Public Statements & Remarks

Achieving Growth and Progress: Statement of Commissioner Caroline D. Pham at the Global Markets Advisory Committee June 4 Meeting

June 04, 2024

Good morning. It’s great to convene another Global Markets Advisory Committee (GMAC) meeting in New York. I want to start by thanking everyone for taking the time to travel here—from all across the United States, and as far away as London, Frankfurt, Tokyo and more—to share your expertise with the GMAC. I know that a lot of time and work goes into preparing for these meetings, so I also want to thank the GMAC members and Subcommittee members for their service, and our presenters for joining us today. The GMAC’s recommendations have real impact and add value to not only the Commission, but also to the international policy dialogue. I especially want to recognize the GMAC’s leadership team for your continued stewardship of the GMAC, and all the Subcommittee workstream leads for their tireless efforts. We have a truly impressive group of leaders to examine the issues.

Of course, I want to acknowledge and thank my team: Harry Jung, the GMAC Designated Federal Officer, and Nicholas Elliot, the GMAC Alternate Designated Federal Officer, as well as Meghan Tente and Taylor Foy. And, as always, many thanks to all the CFTC staff in both the New York office and our DC headquarters who made the GMAC’s meeting today possible.

I will provide a brief update on the status of each of the GMAC’s 11 recommendations to date and potential next steps. I will also recognize the new members of the GMAC and its Subcommittees, and then provide an overview of today’s agenda and speakers.

The GMAC Continues to Deliver

The GMAC continues to support the growth of liquid and efficient markets and make great progress developing thoughtful recommendations and insightful work product to aid the CFTC, both U.S. and non-U.S. authorities, and indeed, all stakeholders in global markets and financial services.

The GMAC was first created in 1998 to handle the issues associated with globalization and access to markets. These issues remain critically important given the interconnected market environment, everchanging geopolitical dynamics, and emerging and innovative products and tools. Accordingly, global collaboration and coordination amongst authorities is critical to promoting regulatory cohesion and financial stability, and mitigating market fragmentation and systemic risk. That is why the GMAC’s mandate includes assessing and informing international standards.

Since it was relaunched, the GMAC has worked to ensure that global markets are well-functioning, promote market integrity and resilience, facilitate compliance, and foster innovation and growth. As the GMAC’s sponsor, I’m honored to help provide a public venue for preeminent industry experts and regulators to discuss and develop pragmatic solutions to global challenges. I hope we have built a union of minds brought together for a common purpose.

Status of GMAC Recommendations and Next Steps

First, I want to commend the GMAC for kicking off last year with a comprehensive stock-take of the most significant current and emerging issues in global markets and the financial system. This global stock-take informed the development of the GMAC’s work program and included input from policymakers, dealers, asset managers, liquidity providers, exchanges, trading facilities, clearinghouses, technology service providers, and end users. I particularly note that the GMAC’s work is based on data and observations from the markets that will support better policy outcomes.

In less than a year, the GMAC has adopted 11 recommendations to date on a variety of issues, including U.S. Treasury market liquidity, well-functioning repo and funding markets, exchange volatility controls, T+1 securities settlement, improved collateral management, central counterparty (CCP) default simulation, streamlining trade reporting data to monitor systemic risk, and a foundational digital asset taxonomy to facilitate alignment in regulation across jurisdictions.

These recommendations have provided data-driven and transparent resources for the CFTC and our counterparts around the world. Just last week, I was honored to present the GMAC’s recommendations at the International Organization of Securities Commissions (IOSCO) 49th Annual Meeting, and I note Chairman Behnam serves as IOSCO Vice Chair. The CFTC has long been a leader in various international fora. The degree of interest in the GMAC’s work speaks for itself.

Global Market Structure Subcommittee (GMSS)

GMSS Recommendation 1 – New Block and Cap Sizes

Appropriately calibrated block and cap sizes are vital to the proper functioning of derivatives markets, including price discovery and transparency. However, the CFTC’s new postinitial block and cap sizes that will require compliance starting July 1, 2024, may negatively affect market liquidity and could significantly raise trading and hedging costs for buyside market participants and end users such as pension and other retirement plans.

The GMAC recommends extending the compliance date for the postinitial block and cap sizes for all asset classes to at least December 4, 2024. The GMAC further recommends that, during the extension period, the Commission engages with market participants in discussions and analysis to ensure the postinitial block and cap sizes are appropriately tailored, including with respect to current market and macroeconomic conditions.

