SPEECHES & TESTIMONY

Statement of CFTC Chairman Timothy Massad before the Market Risk Advisory Committee

November 17, 2016

Thank you. First, I would like to thank Commissioner Bowen, her staff, and the distinguished members of the Market Risk Advisory Committee for all the work that has gone into today’s meeting and its agenda. I’d also like to thank CFTC staff—and all of today’s speakers and presenters for what I’m sure will be an interesting conversation. And I’m pleased to be here with Commissioner Giancarlo.

In the past I’ve underscored the value of these advisory committee meetings as a means to continue the ongoing dialogue between stakeholders and the Commission on a number of issues. Today is no exception. I’m looking forward to hearing the CCP Risk Management Subcommittee’s recommendations for clearinghouse default management. And I’m looking forward to David Bailey’s presentation on CCP resilience. One of the items he will discuss is coordinated default management exercises, and our staff has been working closely with the Bank of England on that. We also have been working closely with the Bank of England and many other regulators on the various international workstreams related to CCP resilience and recovery.

As you all know, the issue of clearinghouse safety and resilience has been a priority of mine since taking office. We’ve accomplished a great deal here. This includes strengthening our own oversight and enhancing our risk surveillance work; working with international regulators, including the Bank of England, on resilience, recovery and resolution planning issues; working with our major clearinghouses to develop recovery plans and rules—which we hope to complete very soon; working with the FDIC on resolution planning; and working with the Federal Reserve to open accounts for the deposit of clearinghouse cash.

Yesterday, the CFTC announced some additional important work we have done in this area. We released the results of a series of supervisory stress tests on the largest clearinghouses under our jurisdiction. These tests assessed the impact of stressful market scenarios across multiple clearinghouses and clearing members on the same date.

Our test focused on the five largest clearinghouses that are registered with us. We developed a set of 11 stressful scenarios based on a number of factors, including price changes and correlations across markets that occurred on specific dates when there was extreme volatility. We constructed them based on what happened on various days of market volatility—such as Lehman Brothers’ collapse and in the aftermath of the “Brexit” vote. And we applied these scenarios to actual positions of clearinghouses as of a specific date, which allowed us to look at impacts across clearinghouses and clearing member firms.

The results show that clearinghouses had ample resources to withstand extremely stressful market scenarios on the test date. And they further showed that risk was diversified across clearing members — a loss at one clearinghouse did not mean losses at all. These findings are good news. They also illustrate how far we have come—in terms of transparency, as well as oversight. We were able to measure what would happen to multiple clearinghouses and their largest clearing members under various stressful scenarios because the activity is now centrally cleared. There is daily margining, and extensive reporting. And so the report gives you extensive detail as to the level of coverage of the clearinghouses, as well as the impact on clearing members. Contrast that with where we were eight years ago, when the over-the-counter swaps market was opaque. At the time of Lehman’s failure and AIG’s near collapse, people scrambled to figure out the exposures of one institution to another, and what would happen if one institution defaulted.

This report is only one test of default risk and the adequacy of the pre-funded resources on one specific date. It is a first step. It is important to do these types of tests regularly, and there are many types of enhancements that can be incorporated into the program in the future. There also will be a need for cooperation among regulators internationally.

If you haven’t seen the report, please visit our website — cftc.gov.

So again, I think this will be a very productive meeting on issues that are critical to the strength and stability of clearinghouses. I again want to commend Commissioner Bowen and members of the MRAC for their leadership on this advisory committee. I thank all the presenters and staff for the work they put into this meeting.

Last Updated: November 17, 2016