 548) addresses the treatment of PdVSA subsidiaries under E.O. 13808.

As previously reported, E.O. 13808 – issued on August 24, 2017 – levied restrictions to prevent U.S. persons from contributing to the Government of Venezuela’s “shortsighted financing schemes.” With certain exceptions reflected in four General Licenses issued by OFAC on the same date, E.O. 13808 generally restricted transactions with respect to the following:

  • new debt with a maturity of longer than 90 days of PdVSA (Venezuela’s state-owned oil and natural gas company);
  • new debt with a maturity of longer than 30 days, or new equity, of the Government of Venezuela;
  • bonds issued by the Government of Venezuela before the effective date of the Executive Order;
  • dividend payments or other distributions of profits to the Government of Venezuela from any entity owned or controlled, directly or indirectly, by the Government of Venezuela; and
  • purchasing securities, directly or indirectly, from the Government of Venezuela, other than new debt with a maturity of less than or equal to 90 days (for PdVSA) or 30 days (for other Government of Venezuela debt).

CFTC Chair Giancarlo Urges SEF Reform and Improved Stress Testing of CCPs

CFTC Chair J. Christopher Giancarlo encouraged (i) reforming the rules recently adopted for regulating swap execution facilities (“SEFs”) and (ii) engaging in collaborative efforts with other regulators to improve the stress testing of central counterparties (“CCPs”).

In remarks before the ISDA Regulators and Industry Forum in Singapore, Chair Giancarlo expressed support of the swap market reforms adopted by Congress in 2010, but criticized the CFTC’s prior rulemakings. He stated:

“[F]inancial regulators have a duty to apply the policy prescriptions of their legislators in ways that enhance markets and their underlying vibrancy, diversity and resiliency . . . [and t]hat duty also includes the responsibility to continuously review past policy applications to confirm they remain optimized for the purposes intended.”

Regarding rules governing the operation of SEFs, Chair Giancarlo criticized the CFTC for “attempt[ing] to re-engineer the entire market structure of swaps execution” and “dictat[ing] the business models of the SEFs themselves.” Chair Giancarlo claimed that this approach is not conducive to liquidity formation. He asserted that the regulatory framework and incongruous rules and regulations have had several “unintended” consequences, including a shift of swaps price discovery and liquidity formation from SEFs to introducing brokers. This shift, Chair Giancarlo argued, is antithetical to the intended purpose of swaps regulations and the goals of Dodd-Frank.

Chair Giancarlo criticized the CFTC’s role in not allowing SEFs to develop their own business models and in implementing “prescriptive and inflexible rules.”

Regarding swaps clearing, Chair Giancarlo explained that default risk is now managed within regulated CCPs. He emphasized the importance of the stress testing recently conducted by the CFTC in measuring the resiliency of CCPs. Recent results demonstrated the ability of three major CCPs to withstand simultaneous default of two significant clearing members, he said. Further, Chair Giancarlo promised the continued development of multi-CCP stress testing in order to create a framework that is “thorough, data driven, econometrically sound and reflective of multi-CCP operations and their role in dynamic market ecosystems.” He encouraged cooperation with the SEC and banking regulators in order to improve upon previous stress tests, and expressed confidence that collaborative efforts will continue to develop over the course of the next year. Chair Giancarlo also noted that he is open to receiving stress testing-related input from European regulators, but reiterated his opposition to certain European Union proposals that would subject certain U.S. CCPs to European oversight.

Lofchie Comment: Chair Giancarlo’s remarks are a blunt criticism of prior rulemakings. Mr. Giancarlo has been consistent in arguing that while the government should regulate markets, it should not dictate or re-invent market structures (and, if it is so ambitious as to do so, it should at least check whether its dictates are having the intended effect). Notwithstanding this criticism of prior rulemakings, the Chair has nothing but good things to say about Dodd-Frank. Even those who do not share this optimism are hoping that he is able to make a silk purse from a sow’s ear.

Those who have a view as to how the swaps markets should function should be seeking this opportunity to get their views in front of the CFTC. While some of the major market participants have already expressed their thoughts through the CFTC’s “KISS” project, the fix of the CFTC’s existing rules will take a good bit of time, and there is thus still opportunity for diverse views to be heard. Further, given that the existing CFTC rules did not draw support from either the buy-side or the sell-side, it is hard to imagine that there is much support for the status quo.

SEC Chair Jay Clayton Sets “Near-Term” Regulatory Goals

SEC Chair Jay Clayton laid out near-term narrowly focused regulatory goals and committed the agency over the long term to greater transparency. The set of priorities will be published as part of the federal government’s Unified Agenda.