The CFTC recently issued a letter that will allow for further study including implications of decreased liquidity and access to markets. I believe that the GMAC’s presentations and recommendations were key, especially the market data and observations. I appreciate the support of Commissioner Mersinger, and Chairman Behnam’s pragmatic approach and consideration of this issue.

GMSS Recommendation 2 – Proposal to Add CCPs as Permitted Counterparties

Further alignment of SEC and CFTC regulations would support critical risk management functions that will promote well-functioning repo and funding markets. While CFTC rules impose customer protection requirements and permit a futures commission merchant (FCM) or derivatives clearing organization (DCO) to utilize repos to manage customer funds, an SEC-registered clearing agency is not a permitted counterparty under Rule 1.25(d)(2).

The GMAC recommends that the Commission allow a CCP that meets the definition of a “covered clearing agency” under SEC Rule 17-Ad-22(a)(5) to be designated a “permitted counterparty” pursuant to CFTC Rule 1.25(d)(2).

I’m pleased to note that I have discussed this recommendation with Chairman Behnam, and it will be considered for CFTC rulemaking given that this recommendation will facilitate implementation of the SEC’s Treasury clearing mandate.

GMSS Recommendation 3 – FICC-CME Customer Position Cross-Margining Structure

For two decades, the CFTC and the Securities and Exchange Commission (SEC) have approved cross-margining for Treasury securities transactions and Treasury futures, promoting the efficiency and well-functioning of the U.S. Treasury markets—the backbone of the global financial system.

The GMAC recommends the Commission make the benefits of cross-margining available to a broader range of sophisticated customers, including those customers that will be subject to the new SEC Treasury clearing requirements, as well as to all customers that voluntarily elect to clear Treasury transactions and will post margin.

This GMAC recommendation is being actively considered as part of the implementation of the SEC’s Treasury clearing mandate. I thank FICC and CME’s leadership on this issue. Both are members of the GMAC’s Global Market Structure Subcommittee and led this work.

GMSS Recommendation 4 – Endorsement of Futures Industry Association (FIA) Volatility Controls Mechanism Paper

The efficient management of financial market volatility is paramount. During recent crises in markets, such as during the COVID-19 pandemic, as well as in commodity markets, the Futures Industry Association (FIA) has noted the pivotal role volatility control mechanisms have played in preserving market integrity. Consequently, FIA engaged with global derivatives exchanges and market participants to explore the most effective ways to mitigate disruptions while ensuring transparent price discovery.

The GMAC recommends the Commission use the best practices as a tool for understanding exchange market risk controls and when engaging with global regulators and international standard setters.

This GMAC recommendation has been a beneficial resource to ensuring market integrity during periods of high market volatility, market stress, or other disruptions through effective application of exchange market risk controls and other volatility control mechanisms and sharing best practices across jurisdictions.

GMSS Recommendation 5 - Inclusion of U.S. Treasury ETFs as Eligible Initial Margin Collateral

The use of exchange traded funds (ETFs) that invest in U.S. Treasury bonds has dramatically increased in recent years. While standalone U.S. Treasury bonds can be used as initial margin (IM) collateral for uncleared swaps, ETFs that invest in them are not similarly eligible as collateral, despite being more diversified which can mitigate idiosyncratic risk.

During many historic volatile trading sessions, certain UST ETFs have acted globally as “shock absorbers,” providing real-time prices and liquidity. Most notably, during the bond market volatility in 2020, volatility increased in U.S. Treasury bonds as dealers’ balance sheets were constrained. During this time, many UST ETFs traded at tighter bid-ask spreads than their portfolio of underlying bonds. For example, dislocations in U.S. Treasuries caused the bid/ask spreads of “off-the-run” bonds with a maturity of 20+ years to widen to almost 20 times that of the iShares 20+ Year Treasury Bond ETF (TLT).

The inclusion of U.S. Treasury ETFs as eligible IM collateral under the CFTC Margin Rules for Covered Swap Entities would enhance the robustness and resilience of the collateral pipeline. This enhancement, driven by factors such as diversification, liquidity, efficiency, and market stability, could prove beneficial for end-users seeking a wider range of eligible IM, CSEs and the broader financial markets. Allowing UST ETFs as IM collateral could not only help safeguard CSEs from counterparty default, but also help reduce the overall risk in the financial system and limit the potential for contagion arising from uncleared swaps.

The GMAC recommends the CFTC expand the universe of liquid assets that can be posted as uncleared margin, specifically to include U.S. Treasury ETFs.

The CFTC has been considering various aspects of margin and eligible collateral requirements. This GMAC recommendation and associated market data and observations are timely given recent developments in Treasury markets, and have contributed to an informed analysis of appropriate collateral management practices.

