FIA offered presentations before an advisory committee of the US Commodity Futures Trading Commission on 6 November, touching on best practices for exchange volatility controls and the potential impact of proposed capital reforms on derivatives clearing.
The CFTC's Global Markets Advisory Committee (GMAC), which is sponsored by Commissioner Caroline D. Pham, held a wide-ranging meeting that voted to approve eight various recommendations for submission to the Commission for consideration. CFTC advisory committees have no direct rulemaking authority, but allow a forum for public and private sector stakeholders to discuss important issues and trends.
At the GMAC meeting, Jackie Mesa, FIA's chief operating officer and senior vice president of global policy, spoke about the potential negative impact of proposed capital requirements proposed by US prudential regulators.
In particular, Mesa highlighted the significant additional amount of capital that would be required for the clearing of over-the-counter derivatives, which could result in pressures on Futures Commission Merchants (FCMs), higher costs for commercial end-users, and the elevation of systemic risk.
Mesa presented FIA data noting the general rise of clearing since the implementation of reforms in the wake of the 2008 financial crisis, proving the success of previous efforts to incentivize the practice. However, the continued decline of FCMs across the same period raises concerns about how proposed capital changes could create challenges to end-user clearing access.
There are many potential causes for the decline in CFTC-registered FCMs, but Mesa noted that "capital is a huge impact" that has led to consolidation.
"You have to do scale to make any money in the OTC clearing business," she said.
Mesa further noted that in addition to the burdensome nature of higher capital requirements on the FCM ecosystem, there are tangible downstream effects for the real economy.
"If end-users do decide to pay more in order to continue hedging, the costs will ultimately be passed on to US consumers in the form of higher prices for food, energy and mortgages," she said.
Lastly, she noted that concentration in the FCM community coupled with proposed capital rules could make the portability of positions impractical should markets suffer a major default.
Exchange volatility controls
Also at the GMAC meeting, FIA's Jackie Mesa offered a recap of the FIA's recently published paper, "Best Practices for Exchange Volatility Control Mechanisms."
Mesa offered a summary of the document, which provides essential guidance for designing robust Volatility Control Mechanisms (VCMs) at derivatives exchanges. She noted the pivotal role VCMs play in preserving market integrity, and emphasized the significance of well-designed and transparent exchange-provided VCMs in maintaining market integrity, reliability, and utility.
The GMAC voted to endorse the FIA paper, and to pass it along to the full CFTC to inform future policy decisions and work with non-US regulators.
Recommendations on CCP default, collateral, and reporting
In addition to these presentations, FIA's General Counsel and Chief Legal Officer Allison Lurton also played a significant role in the GMAC as co-chair of the Technical Issues Subcommittee.
Under her leadership, alongside co-chair Tara Kruse of the International Swaps and Derivatives Association, the subcommittee proposed recommendations in four areas:
- CFTC support for a global CCP default simulation
- The use of money market funds as eligible collateral
- Improved trade reporting by streamlining reportable data elements
- Improved trade reporting to improve data sharing and systemic risk analysis
Other GMAC business
The GMAC also saw presentations and reports on other issues including:
- New block and cap sizes recommendation for swaps markets
- End-user cross-margining across Fixed Income Clearing Corporation and CME
- Proposal by FICC to add CCPs as permitted repo counterparties to FCMs and DCOs under CFTC Regulation 1.25
- A presentation on derivatives exposures, regulatory transparency and trade repositories
- The GMAC’s Digital Asset Markets Subcommittee also provided an update on its work.
Official statements and documents
- Archived webcast
- Full GMAC agenda
- FIA presentation on capital proposal
- Global Market Structure Subcommittee CFTC Rule 1.25(d)(2) Recommendation
- Recommendation on New Block Cap Sizes
- Statement regarding GMAC consideration of CME & FICC cross margining and expansion of Rule 1.25-eligible investments to include FICC-cleared repurchase agreements (the “FICC Recommendations’)
- FICC-CME Customer Position Cross-Margining Structure
- Best Practices for Exchange Volatility Control Mechanisms
- Technical Issues Subcommittee Recommendations
- News & Commentary