SPEECHES & TESTIMONY

Statement of Commissioner Sharon Bowen before the Market Risk Advisory Committee

April 2, 2015

Welcome to the inaugural meeting of the Market Risk Advisory Committee (MRAC), of which I serve as Sponsor. I am pleased to be joined here today with Chairman Massad and Commissioners Wetjen and Giancarlo. I appreciate all of your support and it’s been a privilege to work with each of you these last ten months.

Thank you to everyone involved in bringing this meeting together: First, thank you to the MRAC members and guest presenters for bringing your passion, expertise and intellect to these important issues. Second, I want to extend a special thank you to our two well-regarded and knowledgeable moderators, who are both members of MRAC – Tom Kloet, Trustee at Elmhurst College and Andrew Lo, MIT Sloan Professor of Finance. Third, thank you to the staffs of the Division of Market Oversight, the Division of Clearing and Risk, and the Division of Swap Dealer and Intermediary Oversight, who have generously offered their time to help with this Committee and to attend today. Finally, I want to also say thank you to the staff for helping me set up MRAC and this meeting, particularly my Chief Counsel, Petal Walker, the Designated Federal Officer for this committee who was instrumental in helping plan and shape today’s meeting.

The purpose of MRAC is to provide the Commission with market intelligence and recommendations from industry and other stakeholders, about market risk and market structure issues. The information and recommendations from this Committee will be invaluable. This Committee will help the Commission in our efforts to identify, analyze and mitigate market risk. As we all know, the markets that we regulate are constantly evolving, and this committee’s members can play a critical role in helping the Commission understand these changes and their implications for market risk. Through the work of this Committee, we hope to gain not only a better understanding of the range of systemic risks and the implications of our ever-changing market, but also to get the best thinking about how the Commission should respond to them.

This is a very impressive group with many decades of experience, and a diversity of viewpoints. Pursuant to our charter, Committee members include: end-users, exchanges, clearinghouses, market-makers, intermediaries, academics and a regulator. Represented here are entities from such different corners of the market as Prudential, Cargill, the Federal Home Loan Banks, JP Morgan, Bloomberg, as well as the Federal Reserve Bank of NY, advocates of financial reform and noted academics.

Prior to this meeting, MRAC sought and received comment on the issues that the Committee should consider. During that comment period, commenters suggested many important market risk and market structure issues for MRAC to tackle, including CCP risk management practices (including default management, recovery and resolution, and margin valuation), cybersecurity, unregulated service providers, and FCM concentration. Needless to say, there is a wealth of potential topics this Committee can discuss.

Today we turn to two important topics – one pertaining to market risk, and another pertaining to market structure. Our first panel is on CCP default management. Though I believe it is unlikely that a significant clearing member – one whose default would pose a systemic risk – would actually default, it behooves us to do everything in our power to best prepare for it, given the implications for our economy. As a general matter, the importance of effective, robust risk management of our CCPs cannot be overstated. The big question that we are trying to answer in this panel is whether the default drills, as well as the other default preparation practices in which CCPs are engaging, are sufficient as currently constructed and whether they actually reflect what is our best prediction of what the world would look like if a significant clearing member defaults. Along those lines, I am interested in knowing if there are ways that CCPs can coordinate or standardize their practices to better prepare for a default of a significant clearing member that affects multiple CCPs.

Our second panel is on market structure. At this panel, we ask the important question: have SEFs changed the fundamental swaps market structure? As part of this discussion, we also want to consider the effect on the swaps market of the practice of name give-up. A central goal of Title VII of the Dodd-Frank Act was to bring the once opaque swaps market into the light, and the creation of SEFs was a core part of that effort. Now that the SEF rules have been in effect for well over a year, we want to hear from market participants and other observers about what effect, if any, it has had on the market, and what has been the impact on liquidity and equal access. We also want to hear suggestions on how the Commission should be thinking about, and possibly addressing, the issue of name give-up.

I am looking forward to hearing what our experienced and diverse panels and all our Members have to say about these important issues.

Last Updated: April 2, 2015