Keynote Remarks of Chairman Timothy Massad before the SIFMA Annual Meeting
September 27, 2016
Thank you for that kind introduction. I’m very pleased to be with you today.
It’s been a busy month. As many of you may know, rules for margin on uncleared swaps went into effect on September 1. We held an open meeting to finalize protections against cyberattacks in our markets, and we issued a comparability determination for Japan’s margin rules. In addition, the Commission is currently considering a one-year delay in the decrease of the swap dealer de minimis threshold, and I hope that we will soon finalize additional clearing requirements for interest rate swaps that are subject to a clearing mandate in another jurisdiction.
I expect the rest of the year to be busy as well. And today, I’d like to say a few words about that work, before taking your questions.
I am going to focus my comments on three major areas. The first is our ongoing efforts to ensure the strength and stability of clearinghouses. The second is how we’re confronting some of the technological changes and innovations taking place in our markets. And the third is finishing and fine-tuning the rules required by Dodd-Frank.
CLEARINGHOUSE RESILIENCY, RECOVERY, AND RESOLUTION PLANNING
So let me begin with our work on clearinghouse resiliency, recovery, and resolution planning. Having made clearinghouses more significant in the global financial system, this is a key priority for us and other regulators around the world. And there is much going on here domestically and internationally.
Domestically, you are probably aware of the stress testing clearinghouses do on a daily basis. But in addition, CFTC staff is currently working on our own supervisory or regulatory stress tests. In these tests, we are analyzing the impact of certain stressful scenarios across multiple clearinghouses and their clearing members. We are doing this by applying the same scenarios, at the same time, to actual positions. And we are comparing those positions to actual funded financial resources of the clearinghouses. This allows us to look at systemic impacts and interdependencies across these entities. We hope to finish the first phase of this work later this fall, and I expect that we will issue a public report on the results once it is completed.
In addition, we are working with our systemically important clearinghouses to ensure that they have final clearinghouse recovery and wind down plans in place. We are also making sure that their final recovery rules are effective. And we want to complete this by the end of this year. As you may know, our systemically important clearinghouses have filed preliminary plans and rules, which we have been reviewing. In July, we released some detailed guidance on this, which describes how we are looking at these issues, and what must be part of these plans and rules. This is a top priority for the fall.
We also are working closely with staff of the Federal Deposit Insurance Corporation (FDIC) on resolution planning for clearinghouses.
In addition to these domestic efforts, we are continuing to help lead an international work plan on clearinghouses that, as you may know, has four major elements.
First, we are co-chairing a working group looking at clearinghouse resilience and recovery issues, including whether international regulatory standards are sufficiently granular in several areas. This includes margin methodologies, liquidity, governance and stress testing. This group recently issued a consultative report on this work, and we welcome your input. In addition, CFTC staff will hold a public roundtable on these issues on October 6, in which many of your member firms are participating.
A second working group is assessing the implementation of these standards at ten representative clearinghouses. They also released a report in August.
A third effort is examining resolution planning for clearinghouses, including international coordination. This group also released a Discussion Note for public comment in August. And a final group is examining the interdependencies among global clearinghouses and major clearing members.
Finally, let me just say, as I have said before, while this work on recovery and resolution planning is critical, we want clearinghouses managed so that neither recovery nor resolution ever becomes necessary. The most important element in making sure our clearinghouses are strong and resilient has always been, and will remain, daily risk management, and oversight of that function will continue to be a priority as well.
TECHNOLOGICAL CHANGES IN OUR MARKETS
Now, let me turn to what we’re doing to address some of the technological changes that are reshaping our markets.
Guarding Against Cyber Threats
There is no better example than the risk of cyberattack. This probably represents the single greatest threat to the stability and integrity of our markets we face today. Just a couple of weeks ago, we finalized important rules that will bolster protections against cyberattacks and other types of operational risk in our markets. These rules require the firms that run the core market infrastructure – the exchanges, clearinghouses, trading platforms, and trade repositories – to regularly evaluate cyber risks and test their cybersecurity and operational risk defenses. We require specific types of testing, but we do not prescribe how the tests should be done. Instead, the standards are principles-based and rely on best practices. We are also continuing to make cybersecurity a priority in our examinations.
Addressing Automated Trading in Our Markets
Second, we’re working to address the challenges posed by automated trading in our markets. In recent years, we have seen a fundamental change in this regard –approximately 70 percent of trading in the futures market is automated. While there are positives that come from this technology, there is also a greater likelihood of disruption and other operational problems.
That’s why we are working to finalize our so-called “Regulation AT” proposal, which is designed to address the risk of disruption posed by automated trading. We have received a lot of helpful feedback on the proposed rule we issued last November, and I expect that we will consider a supplemental proposal on certain issues related to this rule in the near future.
Let me also address a few misunderstandings about this proposal. First, our goal has never been a rule that requires large numbers of firms to register with us just for the sake of doing so. But the reality is that some of the biggest traders in our markets are not currently subject to our oversight, and we need a way to make sure they are following reasonable risk controls. And in fact, some of those traders have supported a registration requirement.
Second, as I’ve said many times, our desire has never been to require that source code be turned over to us routinely. I want to make sure this rule respects the proprietary value and confidentiality of source code, while at the same time ensuring that we have access when necessary. I will have more to say about this in the weeks to come as we finalize the supplemental proposal.
FINISHING AND FINE-TUNING DODD-FRANK
Next, let me turn to the remaining rules required by the Dodd-Frank Wall Street Reform Act.
