The US Commodity Futures Trading Commission held a meeting of its Market Risk Advisory Committee (MRAC) on 23 February via teleconference. Among other matters, the MRAC considered reports on CCP margin methodologies at central counterparties and how CCPs adopt rules and respond to feedback from market participants.
In his opening remarks, Acting Chair Rostin Behnam noted the CFTC is monitoring recent market dynamics in energy markets in the wake of severe winter weather in Texas. "I commit to taking any and all actions to ensure the CFTC contributes to this administration’s efforts by ensuring our markets remain transparent, fair and efficient, and fulfill their core responsibilities of price discovery and risk management to ensure reliable and low-cost energy for all Americans," Behnam said.
Behnam's remarks at the MRAC came as the Federal Energy Regulatory Commission (FERC) also focused its attention on natural gas trading. FERC announced its Office of Enforcement will be examining wholesale natural gas and electricity market activity to determine if any market manipulation occurred in either physical or financial natural gas trading markets.
While the MRAC has no formal rulemaking authority, the committee is formed of public policy experts and market participants including exchanges and clearing firms to help guide future CFTC priorities and potential rulemakings.
CCP margin methodologies and risk governance
FIA board member Alicia Crighton, co-chair of the MRAC's CCP Risk and Governance Subcommittee and global co-head of futures and head of OTC and prime clearing businesses at Goldman Sachs, and Lee Betsill, co-chair of this subcommittee and the managing director and chief risk officer at CME, presented two reports.
"Members of this subcommittee, from different sectors of the industry, collaborated to produce two important reports on CCP margin methodologies and CCP risk governance," Crighton said. "We found common ground, and where we didn't, we've laid groundwork for further discussions."
The first report, which was adopted by the MRAC, focused on CCP margin methodologies and set forth recommendations including:
- The CFTC enhance its flexible approach to supervising how CCPs manage procyclical margin requirements;
- The CFTC promote the use of scheduled and predictable variation settlement cycles;
- CCP margin methodologies should be sufficiently transparent to market participants. The MRAC subcommittee plans to issue a separate position paper with recommendations on this specific topic.
The second report from the CCP Risk subcommittee focused on the rule filing and feedback process for Designated Clearing Organizations, the legal term for clearinghouses used by the CFTC, under Part 40 rules. Recommendations in the report "seek to further enhance the effectiveness of CFTC governance standards by ensuring that DCOs' management and their boards of directors have a formalized process to solicit, consider, and address input from varied clearing members and end-users before making decisions that could materially affect the risk profile of the DCO's activity." The MRAC also voted to adopt this report.
Climate risk, market structure and other matters
The MRAC also received reports from its other subcommittees including:
Climate-Related Market Risk
Building on its September 2020 report entitled "Managing Climate Risk in the U.S. Financial System," the Climate-Related Market Risk subcommittee urged continued focus on the urgent issues of sustainable finance and climate change.
CFTC Commissioner Dan Berkovitz complimented the Climate-Related Market Risk Subcommittee for producing a "thorough and comprehensive report" and asked Bob Litterman, the subcommittee chair and partner at Kepos Capital, what role an agency like the CFTC can play in implementing the report's recommendations related to disclosures and standards. Litterman responded that members of the subcommittee felt strongly that regulators must work closely with the private sector to develop shared standards and taxonomy on this important issue, which is still in its early stages.
Lisa Shemie, associate general counsel and chief legal officer for Cboe FX Markets and Cboe SEF, and Stephen Berger, managing director and global head of government and regulatory policy at Citadel, presented two final reports and recommendations.
The first report provided recommendations related to the "made available to trade" (MAT) process for determining when swaps must be traded on swap execution facilities. The MRAC voted to adopt the recommendations related to the MAT process.
The second report provided recommendations related to the swap dealer landscape, including a recommendation that the CFTC exclude swaps that are exchange-traded and centrally cleared from the swap dealer registration threshold calculation. The MRAC also voted to adopt these recommendations.
Interest Rate Benchmark Reform
Thomas Wipf, vice chairman of institutional securities at Morgan Stanley and a member of the Alternative Reference Rate Committee, the quasi-public body that is leading the transition away from Libor in the US, discussed three recent developments of particular importance to derivatives markets.
He described the process put in place by CME and LCH to convert interest rate swaps to SOFR-based discounting, and praised the clearinghouses for the "seamless execution" of this process. He also highlighted the IBOR Fallbacks Protocol recently issued by the International Swaps and Derivatives Association, saying that it provides a "clear, consistent and transparent methodology" for dealing with benchmarks that come to an end. Third, he noted that CME and LCH have provided indications on how they would approach a LIBOR cessation event from an operational and risk management perspective, and he said that the subcommittee is now in the process of forming a response to these plans.
The MRAC meeting concluded with an hour-long discussion regarding the need to foster diversity, equity, and inclusion in the derivatives industry. The panel provided a forum for MRAC members to discuss the value and importance of promoting diversity and the benefits for individual firms and the industry at large. The panel also provided a forum to discuss best practices from industry experts on how to promote an inclusive and equitable culture in firms and organizations.
Official statements and documents
MRAC Interest Rate Benchmark Reform Subcommittee Report
MRAC Diversity Poll Questions
MRAC Climate-Related Market Risk Subcommittee Briefing Report
MRAC Market Structure Subcommittee Recommendations Regarding the MAT Process
MRAC Market Structure Subcommittee Recommendations Regarding the Swap Dealer Landscape
MRAC CRG Subcommittee-Recommendations on CCP Governance
MRAC CRG Subcommittee-Discussion Paper on Best Practices in CCP Margin Methodologies
Diversity Panel Speaker Bios