Public Statements & Remarks

Keynote Remarks of Commissioner Brian D. Quintenz before the Federal Reserve Bank of Chicago’s Fourth Annual Conference on CCP Risk Management

October 17, 2017

Thank you, Charles, for the kind introduction, to the Federal Reserve Bank of Chicago for inviting me to speak at this year’s Conference on CCP Risk Management, and to all of you for your warm welcome. It’s an honor to be here and to deliver these remarks kicking off the start of the events for today. Before I begin, I must add the disclaimer that the views contained in this speech are my own, and not necessarily those of the Commission.

It is fitting this conference, Beyond Default of a CCP, is happening now. With Halloween right around the corner, Nightmare on Elm Street reruns on TV, and a Stephen King movie smashing box office records, this seems an appropriate time of year to talk about the truly frightening event of a CCP going down.

In fact, when I think about CCP resolution scenarios, I usually also picture fire raining down from the sky and mad hoards rampaging through the streets. While very little preparation would matter in that a scenario, the reason we undertake these exercises as regulators is to provide clarity if something happens that we do not expect, so that a well-defined process can be followed. Before I get into my Halloween-inspired views as to the current risks around CCPs and how we may, in fact, be exacerbating them, let me first talk about process, specifically the CFTC’s leadership role in oversight of CCPs registered with the Commission as derivatives clearing organizations (or DCOs).

CFTC’s Oversight of DCOs

DCOs have long been an important part of the global financial system, and they assumed even greater importance following the 2008 financial crisis. The Commission is responsible for seeing that the risks of clearing are appropriately mitigated through our ongoing oversight and surveillance of DCOs, clearing members, and other participants in the clearing process.

Currently, there are 16 DCOs registered with the Commission, including six that are based outside of the United States.1 The Commission is also responsible for the supervision and financial and risk surveillance of futures commission merchants (FCMs) that are clearing participants, non-FCM clearing participants, and other market participants that may pose risk to the clearing process, including swap dealers, major swap participants, and large traders.

The Commission has three primary methods by which it oversees DCOs and the overall clearing process: (1) review of DCO applications and rule changes, (2) examinations of DCOs for compliance with the statute and regulations, and (3) daily risk surveillance.

First, with regard to rule reviews, registered DCOs must submit rulebook changes to the Commission for review. Although generally the Commission is not required to approve rule changes, DCOs are permitted to implement rule changes once the Commission has had sufficient time to review and consider them.2

Two registered DCOs, CME and ICE Clear Credit, have been designated as systemically important by the Financial Stability Oversight Council. For these systemically important DCOs, (SIDCOs) certain rule changes are subject to greater scrutiny by the Commission, in consultation with the Board of Governors of the Federal Reserve. Commission staff and Fed staff work together to assess the effect on risk such rule changes might have.

Second, Title VIII of the Dodd-Frank Act requires annual examinations of SIDCOs and further specifies that the CFTC shall lead these exams but must consult with Fed staff.3 The importance of these exams requires a positive and productive relationship that provides for a highly effective and efficient process. Any productive and healthy relationship astutely assigns leadership and efficiently leverages its parties’ expertise, since positive benefits accrue from strong leadership and appropriate deference. The CFTC is the lead examiner for SIDCO exams by statute and in practical experience. We greatly appreciate the Fed Staff's broad deference to our expertise and process. I was pleased to hear recently that senior officials at the Fed support our strong leadership role in these reviews. Working cooperatively with appropriate deference to our expertise we can fulfill the goals of the Dodd Frank Act and not get mired in bureaucratic challenges that befall other inter-agency efforts. I thank the Fed staff involved in these reviews for giving CFTC staff the space and deference they need to accomplish our mission.

The CFTC also conducts periodic examinations of other registered DCOs for compliance with all relevant requirements of the CEA and Commission regulations. The Commission reviews DCO policies and procedures across a range of topics, including financial resources, default management, liquidity risk management, treatment of customer funds, and cybersecurity and resiliency. These examinations are among the most important activities that the Commission conducts, as DCOs have taken on an increased importance in the global financial system.

Other DCOs are examined on a frequency and scope determined by the Commission’s risk assessment of each DCO’s activities. Therefore, each examination is unique to the DCO, is done onsite, and typically involves an in-depth review of documents provided to the Commission as part of that specific exam. Staff use advanced data analytics to verify reported results and enhance the staff’s understanding of a DCO’s data aggregation and manipulation practices.

Lastly, through the Commission’s risk surveillance program, CFTC staff analyze daily DCO position and margin information through various internally-developed tools to conduct daily risk surveillance. As a result, each day we can examine and quantify the risks posed by large traders to clearing members and by clearing members to DCOs, and compare those risks to available resources.