Technical Issues Subcommittee (TIS)

TISS Recommendation 1 - Global Default Simulation

In November 2023, CCP Global conducted a global default simulation across CCPs. Global regulator support of the exercise was critical to its success. The default simulation was arranged in consultation and with input from regulators. It is critical the CFTC continue its support and valuable input, alongside its role in convening regulators and market participants.

The GMAC recommends the CFTC consider inclusion of lessons learned and best practices arising from such simulations into its capacity building programs with, especially, some emerging market regulatory homologues.

The CFTC, through the work of the Office of International Affairs, actively provides technical assistance to many other jurisdictions in the development of effective derivatives markets. CCP resilience, recovery, and resolution has been a top financial stability priority, and the GMAC recommendation has supported ongoing efforts to identify and mitigate systemic risk.

TIS Recommendation 2 – MMFs as Eligible Collateral

The CFTC’s proposed rule amendment to remove the asset transfer restriction from money market funds (MMFs) used as eligible collateral for noncleared margin will harmonize the parameters for MMF use with the UK and resolve one of the impediments to the use of MMFs between the U.S. and European Union (EU). The proposed rule will also allow the CFTC to selfalign MMFs with its eligible collateral requirements for cleared margin, per CFTC Rule 1.25, which governs the investment of customer money by FCMs without similar asset transfer restrictions.

The GMAC recommends the Commission: (i) finalize the proposed rule amendment; (ii) encourage the U.S. Prudential Regulators to adopt a corresponding amendment to their noncleared margin rules, including allowing third country funds; and (iii) encourage European Union (EU) policy makers to remove the third country fund restriction for eligible collateral from their noncleared margin rules.

The CFTC currently has a pending rulemaking proposal on MMFs as eligible collateral for non-cleared margin. The GMAC recommendation has provided a key perspective on cross-border harmonization of MMF treatment.

TIS Recommendation 3 – Improve Trade Reporting for Market Oversight, Streamline Potential 40% Increase in CFTC Reportable Data Elements

The Commission is currently amending its Part 43 and Part 45 swap data reporting requirements to potentially add nearly 50 additional reportable fields on top of the currently required 128 data elements that were just implemented in December 2022. The potential 40% increase in data reporting elements distracts from optimizing analysis and use of the recently expanded data set and creates further obstacles and uncertainty for meaningful global aggregation and analysis of trade repository data. Further, an ad hoc approach to additional data reporting elements unnecessarily increases costs.

The GMAC recommends several steps to improve data reporting elements which will (i) advance analytical tools to optimize use of the current, recently expanded, data set; and (ii) focus on impediments to data sharing, including the alignment of the validations and requirements for critical data elements (CDE) fields and global identifiers.

This GMAC recommendation informed the CFTC’s recent Part 43 and Part 45 rulemaking proposal, and was then submitted to the public comment file. The CFTC is working to finalize this proposal.

TIS Recommendation 4 – Improve Trade Reporting for Market Oversight and Improving Data Sharing and Systemic Risk Analysis

Regulators, including the CFTC, have implemented global trade reporting harmonization efforts to enable data amalgamation to facilitate regulatory data usage across jurisdictions. However, there are nondata related impediments that could prevent data sharing, thus undermining the value of these significant projects.

The GMAC recommends the Commission facilitate discussions with key regulators (market and prudential) on the desire to share data elements and agree upon the Memoranda of Understanding (MOU) needed to allow such activity, starting with U.S. and then prioritize other G20 regulators where there is significant overlap.

There are several international, major trade reporting initiatives at the FSB and IOSCO, among others, to improve trade reporting for market oversight and improve data sharing and systemic risk analysis consistent with this GMAC recommendation. The CFTC is actively participating in these ongoing initiatives.

TIS Recommendation 5 - Publication of Resource Document to Support Transition to T+1 Securities Settlement

As the United States prepares to transition to next-day trade settlement (T+1) for securities in May 2024, the Subcommittee crafted a resource document to support market participants. The document details products covered by the transition to T+1, timelines for transition in various markets, and the benefits to the transition. The document also highlights the implications T+1 has for various markets – particularly foreign exchange markets, and discusses its impacts on transaction processes for various products, including cross-border impacts. Further, it provides a list of resources to help firms prepare for the transition.

This GMAC recommendation helped to prepare the U.S. securities markets, and other impacted asset classes and products, for a smooth T+1 securities settlement transition completed over the Memorial Day holiday weekend. It provided resources for aspects such as foreign exchange (FX) markets and cross-border transactions.

