Both the House and Senate Agriculture committees heard from industry participants in a pair of congressional hearings about the derivatives industry. FIA President and CEO Walt Lukken took part in both, testifying on international and domestic regulatory issues affecting the industry.
On June 26, a subcommittee of the House Agriculture Committee, which has jurisdiction over U.S. futures markets, held a hearing titled "Brexit and Other International Developments Affecting U.S. Derivatives Markets." Separately, on June 25, the Senate Committee on Agriculture held a hearing entitled "The State of the Derivatives Market and Perspectives for CFTC Reauthorization."
House Subcommittee discusses cross-border derivatives issues
On June 26, the House Subcommittee on Commodity Exchanges, Energy, and Credit held a hearing that highlighted the impact that Brexit may have on global derivatives markets.
In prepared testimony before the subcommittee, FIA President and CEO Walt Lukken urged Congress to protect "open and fair access to derivatives markets" and expressed industry concerns about the increasing fragmentation of derivatives markets.
"Ultimately, market participants benefit from the global nature of the markets," Lukken said. "The more participants, the stronger the market for those seeking to hedge risks. Open markets improve competition, keep costs affordable for customers, and grow the economy."
Lukken also spoke specifically about how bank capital requirements such as the supplemental leverage ratio need to be recalibrated so that they reflect the true amount of risk involved in the trading of listed and cleared derivatives. He added that if the U.S. does not correct these rules, capital costs associated with central clearing will put market participants in the U.S. at a disadvantage to their competitors in Europe.
Most of the hearing focused on EMIR 2.2, the revision to the European Market Infrastructure Regulation that strengthens EU oversight over non-EU clearinghouses that it deems to be systemically important to EU financial markets. Members of the subcommittee from both parties expressed concerns about the implementation of EMIR 2.2 and the impact on U.S. clearinghouses, clearing firms and end-users.
Witnesses and members of the committee referenced the importance of the 2016 equivalence agreement reached between the CFTC and European Commission related to clearinghouse supervision. Witnesses also provided recommendations for steps Congress may consider taking related to the implementation of EMIR 2.2 and the impact on U.S. market participants.
Members of the subcommittee and witnesses also raised concerns about the uncertainty surrounding Brexit and the need to ensure measures are in place to avoid disruption to market access for participants in the U.K. and outside of the EU.
Senate Committee discusses CFTC reauthorization
On June 25, the U.S. Senate Committee on Agriculture held a hearing that highlighted the role the CFTC plays in regulating the derivatives market and provided members of the committee with opportunities to discuss their priorities.
Federal agencies and programs often need to be renewed in a process called reauthorization. That is, congressional committees must give their stamp of approval in law for the regulatory program that the CFTC is directed by Congress to pursue. Under law, the CFTC should be reauthorized every five years. The last reauthorization was in 2008 and is years overdue.
FIA's President and CEO Walt Lukken urged the committee in its reauthorization efforts to understand the importance of the role that derivatives markets play in price discovery and risk management needs. He called on Congress to maintain global access to markets, support regulatory harmonization at both the domestic and international level, and support modernization of the CFTC to stay current on issues such as cybersecurity, fintech, and customer protection.
Other notable issues that were addressed during the hearing included:
Position Limits: Committee Chairman Sen. Pat Roberts (R-Kan.) spoke about the needs of end-users during CFTC reauthorization. Joe Barker, director of brokerage services at commodity brokerage CHS Hedging, responded that any position limits rule proposed by the CFTC must recognize common hedging practices such as anticipatory hedging and cross-hedging as bona fide hedging activity.
EMIR 2.2: Sen. Dick Durbin (D-Ill.) raised concerns about the potential impact of EMIR 2.2 on U.S. clearinghouses. Lukken responded that FIA urges the EU to move forward with a full deference approach and recognize the original equivalency agreement.
User Fees: Several senators raised questions about whether the CFTC has the resources necessary to regulate the markets. Dennis Kelleher, president and CEO of the non-profit Better Markets, strongly urged the Committee to provide the CFTC the authority to collect user fees, while Barker raised concern about the prospect of user fees and the impact they may have on commodity end-users.
Digital Currencies: Roberts asked Lukken what role regulators should play in the emerging virtual currency markets. Lukken responded that the CFTC already has the authority over derivatives products based on virtual currencies, but that there is no regulator over the cash market, and he suggested that this is something for the Committee to consider.
Automated Trading: Sen. Chuck Grassley (R-Iowa) asked if the CFTC needs new tools to address the increasing use of automated trading. Thomas Sexton, president and CEO of the National Futures Association, responded that the NFA has the tools necessary to monitor this type of trading. Lukken added that automated trading provides needed market liquidity and that the CFTC has the authority necessary to monitor for manipulation.
Decline of FCMs: Sen. John Boozman (R-Ark.) asked Lukken about the declining number of futures commission merchants in the U.S. Lukken responded there are several natural reasons for this trend, including technology innovation and industry consolidation, but unnecessarily high capital requirements are also a factor. He explained that the banks are facing capital charges that disincentivize the provision of clearing services for their customers.