Last November, Commission staff completed the first independently-executed supervisory stress test across the five largest DCOs registered with the Commission. As part of this effort, staff concluded that the DCOs could withstand extremely stressful market scenarios and that risk was sufficiently diversified across clearing members. 4

Just yesterday, the Commission issued another cross-DCO report focusing on DCO liquidity. The report examined not only whether DCOs have adequate resources to meet their obligations in the event of major defaults, but also whether those resources can be converted into cash in a timely manner for the DCO to meet its settlement obligations.5 The stress test itself generated settlement requirements more than three times larger than if the two largest clearing members had defaulted on the day after Brexit. In that scenario, all DCOs covered by the exercise would have had sufficient liquidity to meet their settlement obligations in the required timeframes.

Access to Fed Accounts

One way in which the Commission and the Federal Reserve Board have worked together is provide access to Federal Reserve Bank deposit accounts for systemically important DCOs and the customers who clear through them.

DCO access to Federal Reserve deposit accounts is a critical tool in mitigating systemic risk. It protects DCOs and their customers from the risks of commercial banks and also provides a reliable source of liquidity to DCOs. Because of these benefits, I believe access to Fed accounts should be expanded to all DCOs regardless of systemically important designation. As noted in the Treasury Department’s report on the U.S. capital markets, restrictive Federal Reserve Bank account access may jeopardize large amounts of U.S. dollar-denominated margin during times of market stress.6

Recovery and Resolution Planning

For the reasons described above, I believe that the probability that a DCO will fail is very remote. Nevertheless, prudence dictates that DCOs and regulators must plan for extreme circumstances, however unlikely, that threaten a DCO’s ability to perform its critical payment and settlement services. Continuity of these critical services is crucial to maintaining financial stability.

DCOs are required to develop recovery plans in which a DCO must analyze scenarios that could lead to uncovered credit losses or liquidity shortfalls. They must also consider the accompanying management challenges they would face. This analysis promotes the ability of DCOs to effectively and efficiently meet their obligations promptly. It reduces the possibility of market disruptions and financial losses to clearing members and their clients.

DCOs have implemented rule and procedure changes to fill their toolboxes to aid in a potential recovery. These include gains-based haircuts, juniorization rules, new auction procedures, and partial tear-up provisions.

DCOs’ recovery plans also are a critical input in regulators’ contingency planning to address the even more unlikely event that a DCO’s recovery plan fails. Under current law, a systemically important financial company, including a DCO, could be resolved if: 1) federal regulators, in consultation with the President, determine that the systemically important DCO’s failure to provide its critical services would have serious adverse impacts on the U.S financial system, 2) there is no private sector solution, and 3) liquidation of the systemically important DCO under the bankruptcy code would not avoid or mitigate the systemic impact.7

Under the Orderly Liquidation Authority in Title II of Dodd-Frank, the FDIC is the resolution authority for all eligible financial companies and would also be appointed as the receiver for a DCO. However, the CFTC has been actively working with the FDIC on DCO resolution plans.

As those recovery and resolution planning efforts continue and as our analysis deepens, we must always remember that a DCO is not a bank. In no way can resolution plans undermine a DCO’s potential successful recovery. We do not want to disincentivize market participants from taking actions that would promote recovery because they think a better deal could exist under resolution.

Ultimately, I believe that the CFTC’s extensive experience and expertise in the oversight of both DCOs and their clearing members make us the best positioned regulator to create the right incentives, ensure the continuity of critical payment and settlement services in the event of a crisis, and mitigate or avoid systemic impact of a DCO failure.

CCP systemic risk – reduced mutualization and increased interconnectivity

Despite all our efforts regarding DCO resilience, recovery, and resolution, there continue to be concerns that DCOs concentrate risk within the financial system and pose a systemic threat to financial stability in the event of a crisis.

Does that sentiment have merit? I believe the theoretical answer is what any good economist would tell you...that it depends. As all of us here know, but some outside observers may not, clearinghouses do not eliminate risk. Rather they diversify it among their membership. Obviously, a larger and more diverse membership is advantageous and would, if large and diverse enough, actively reduce systemic risk through effective risk mutualization. Unfortunately, I do not believe that is the current situation.

Since 2002, the FCM marketplace has declined from 100 CFTC-registered entities to 55 at the beginning of 2017.8 The top five FCMs currently hold 53 percent of total client margin with the top 10 holding 74 percent.9 The situation is even more concentrated in the swaps market: the top three firms hold 54 percent of client margin, the top seven hold 91 percent of client margin, and the total population holding client swaps margin numbers only 19 firms.10

While consolidation and business exits have been contracting the population, the lack of new entrants into the marketplace have not counterbalanced that pressure. Through an internal examination of public data, our office has found the annual number of entrants into the FCM space has dropped precipitously over the last 15 years. Pre-Dodd Frank, from 2002 through 2011, an average of 14 firms entered the FCM marketplace annually. Since Dodd-Frank, the average has been four, with only two last year and only one this year.

The more a DCO’s clearing membership consolidates, the less the clearing system mutualizes risk and the more it interconnect firms’ exposures. Might we be encouraging the Armageddon scenario we are so explicitly trying to avoid? What can we do to reverse this Nightmare on Elm Street situation? One thing in particular deserves immediate attention.

