Opening Statement of Commissioner Kristin N. Johnson before the Open Meeting of the Commodity Futures Trading Commission
November 10, 2022
Thank you, Chairman Behnam. It’s an honor to join you and my fellow Commissioners today. I want to thank my team, Bruce Fekrat, Gene Smith, and Matt Rowland for their tremendous efforts preparing for the meeting today.
I also want to thank the staff for their commitment to the public’s interest. Their dedication to advancing customer protection, market integrity, and market stability most visibly manifests through rulemakings, as it should. I want to thank you for your hard work day in and day out and service to the Commission and the American economy and your support of the Commission’s deliberation process. I am continuously impressed by your willingness to deeply engage with my Office and appreciate the valuable insights we learn from you each time we meet.
The rulemaking process serves as an engine in the democratic institutions that implement and enforce Congressional mandates. My friend Bobby Ahdieh, Dean of Texas A&M Law School, long ago described this enlivening and interactive engagement as a regulatory dialectic – a continuing dialogue among regulators and a diverse spectrum of stakeholders including public interest advocates, members of Congress, and a wide array of market participants from large, multi-national institutions to end-users who manage family ranches and farms.
Today the Commission will consider two important matters. The first matter is the continued outgrowth of Congressional action expanding the Commission’s mandate to mitigate systemic risk concerns. The second ensures the integrity of our markets through a long-standing commitment to cooperation and collaboration with regulators in other nations as we seek to preserve the integrity of global markets. In each instance, the Commission improves its visibility into transactions and markets that endured remarkable and disruptive declines and triggered a global financial crisis a little over a decade ago. The steps we take today ensure that we will not regress nor relent in our efforts to protect markets. Rather, we are steadfast and forward marching as we adapt Commission regulations to address new learning, refine regulatory needs, and reflect innovative technologies.
The derivatives clearing organization (DCO) proposed rulemaking sits within a broader regulatory framework that addresses both the significance of centralized risk management oversight and concerns that, in the absence of effective general and enterprise risk management oversight, DCOs might create single points of failure that amplify – rather than mitigate – systemic risk. Payment, clearing, and settlement systems serve a central role in financial market infrastructure. DCOs play a central role in clearing and settling trillions of dollars in global financial market transactions, interposing the DCO for each counterparty and contract. This novation aggregates risk, enables greater visibility into the risk exposure of market participants, introduces uniform contractual obligations, and establishes standards for initial and variation margin. Clearing service providers are on the front lines, facilitating dispute resolution among counterparties, ensuring minimum liquidity reserves are maintained by the individual counterparties and the clearing organization, enabling the introduction of critical cyber-risk management measures, and implementing governance measures that mitigate conflicts of interest and monitor systems safeguards.
DCOs provide channels for executing the largest and smallest commercial transactions in local, national, and international financial markets. The Dodd-Frank Act reflects Congress’s and regulators’ perception that centralized clearing will ultimately “foster greater efficiencies . . . and promote transparency” in derivatives markets. The proposed DCO reporting rulemaking is emblematic of the evolving nature of the Commission’s work. The proposal would increase the reporting of DCO automated system impairments, including impairments concerning third-party provided services. We live in a digital age that is dependent on technology and the systems and software that comprise it. The Commission needs this information to surveil for operational soundness.
The rulemaking also sensibly recognizes that the reporting of variation margin and cash flow at the individual customer level may not be consistent with current DCO capabilities, and that amendments to these requirements may be warranted. The rulemaking also pragmatically recognizes that DCO regulations drafted with margin in mind do not directly apply to clearing houses that clear and settle transactions on a fully collateralized basis.
Most critically, the rulemaking proposes a package of liquidity-related transparency amendments. Macroeconomic conditions today are marked by persistent inflation and periods of sustained volatility. Prudent risk management, and particularly the management of liquidity needs, is critical to DCO resilience. Collectively, the transparency amendments, which trigger reporting of changes to credit and liquidity facilities, and the financial health of the entities that offer them, should significantly improve the Commission’s risk surveillance of DCOs and clearing members. Prevailing market conditions are characterized by extreme volatility and positively correlated assets that amplify the risk of contagion. This is a perfect storm for unanticipated liquidity demands. I fully support these transparency provisions. They add value to the core principles we uphold – the protection of customers and the integrity of the financial markets that we regulate.
While I appreciate that new reporting obligations will require adjustments, these important reforms represent a refined, more carefully tailored reporting regime that seeks to achieve the goals outlined in the Dodd-Frank Act. I also very much welcome stakeholder comments associated with the ability to comply with the proposed reporting requirements.