The US Commodity Futures Trading Commission held a meeting of its Global Markets Advisory Committee on March 11 via teleconference. The meeting, led by GMAC Sponsor and CFTC Commissioner Dawn D. Stump, focused on trends in retail investing in global derivatives markets, as well as a review of 2020 derivatives clearing trends including the impact of the pandemic on margin requirements.
“Whether it’s clearinghouse risk or margin issues and certainly today’s discussion around retail trading, these are the most ripe and important issues that we care about in our markets,” added Acting CFTC Chairman Rostin Behnam.
Retail investing in derivatives markets
CFTC staff from the Division of Market Oversight discussed the recent rise in retail trading volume in derivatives markets. They attributed this growth to structural changes including easier market access, smaller retail-friendly derivatives contracts and innovations by exchanges to reduce barriers to entry. Staff did mention recent economic trends including prospects of inflation and rising commodity prices as well as social media attention as short-term drivers of retail participation. However, they stressed that the rise of retail participation is a durable trend and not a fad.
"Retail participation is directly and indirectly here to stay," said Mel Gunewardena of the CFTC's Division of Market Oversight, and that participation "provides diversification and liquidity to our markets." As a result, the CFTC should continue its work on investor protections, disclosures, education and suitability standards. There was also a brief discussion of industry-led initiatives, including education portal Futures Fundamentals, that can help the growing cohort of retail derivatives traders, he said.
Gunewardena also noted that data shows that between January 2020 and February 2021, most retail participants "have had significant negative returns." As a result, "if this sector is to develop fully, a more even return profile is needed to emerge." To facilitate this, he said, it is also important for the CFTC to monitor the microstructure of markets including price discovery, profit spreads, and emerging strategies by institutional traders that may be "predatory" and directly target retail trading.
Additionally, there was a presentation from Alison Beer of the Ontario Securities Commission discussing differences between retail participation in US and Canadian derivatives markets. She pointed to BlackBerry, a Canada-based stock also listed in the US, which saw a relatively modest increase in options volume in Canada even as US options volume in the stock spiked in January to a peak volume of 1 million contracts in a single session. Beer said that, in her opinion, the event shows "this type of short-term trading attracts people looking for liquidity" and "almost all relevant trading activity takes place on US exchanges."
Derivatives clearing trends
In the second half of the GMAC meeting, the subcommittee continued its December discussion, exploring the impact of the pandemic on margin requirements, clearing volume, and CCP operations.
Discussions touched again on topics including initial margin volatility, Value-at-Risk (VaR) models and margin floors. Ulrich Karl, head of clearing services at the International Swaps and Derivatives Association, presented an ISDA analysis of CCP risk management frameworks and recommended additional focus on anti-procyclicality measures and public quantitative disclosures. The recommendations echo those of FIA that were published in a detailed whitepaper in October 2020 on the impact of the COVID-19 pandemic on CCP margin requirements.
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