In remarks at the Practical Law Institute’s 49th Annual Institute on Securities Regulation, Chair Clayton discussed the SEC approach to developing the agency’s five-year strategic plan while articulating short-term narrowly focused efforts. He identified the following immediate efforts:

  • Initial Coin Offerings (“ICOs”): ICOs are vulnerable to price manipulation and other fraudulent actions. The SEC will continue to take steps to warn investors about the enhanced risks presented by ICOs, and to protect market participants from some of these risks. The SEC plans to offer clarification as to (i) how tokens are listed on exchanges (and the standards for listing), (ii) how tokens are valued, and (iii) what protections exist for investors and market integrity.
  • Fee Disclosures: Hidden or inappropriate fees and expenses can harm investors. The SEC will pursue enforcement for fee disclosure-related cases, and look to clarify fee disclosure requirements in order to reduce opportunities for misconduct.
  • Penny Stocks: Reliable information is often unavailable for penny stock issuers. The SEC will seek to expose some of the “opaque aspects” of the penny stock market.
  • Transaction Processing: Transfer agents are “well-positioned” to prevent the distribution of unregistered securities. The SEC will monitor transaction processing, particularly with regard to restricted securities.
  • Investor Education: The SEC is creating a searchable database that will contain information on individuals who have been barred or suspended due to federal securities law violations.

In terms of long-term initiatives, Chair Clayton identified shareholder engagement and the proxy process as an area of focus. He emphasized the importance of proxy rules in providing an avenue for shareholder engagement, and said the SEC will conduct a close examination of whether the current rules are effectively meeting both shareholder and company needs. Chair Clayton explained further that voting power often sits with investment advisers rather than shareholders, thereby limiting shareholder participation rates in the proxy process. He stated that the proxy process may demand a review and corresponding updates to ensure that long-term retail investors are fairly represented in corporate governance. Regarding shareholder proposals, Chair Clayton said the SEC intends to find common ground between the viewpoints held by all stakeholders. This will include an examination of ownership level thresholds for the submission of shareholder proposals and the resubmission process.

Chair Clayton highlighted the importance of transparency in the securities markets. He noted that enforcement plays an important role in ensuring transparency, and stressed that transparency can play a role in deterring, mitigating or eliminating wrongdoing before an enforcement action becomes necessary.

Lofchie Comment: From a financial policy standpoint, the SEC’s renewed focus on its traditional economic missions (good disclosure, investor protection) is an important change in priorities. When combined with a rulemaking agenda that is limited to achievable and announced goals, businesses are better able to prepare.

Congrats Randal Quarles on Fed Appointment…


Congratulations to Randy Quarles for his appointment and confirmation to serve as the Vice Chairman of the Federal Reserve Board.

CFS is thankful for Randy’s early and constant support of our organization. As an Advisory Board Member and Trustee, he has been a source of wisdom on a wide range of topics. In particular, his involvement in “Bretton Woods: The Founders and Future” was especially productive and meaningful. The inspiration and encouragement from Randy will continue to guide CFS especially as we plan to honor the 75th anniversary of the birth of the international financial system and think strategically about the future.

See “Summary and Next Steps  – Bretton Woods: The Founders and Future.”

Randy is uniquely experienced, remarkably learned, and thoughtful on virtually any monetary, regulatory, or related legal topic. Likewise, few to none are more honorable in character.

We wish him the best at the Fed.

CFTC Chair J. Christopher Giancarlo Criticizes “EU Plan to Invade U.S. Markets”

CFTC Chair J. Christopher Giancarlo warned of the potential negative effects of European regulatory changes on U.S. financial markets.

In an Opinion/Commentary in The Wall Street Journal, Chair Giancarlo argued that as a result of Brexit pushing London financial markets outside of the European “regulatory umbrella,” the European Commission is proposing to delegate regulation of non-European Union entities to the European Central Bank (“ECB”) and the European Securities and Markets Authority (“ESMA”). Chair Giancarlo is concerned that U.S. financial institutions would now be subject to European regulatory oversight. In particular, he is concerned about potential European Commission regulations that might allow ESMA to conduct on-site inspections of U.S. businesses, like the Chicago Mercantile Exchange, without informing the CFTC.

Chair Giancarlo asserted that such regulatory measures would negatively affect U.S. markets, and potentially “dry up the capital necessary for growth and job creation.” Chair Giancarlo argued that “overlapping” regulation inhibits growth, and said that U.S. acceptance of European regulation would represent a “dangerous precedent.” The “rules-based” European approach contrasts with the “principles-based” U.S. approach, he said, and so any imposition of additional burdens is the “last thing” that the American economy needs.

Lofchie Comment: Not so long ago, CFTC Commissioners were imagining the adoption of U.S. regulations that would have required the rest of the world to acquiesce. CFTC Commissioner Chilton Delivers Speech before International Regulators Conference (with Lofchie Comment). The current Chair is now left to see if peace can be made.