The SLR Horror Show

Speaking of horror shows, the Supplementary Leverage Ratio (SLR) is a becoming a real-time slaughter house for the clearing industry and palpable threat to the cleared financial system.

As a global capital requirement for banks, the SLR is intended to consider size rather than risk. The SLR requires that large banks set aside roughly five percent of assets for loss absorption to supplement risk-based capital requirements and reduce the risks posed by on-balance-sheet lending activities. However, the SLR is also being applied to customer swaps clearing, a different activity altogether. Bank-owned FCMs that hold cash margin for their clearing clients must also set aside the requisite five percent in capital under the SLR.

DCOs, FCMs, clients, and all most all financial regulators uniformly recognize this is having multiple devastating impacts.

First, the application of the SLR to clearing customer margin reflects a fundamental misunderstanding of central clearing. The G-20 adopted central clearing for swaps in 2009 in part to move customer margin off the balance sheets of bank FCMs and into DCOs. But the SLR treats FCMs as if their risk exposure never changed.

Second, the SLR ignores the fundamental nature of customer margin. Margin’s purpose is to reduce the risk exposure of derivative contracts. The SLR not only disregards that risk reduction, it transposes it, viewing margin as risk-enhancing. It also disregards the broader exposure reduction through netting of offsetting transactions.

Third, the SLR significantly tightens the already narrow profit margins of bank-owned FCMs, with many choosing to leave the business. These aren’t small players either - many of the largest banks have run for the exits, including State Street, Bank of New York-Mellon, Nomura, RBS, and Deutsche Bank.

Of those that remain, how do you think a business line with a 5 percent profit margin is treated within a larger financial institution? For starters, management stops investing in technology and infrastructure. Talented employees either leave as soon as possible or shun the business completely. Clients get left behind. Ultimately, inexperience, a lack of motivation, and outdated systems dominate the entire industry.

Last but not least, the SLR poses a significant barrier to resolution. The ability to quickly and easily transfer customer positions is indispensable to the central clearing model, as it enables the smooth functioning of the cleared markets even after one or more clearing members fail. We saw those benefits following the failures of both Lehman and M.F. Global. But in the next crisis, because of the SLR, there may not be FCMs willing and/or able to take on non-defaulting customers. That would severely limit a DCO’s options in the middle of a stress event, and it could force the fire-sale liquidation of positions, further roiling markets. Maybe after this conference is over someone can explain to me why this is such a great idea if, during a future financial crisis, it would actually make the situation much, much worse.

So here we are, subjecting a hedging service industry to an irrelevant test which increases systemic risk, dis-incentivizes investment and innovation, raises costs for customers, and may prevent an orderly resolution of the next crisis. Well done Washington, D.C., well done. Despite some people’s apparent best intentions, the clearing industry isn’t dead yet. But remedying the misapplication of the SLR is critical to ensuring the patient lives.

Two steps can be taken to provide relief:

1. Customer cash collateral held at a DCO must be excluded from a bank’s leverage calculation.

2. Customer collateral held at a DCO must reduce a bank’s potential future exposure. This reduction should be consistent with the Basel Committee on Bank Supervision’s standardized approach to counterparty credit risk.

Those two changes will significantly reduce capital costs for clearing members, a conclusion supported by the most recent Treasury Report.11 By CFTC estimates, the potential reduction in capital costs for bank FCMs could be as high as 70 percent, but it would only translate into a one percent capital reduction at the bank holding company level.12 Such reductions, if passed on to customers, could lead to a three-fold increase in trading activity, particularly hedge positions carried overnight. The dramatic reduction in customer clearing costs on a service imperative to managing systemic risk in swaps is well worth this miniscule exception. The financial system will be safer and more stable for it. Those who are standing in the way of this solution need to either get out of the way or get out of their roles.


In conclusion, though the CFTC’s vigorous oversight, we can hold DCOs to high standards and enhance the competitive environment for clearing members so that the clearing system can remain a healthy, innovative market to promoting economic growth. If we take the right steps now, we can wake up from the nightmare before it is too late.

1 For a list of the DCOs currently registered with the Commission, please see:  

2 See 12 C.F.R § 40.6

3 See 12 USC § 5466.

4 See Press Release, CFTC Staff Issues Results of Supervisory Stress Test of Clearinghouses (Nov. 15, 2016), available at

5 See “CFTC announces Clearinghouse Liquidity Stress Test Results,” October 16, 2017, at:

6 See U.S. Treasury Report: “A Financial System that Creates Economic Opportunities: Capital Markets,” October 6, 2017 at:

7 See 12 USC § 5383(b).

8 See FIA FCM Tracker, at:

9 Ibid

10 Ibid

11 See U.S. Treasury Report: “A Financial System that Creates Economic Opportunities: Capital Markets,” October 6, 2017 at:

12 See Testimony of CFTC Chairman Nominee J. Christopher Giancarlo, Responses to Questions for the Record, June 22, 2017.



Last Updated: October 17, 2017