The US Commodity Futures Trading Commission's Energy and Environmental Markets Advisory Committee (EEMAC) held a meeting on 10 April at the University of Missouri – Kansas City.
The meeting agenda featured a discussion on the pending US bank capital rules and implications for and impact on the derivatives market. There were also presentations on the state of crude oil markets and the future of power markets.
Presentation on the US bank capital rules
During the opening statement by CFTC Commissioner Summer Mersinger, the advisory committee’s sponsor, she noted that after a discussion about pending US bank capital rules at EEMAC’s last meeting in February 2024, “a committee member requested that we devote a panel to some different views” more supportive of the current proposals.
To address this request, the advisory committee heard a presentation from Alexa Philo, a senior policy analyst at the Americans for Financial Reform, a non-profit organization that describes itself as an advocate for “stricter regulation of Wall Street.” She urged the US bank regulators to “finalize the proposals with the main components intact…incorporating only a select set of appropriate tweaks.” Philo said this would improve the strength of the banking system and the resilience of the financial markets.
Notably, Philo said “the GSIB surcharge proposal would properly incorporate derivatives enhancements amending the complexity and interconnectedness indicators to include OTC derivatives cleared provided to clients under the agency model.” Philo also said the Basel III endgame proposal would improve the risk sensitivity of CVA loses in certain derivatives transactions.
Philo said the bank capital proposals “address the chronic problem of under capitalization of the largest banks” and would help prevent a future financial crisis, and that the increased clearing costs associated with the proposals would be “modest” making clearing transactions “slightly more expensive.”
Philo attributed the concentration of futures commission merchants (FCMs) over the past twenty years, and concerns raised by end-users about this concentration, to a broad set of economic trends. Philo said the right response to these trends “is to restore a more competitive clearing market…not to block measures that would increase safety and soundness” across the system.
Philo’s presentation prompted several members of the advisory committee to push back on her views.
John Murphy, the global head of futures at Mizuho, highlighted the negative impact that the potential increase in clearing costs would have on end-users that use derivatives to hedge their commodity price risks. Murphy said that the costs would become “so clearly high” that end-users will choose to not hedge their physical portfolio. Murphy asked if Philo had considered that impact from a risk and liquidity perspective. Philo said she did not think the capital impact would be enough to change that hedging behavior.
Rob Creamer, the chief executive officer of Geneva Markets, who represents the FIA Principal Traders Group on the advisory committee, raised concerns about the consolidation among FCMs and the impact on the availability of clearing services for firms like his that provide liquidity for commodity futures. . Creamer said the return on equity calculation for FCMs that clear principal traders and market makers, even under existing capital rules, makes these types of firms very unattractive for FCMs.
Demetri Karousos, president of Nodal Exchange, emphasized the differences between cleared and uncleared markets and the resilience of the cleared derivatives markets during the 2008 financial crisis and during recent periods of volatility. Karousos cautioned that increasing the costs of cleared derivatives transactions and equalizing the capital treatment closer to that of OTC bilateral transactions would be unaligned with the goals of the reforms put in place by policymakers after the 2008 financial crisis.
Derek Sammann, global head of commodities, options and international markets at CME Group, said the proposed rules for GSIBs would create an economic disincentive for clients to clear their OTC derivatives which would increase risk in the system. Sammann emphasized the importance of the risk-reducing role of central clearing.
Additional Documents
Agenda
Opening Statement of Commissioner Summer K. Mersinger
Opening Statement of Commissioner Kristin N. Johnson