FERC at Full Strength as Senate Confirms Commissioners

The U.S. Senate confirmed the nominations of Kevin McIntyre and Richard Glick to become members of the Federal Energy Regulatory Commission (“FERC”). The confirmations restore the Commission to full strength. Mr. McIntyre will serve as FERC Chair.

Mr. McIntyre is set to serve out the remainder of a term that ends June 2018 and begin a full term that ends June 2023. Mr. Glick is set to serve a five-year term that ends in 2022.

President Trump Nominates New Fed Chair

President Donald J. Trump nominated Jerome H. Powell to be the next Chair of the Federal Reserve System. Pending Senate confirmation, Mr. Powell – a current member of the Board of Governors of the Federal Reserve System (“FRB”) – will replace current Chair Janet Yellen when her term expires in February 2018. Mr. Powell vowed to use his position to pursue the FRB goal of “stable prices and maximum employment.”

Mr. Powell has been an FRB Governor since 2012. He also served as Assistant Secretary and Undersecretary of the Treasury under President George H.W. Bush, and was a visiting scholar at the Bipartisan Policy Center in Washington, D.C.

Chair Yellen has served in her position since February 2014.

OCC Provides Guidance for Federal Branches and Agencies of Foreign Banks

The Office of the Comptroller of the Currency (“OCC”) updated two documents providing guidance for OCC-supervised branches of foreign banking organizations (“FBOs”): (i) a paper titled The OCC’s Approach to Federal Branch and Agency Supervision (the “paper”), and (ii) the “Federal Branches and Agencies” booklet of the Comptroller’s Licensing Manual. The paper replaces a document from October 8, 2014, while the booklet is an update of a document previously issued in July 2015.

With the passage of the International Banking Act (“IBA”) of 1978, FBOs could opt to conduct banking operations through a branch or agency licensed by the OCC. Such licensed entities are known as “federal branches and agencies.” FBOs acting through federal branches and agencies generally have the same rights and responsibilities as national banks operating at the same locations and are subject to the same laws, regulations, policies and procedures that apply to national banks. There are important differences, however, between an FBO and a full-service bank with respect to OCC supervision.

The paper gives an overview of OCC regulatory practices with regard to FBOs. The OCC International Bank Supervision group of the Large Bank Supervision Department is responsible for the supervision program for these entities. The paper explains the supervisory approach for federal branches and agencies, including a “multifaceted” risk assessment process that takes into account the impact of the parent bank on each supervised entity. Supervision also includes onsite and offsite monitoring, cross-border coordination with home country regulators, and clear communication of examination results. The paper also includes a discussion of resolution and recovery planning, as well as of licensing processes.

The booklet includes all OCC policies and procedures for establishment, operations, and other activities for the federal branches and agencies of FBOs. It provides information regarding establishing branches or agencies, acquisitions, the conversion or contraction of operations, relocations, fiduciary powers, voluntary liquidation, and other relevant topics.

U.S. Senate Votes to Block CFPB Arbitration Rule

The U.S. Senate voted on a resolution to overturn the Consumer Financial Protection Bureau’s (“CFPB”) arbitration rule. Republican senators Lindsey Graham of South Carolina and John Kennedy of Louisiana opposed the resolution, and Vice President Mike Pence cast the deciding vote in favor of striking down the rule to break a 50-50 tie.

The CFPB arbitration rule restricts mandatory arbitration clauses in certain consumer financial contracts. The rule has been subject to criticism from various sources who allege that the rule will greatly increase the number of class-action lawsuits, thereby benefiting the plaintiff’s bar and increasing costs to consumers. The U.S. Department of the Treasury recently released a report criticizing the rule and the CFPB’s review process in adopting the rule.

In July, Republicans in the House of Representatives and the Senate introduced joint resolutions to nullify the rule using the authority granted under the Congressional Review Act. Under the Congressional Review Act, a rule can be repealed by simple majority votes in both the House and the Senate within 60 legislative days of its finalization. The House promptly voted to block the rule in July and, by a narrow margin, the Senate has now voted to do the same. The resolution now will be put in front of President Trump, who is expected to sign it into law and block the rule from taking effect.

Lofchie Comment: The need for Congress and the President to undo the actions of the CFPB illustrates what an odd regulatory structure Dodd-Frank created in establishing the CFPB. The agency operates independently of, and now in opposition to, both the Executive and Legislative branches of government. While there are undoubtedly those who favor the rulemakings of the CFPB on a policy basis, that does not change the fact that the CFPB is, from a Constitutional standpoint, operationally unsound. Should a Democrat win in the next Presidential election, presumably the CFPB would be headed by a Republican and appointed by President Trump. Undoubtedly, such an appointee would seek to frustrate the goals of the next President. That is simply not the way that the government should work.