Digital Asset Markets Subcommittee (DAMS)

DAMS Recommendation 1 - Adoption of an Approach for the Classification and Understanding of Digital Assets

A clear, consensus-driven approach to classifying assets and the functions they serve underpins robust markets and effective regulation. The evolving digital asset ecosystem has led many to develop proprietary taxonomies to classify digital assets and their related technology. In recognition of this progress, the Subcommittee has engaged digital asset stakeholders across the broader digital asset ecosystem to build a common approach for the classification and understanding of digital assets.

This approach aims to set out consistent language for participants in the digital asset ecosystem to promote innovation, identify and address risk considerations, and enable effective regulatory understanding. With this objective in mind, the approach builds upon the considerable classification efforts of global prudential standard setters and regional authorities, including the Bank for International Settlements, the Financial Stability Board and others.

The GMAC recommends this approach be considered an initial basis for a consensus-driven, functional taxonomy. However, as the digital asset ecosystem continues to evolve, so too will the terminology used to classify it. The Subcommittee will reassess any future developments to provide further recommendations to this approach, based on the guidance of its members. The Subcommittee seeks to support effective rules and regulations for digital assets, and recommends continued collaboration between industry, standard-setting bodies, and the regulatory community.

The first-of-a-kind GMAC digital asset taxonomy framework provides valuable foundational guidelines to further advance the discussion and promote U.S. regulatory clarity, and was extensively vetted by stakeholders such as regulatory authorities, financial institutions, asset managers, market infrastructures, and service providers.

New GMAC and Subcommittee Members

I also want to welcome a few new faces to the GMAC and our Subcommittees. We've added a few new experts to our ranks since we last met.

On the GMAC, we’ve added Chuck Mack, Head of Strategy for North American Markets at Nasdaq, and Derek Kleinbauer, President of Bloomberg SEF. On the Digital Asset Markets Subcommittee, we’ve added Mo Shaikh, Co-Founder and CEO of Aptos Labs; Terrence Dempsey, Senior Vice President and Head of Product Strategy at Fidelity Digital Assets; Ian Grieves, Vice President for Product & Strategy at Cboe; and Chen Arad, Co-Founder & Chief External Affairs Officer at Solidus Labs.

Welcome, and I look forward to your contributions to the GMAC.

Today’s GMAC Meeting

Today’s meeting will continue to build on the significant progress we’ve already made. We’ll start with a presentation from the Global Market Structure Subcommittee on the impact the proposed U.S. implementation of Basel III endgame’s bank capital requirements would have on end users who rely on cleared derivatives markets. Providing this timely presentation will be Kyle Glenn, Vice President for Government Relations at FIA, and Thane Twiggs, Chief Compliance Officer for Risk Management at Cargill.

We’ll then have a panel discussion on Swap Execution Facilities. Our esteemed panelists are:

  • Thomas Pluta, President of Tradeweb;
  • Scott Fitzpatrick, CEO of Tradition SEF; and
  • Adam Lister, Interest Rate Swaps Electronic Trading Product Manager at Bloomberg

Tara Kruse will lead our Technical Issues Subcommittee’s discussion on its proposed recommendation on Variation Margin Processes in Non-Centrally Cleared Markets. Tara is the Global Head of Infrastructure, Data, and Non-Cleared Margin at ISDA.

Following a brief break, we’ll receive an update on global commodity markets from Derek Sammann, Senior Managing Director and Global Head of Commodities, Options & International Markets at CME Group.

Finally, we’ll receive a presentation on the CFTC’s international engagement from Andrea Musalem, Associate Director of the Commission’s Office of International Affairs. We’ll close out today’s meeting with updates from each of the Subcommittees on ongoing workstreams and future agenda items.

I’m very much looking forward to these timely presentations and the consideration of the latest round of recommendations. Once again, thanks to our speakers and all members for being here and making the GMAC such a success.

The GMAC and the CFTC’s Mission

Today highlights that the CFTC is first and foremost a market regulator, and I’m pleased we’re getting back to basics with very important presentations and discussion of market characteristics, trading activity, and market fundamentals driving both, as well as capital and margin requirements. I look forward to the insights that will be shared on ways to enhance liquidity in markets, which could be the basis for additional GMAC initiatives. This is the bread and butter of the CFTC’s core mission to oversee derivatives markets and ensure they are well-functioning. This doesn’t get the headlines, but it is absolutely our day job and I appreciate Chairman Behnam’s focus on this. I especially thank the CFTC’s Office of International Affairs for their presentation and international leadership. Thank you all.