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.

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