The U.S. Commodity Futures Trading Commission's Global Markets Advisory Committee met via teleconference on May 19 to discuss two topics: the international response to coronavirus, and a set of recommendations related to the implementation of margin requirements for uncleared swaps (UMR).
At the end of the meeting, CFTC Commissioner Dawn Stump, the advisory committee's sponsor, noted that a future GMAC meeting could delve into the “lessons learned” during the coronavirus pandemic in greater detail.
Margin requirements on uncleared swaps
It was noted during the discussion that the Basel Committee on Banking Supervision and the International Organization of Securities Commissions recently announced a one-year extension to the final phases of initial margin requirements for uncleared derivatives. CFTC Chairman Heath Tarbert said in his opening remarks that he agrees with that recommendation.
The majority of the May 19 meeting consisted of a discussion on the UMR recommendations and their importance to asset managers and other swaps market participants that will be affected by the final two phases of the UMR requirements. The recommendations were drafted by a subcommittee formed by Stump in November that is chaired by Wendy Yun of Goldman Sachs Asset Management.
The subcommittee gave an overview of its recommendations and presented an 82-page document that described the recommendations in detail. Stump praised the subcommittee for its work, commenting that it was "remarkable that such a diverse group of representatives was able to deliver a report to the committee in a relatively compressed time frame, further complicated by an unprecedented global pandemic."
The near-term recommendations of the subcommittee, suggested for adoption prior to the Phase 5 compliance date of Sept. 1, 2021, included:
- Confirm interpretation that a covered swap entity can continue to trade with an SMA client in the case of an inadvertent breach of the $50 million initial margin threshold
- Removal of certain collateral eligibility restrictions on money market funds
- Removal of consolidation requirement for seeded funds
- Relief relating to IM calculations for small covered swap entities
- Provide a grace period to reduce congestion and facilitate compliance
The subcommittee's second group of recommendations, suggested for adoption before the Phase 6 compliance date of Sept. 1, 2022, included:
- Application of separate IM threshold to each separately managed account of an SMA client
- Adjustments to the "material swap exposure" calculation’s timing and methodology and the post phase‐in compliance periods
- Codification of relief related to minimum transfer amount
- Removal of deliverable FX from MSE calculations
The GMAC adopted the subcommittee’s recommendations on a vote of 17 to 1, with 4 abstentions.
Suyash Paliwal, director of the CFTC's Office of International Affairs, noted that while the coronavirus pandemic has created real and serious difficulties, "in many ways we could not have conjured up a better stress test" for markets, participants and global regulators to face "the same challenges at the same time." Paliwal noted intensive internal coordination at the CFTC as well as external cooperation with other domestic and international financial regulators to ensure efficient price discovery and hedging in derivative markets.
While Paliwal admitted to some challenges, specifically in regards to liquidity strains and margin, he stressed that the global financial system remained resilient in large part because of post-2008 reforms including concerted efforts to strengthen the clearing ecosystem.
Official statements and documents
- Archived webcast, agenda and meeting documents
- Recommendations to Improve Scoping and Implementation of Initial Margin Requirements for Non-Cleared Swaps
- Introductory Statement of Commissioner Dawn Stump before the Global Markets Advisory Committee Meeting
- Opening Statement of Commissioner Brian Quintenz before the CFTC Global Markets Advisory Committee