April 21, 2020

ICYMI: Chairman Tarbert Discusses Crude Oil Futures on CNBC’s Squawk Alley 

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Chairman Tarbert on State of Oil Futures Markets:

“[T]he CFTC obviously is watching these markets closely and in real time. Our main job as a regulator is to make sure that whatever is going on in the markets is actually reflective of real supply and demand and not anything else. I think when we look at this situation; it does appear to be a fundamental supply and demand issue … [I]t's not a financial markets issue at this point. Obviously we're looking into it to make sure we understand all the factors, but basically it can be explained by what's actually going on in the real markets, which obviously is a tremendous amount of dislocation with respect to storage, supply, capacity, and dramatically decreased demand. So, the markets are just simply reflecting at this point what's going on in the real economy, which obviously is a lot of volatility … The volatility that we saw yesterday—even though the WTI contract reached a historic low—we didn't see that across other commodity classes.”

Chairman Tarbert on Why Negative Futures Prices Were Expected

“[I]n fact, it was somewhat expected because as many of the viewers know, futures contract ultimately relies on convergence. At the end of the day, at the end of trading, the futures price needs to be the same as the cash. So, for weeks now, we've seen spot physical cash prices of crude approach zero and go negative. So, market participants as well as the CFTC have actually been preparing for some time to make sure that our trading systems could handle negative prices. But, ultimately it's a fundamental supply and demand issue more generally, but also specifically with the WTI contract.”

Chairman Tarbert on Counterparty Risk

“The good news here is that very few people stay in the contract when it goes into the delivery period; so, the amount of people that are actually in these markets is reduced significantly to a very small number, in some cases mainly those already hedging … [T]hat reduces counterparty risk. I’m pleased to say that all of our clearinghouses, which collect variation and initial margin payments, all variation and initial margin payments were made yesterday throughout the day, so no one missed margin payments.”

Chairman Tarbert on Lowering Initial Margin Requirements in Response to Liquidity Concerns

“No. I think not at this time. The initial margins obviously were increased due to the last big spike that we saw in mid-March, and so as a result, those initial margins have actually served as a cushion against defaults. The thing to think about here is that we don't think initial margins will rise dramatically because again this was just a single contract on a single month. We didn't see the level of volatility in the June contract and the July contract, just this closing period for this one contract, so we're not expecting initial margin levels to dramatically increase as a result of what happened yesterday.”

Chairman Tarbert on the Impact on Volatility

“[B]ecause the negativity only occurred within the May-front-month contract, the volatility was actually not as extreme as the volatility that we saw last month because it went across the curve and into the curve. So today, if you look, for example, the July Brent contract and the July WTI contract are pretty tight in terms of spread, so they're not as wide as we saw yesterday. But again, time will tell.”

Chairman Tarbert on Open Outcry Trading

“As far as open outcry goes, I think we've seen a dramatic increase in liquidity as a result of electronic markets. The other thing that I think is a really key point, particularly in this time of coronavirus, Morgan, is that if we had open outcry, nobody would be trading. So, the electrification and the electronic trading systems that have been put in place for the last 20 years have essentially allowed trading to continue even in an era of social distancing. But your point about liquidity is absolutely critical; our main goal at the CFTC is to ensure that our markets remain orderly and liquid so we've been doing everything we can to ensure that trading can continue even with social distancing, even with traders operating from home. But, I think if we had a situation where the only markets we had available were those of open outcry, it would be very difficult to allow trading at all with social distancing.”

-CFTC-