October 9, 2014
Thank you everyone for being here today. We have a couple of interesting topics to discuss here today, both related to currency and derivatives under the CFTC’s jurisdiction. Let me start by welcoming Chairman Massad and Commissioners Bowen and Giancarlo, their first GMAC meeting. And I want to extend a special welcome to David Bailey from the Bank of England, and Rodrigo Buenaventura from the European Securities and Markets Authority. It’s a pleasure to have you with us today. Before we turn to Chairman Massad and the other commissioners, I want to make a couple of brief remarks.
Bilateral Discussions on CCP Equivalency
First, I know there is considerable interest in the discussions between the European Commission and the CFTC on equivalency determinations for CFTC-registered clearinghouses. Chairman Massad is obviously best positioned to report on those discussions, but my impression is that there remains on both sides the will to pursue agreement on equivalency within a dual-registration framework. Indeed, representatives from the European Commission are here this week to engage in discussions toward that end.
As a practical matter, this means that both the CFTC and European Commission will need to come to agreement on which specific requirements the CFTC will be willing to find compliance when the CCP is following an EMIR-specific rule. At this stage of the discussions, the number of those requirements in focus is now rather small, which is encouraging.
We have already made accommodations with respect to how certain of our rules apply to European clearinghouses, and many clearinghouses have been operating for some time under the current framework. Although there are other approaches, to be sure, I believe appropriate deference or substituted compliance within the dual-registration framework makes sense, similar to what we have already done.
I urge the negotiators to focus on seeking practical solutions while respecting both the CFTC’s and home regulator’s regulatory prerogatives in their discussions this week. Neither side can be doctrinaire in their approach – instead, the analysis should be outcomes-based. I also urge the European Commission to make their determinations as quickly as possible.
Second, and once we get past the equivalency determinations, I believe there are a number of areas where the CFTC and its counterparts around the globe can continue harmonization efforts, including with respect to trading platforms. For instance, we have work to do in approving a number of FBOT applications, and I believe we still need to pursue a more lasting framework for non-U.S. swap-execution platforms. I look forward to being involved in those efforts.
NDF Clearing Mandate
Regarding a clearing mandate for NDF contracts, today’s meeting will be instructive both in substance and in process. Based upon discussions with my fellow commissioners, I anticipate that the commission will seek input and direction from the GMAC and its newly created subcommittee of FX experts – as evidenced by today’s meeting – before proposing a clearing mandate with a release for public comment. When practical, a process of public consultation even before issuing a release for public comment is the best one for making policy at the commission.
The settlement characteristics and standardization of NDF contracts seemingly render them clearable, and clearinghouses have made that case to the commission already, but analyses and discussions involving other market participants should inform the matter as well. Additionally, the related market-structure issues involving clearinghouse, FCM and service-provider risk management, as well as those related to trade execution for NDFs, are important to the analysis of whether and when a clearing mandate is appropriate. As sponsor of GMAC, I am requesting the FX subcommittee to prepare a written recommendation that addresses each of these issues in full – I expect that the commission will draw heavily from the recommendation in formulating its NDF-clearing policy. I also believe the implementation of any such mandate must be aligned with any comparable mandates overseas, in Europe particularly. ESMA has recently put forward a consultation release related to NDFs that contains differences in substance and implementation when compared to earlier recommendations from CFTC staff. Those gaps should closed if possible.
Today we also are discussing crypto-currency developments and how they relate to the commission and the markets we oversee. This is an important and timely discussion for two reasons.
First, there are a number of merchant businesses who now accept Bitcoin as payment for goods they sell. For many merchants, fluctuations in the value of Bitcoin have created a demand for a derivatives market that would allow for hedging against those fluctuations. Consequently, the commission already has been presented with one swap contract on Bitcoin by a registered SEF that has been listed for trading, and there are at least several other platforms already registered or soon-to-be registered that intend to list other Bitcoin-denominated contracts.
Today’s session will be helpful in educating the public and the commission on the various regulatory challenges that these novel contracts present. Only with additional understanding can the CFTC be confident that it can effectively execute on its mission of preserving the proper functioning of a crypto-currency derivative market, which includes enforcing rules intended to prevent manipulation of these markets. Again, we anticipate more instances in the near future where the commission will be asked to review contract design as well as consider the applicability of those core principles affecting trading venues when a crypto-currency-contract has been listed.
Second, the discussion today will be relevant in helping the CFTC and the public better understand the potential benefits that Bitcoin or Bitcoin-like protocols and technology – as opposed to the crypto-currency itself – could bring to the derivatives marketplace. Settlement and other trustee-like services are at the core of the bitcoin-technology protocol. Any type of open-sourced, public-ledger technology seemingly could be useful in the derivatives space, where monies and collateral are frequently transferred and settled throughout a trading day. But again, the novelty of the technology and its applications in turn present novel policy questions for regulators, and the commission needs to be thinking about those questions today rather than tomorrow.
Last Updated: October 9, 2014