You know, every September reminds me, and probably reminds many of you, what happened eight years ago this month – when we confronted the worst economic crisis in a generation, and stood on the precipice of another Great Depression. We must never forget the pain and suffering that followed for millions of Americans who lost their jobs, homes and savings.
We’ve come a long way since those dark days of the crisis. We have largely completed all the rules required by Dodd-Frank, and we’re now largely focused on implementing and fine-tuning those rules. And it’s worth noting that when it comes to regulating the swaps market, today the debates are more about the details of regulation, not the need for a regulatory framework in the first place. That is a clear and important advancement.
So let me just discuss a few of the Dodd-Frank related items we’re currently working on. I’ll first turn to margin for uncleared swaps.
Margin for Uncleared Swaps
As you know, on September 1, our margin rules went into effect, as did those in Japan and Canada.
The European Commission’s delay in implementation was a disappointment, but I and my fellow U.S. financial regulators decided to move forward. Let me briefly tell you why.
First, the September 1 date applies only to swaps between the largest swap dealers—those between counterparties that each have $3 trillion in gross exposure. Approximately 20 global firms are affected by this date. And notwithstanding the European delay, any European institution transacting with U.S., Canadian, and Japanese institutions is still required to comply with uncleared margin rules.
Second, I believe that this delay will be short, and I know that Europe is committed to minimizing it. We’ve stayed in touch with the European Commission and members of the European Parliament on this; and I have been reassured of their desire to do so. Their implementation calendar indicates the standards can be in place by March 1, when a larger group of firms will be subject to variation margin requirements.
Third, and perhaps most importantly, we are a U.S. regulator, and our primary responsibility is to ensure the full implementation of United States laws. Coordination with other regulators is critically important, but the objective of the U.S. margin rules is to protect the U.S. financial system.
Our decision to move forward will better protect the U.S. financial system. And I believe it will also get us to a strong international framework faster. We remain mindful of the March 1 date, and will explore alternative actions that we could take to address any further consequences in the event it does not look like the delay will be short.
De Minimis Threshold
Two weeks ago, I announced my intention to ask the Commission to extend the date when the de minimis threshold for swap dealing will be lowered. The Commission is currently considering this.
The de minimis threshold determines when an entity’s swap dealing activity requires registration with the CFTC, which triggers margin and capital requirements, as well as other oversight and business conduct rules. The CFTC and the Securities and Exchange Commission set the de minimis threshold to automatically drop from $8 billion dollars in notional amount of swap dealing activity over the course of a year to $3 billion, unless action is taken to change that. Absent that action on our part, firms would need to start determining whether their activity exceeds that lower threshold in January of next year – just a few months from now. I’ve called for a delay so that we can study the issue further. In addition, I believe we should complete our rule on capital for swap dealers first.
Capital Requirements for Swap Dealers and Major Swap Participants
Capital Requirements for Swap Dealers and Major Swap Participants
And as you can therefore imagine, another key focus for this fall is to repropose our rule on capital requirements for swap dealers and major swap participants.
Adequate capital is critical to the ability of swap dealers to absorb losses. And that is in turn critical to preventing systemic risk and enhancing the resiliency of our system generally.
As with margin, the law provides that swap dealers for which there is a prudential regulator shall comply with the capital rules of the prudential regulators, and the CFTC must adopt capital rules for all others. As with our original proposal, this should not be a one-size-fits-all approach. Some dealers are affiliates of prudentially regulated firms. Therefore for such firms, we should have an approach that is consistent with that of our banking regulators. But that approach is not necessarily suited to other types of firms—be they broker dealers, futures commission merchants, or non-financial companies. So I believe it is important that we have a rule that recognizes this diversity while still promoting safety and soundness.
Indeed, if we were to require all firms to follow one approach, we may in fact favor one business model over another, and cause even greater concentration in the industry.
I expect to have more to say about this in the weeks to come.
Cross-Border Application of Swap Rules
This fall, I also expect the Commission will consider a rule addressing certain aspects of the cross-border application of our swaps rules. Of course, we’ve been addressing cross-border issues and cross-border harmonization in many ways. We harmonized margin requirements, reached an equivalence accord with Europe on clearinghouse regulation, and are helping to lead the international work taking place on clearinghouse resilience, recovery and resolution that I described earlier. We have also issued several exempt orders for clearinghouses and registration orders for foreign boards of trade, and we are looking at trading rules. This fall, I also hope we can consider the issues pertaining to when a non-U.S. swap dealer uses personnel in the United States to “arrange, negotiate or execute” swaps. As you may know, the CFTC staff issued guidance on this subject three years ago, which said such firms should be subject to the same transaction-level requirements as a U.S. swap dealer. The agency later postponed and also solicited comments on that guidance. And we recently extended that postponement.
I have often said that physical activity within the territory of the Unites States is a traditional basis for jurisdiction, and should be when it comes to our rules as well. The question is which particular standards or rules should apply when transactions involve arranging, negotiating or executing a swap in the U.S. That is what I hope we can begin to consider in a rule-making this fall.
There is more going on, of course. In the months ahead, I will ask the Commission to consider some proposed rule changes to improve trading on swap execution facilities that are consistent with the no-action letters we have issued over the past couple of years, and I expect that we will have additional proposals to improve swap data reporting. And I’m working hard to finalize our rule setting position limits by the end of this year.
And let me just say that our ambitious agenda is only possible because of the talented and dedicated staff at the CFTC. I want to thank all of our employees for their diligent work on these and other important activities. And I also want to thank my colleagues, Commissioners Bowen and Giancarlo for their dedication and contributions. I believe we have, and will continue to, work together collaboratively and constructively to get things done.
Thank you very much. I’d be pleased to take your questions.
Last Updated: September 27, 2016