SPEECHES & TESTIMONY

Opening Statement of Commissioner Brian Quintenz before the CFTC Global Markets Advisory Committee Meeting

September 24, 2019

Thank you Commissioner Stump for convening today’s meeting of the Global Markets Advisory Committee (GMAC).  Today’s meeting has a robust agenda, including exploring some of the current challenges firms are facing during the implementation of two significant derivatives regulatory matters: uncleared margin regulations and EMIR 2.2.  I would like to thank all of the presenters and Committee members for their participation and engagement.

Implementation of Uncleared Margin Rules

The margin framework for uncleared swaps developed in 2013 by the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) established staggered compliance dates.  Under this framework, by September 1, 2020, all covered swap entities with counterparties that are swap dealers or financial end users with a material swap exposure exceeding a notional threshold of $8 billion will be required to comply with initial margin requirements.[1]  This final phase of implementation, also known as Phase 5, will bring a significant number of counterparties into scope for initial margin requirements.

Recognizing the operational challenges associated with Phase 5 implementation, BCBS and IOSCO recently revised the uncleared margin framework to include an additional implementation phase.  Under the revised approach, the compliance date for smaller entities with average daily aggregate notional amounts between $8 billion and $50 billion would be extended for an additional year until September 1, 2021.  Counterparties with average daily aggregate notional amounts between $50 billion and $750 billion would continue to be subject to the original Phase 5 compliance deadline of September 1, 2020.[2]  The banking regulators have recently proposed regulations incorporating this extended compliance period for smaller firms.  I expect that the CFTC will similarly follow suit in the upcoming months.

Firms coming into compliance with initial margin requirements will also be subject to a number of new regulatory obligations, including regularly calculating initial margin amounts to determine if and when margin must be exchanged.  In order to streamline this exercise, the CFTC issued guidance this past July clarifying that no initial margin documentation must be entered into prior to reaching the $50 million initial margin threshold.  The banking regulators have included guidance consistent with this approach in their recent margin proposal.  I am interested to hear from our panelists about the challenges and possible solutions firms will face during these final phases of uncleared margin implementation.

EMIR 2.2 and ESMA Consultation

Today’s final panel will focus on an issue that I believe is critical to the health and integration of the global derivatives markets: when it may be appropriate for a third-country regulator to exercise authority over another jurisdiction’s central counterparties (CCPs).  ESMA recently published several documents for public consultation regarding when it would extend the authority provided to it in EMIR 2.2 over CCPs located outside of the European Union (third-country CCPs).  These provisions govern when a CCP organized outside of the European Union may clear for EU citizens.  EMIR 2.2 establishes a two-tier system for third-country CCPs.  Where ESMA determines that a third-country CCP is not systemically important for the financial stability of the European Union, it will be classified as a Tier 1 CCP, and existing recognition conditions for clearing will apply.  Third-country CCPs that ESMA finds to be systemically important for the financial stability of the European Union or one or more of its member states will be classified as Tier 2 CCPs.  In order to continue offering clearing services into the European Union, Tier 2 CCPs will be required to comply with some of, or all of, EMIR’s requirements, unless ESMA grants substituted compliance with the CCP’s local regulatory regime.

ESMA has proposed a set of 14 “indicators,” as well as numerous subfactors, that it will use to determine whether a third-country CCP should be classified as Tier 2.  Considerations include the ownership, business and corporate structure of the CCP; details of the CCP’s clearing services provided to each EU clearing member broken out by financial instrument, regardless of whether the instruments are denominated in EU currencies; and broad risk factors with no clear nexus to the European Union, including IT risks, third-party outsourcing risks, and legal risks.  In explaining each of these factors, ESMA lists many qualitative criteria, but not a single quantitative metric to assess whether a CCP is systemically significant or when its co-regulation of the CCP with a home regulator is justified.

This is not an exercise in “big data” analytics, where a theoretical framework is constructed and thousands or millions of data points are run through quantitative tests to arrive at an unknown result.  Given the concentrated nature of the clearinghouse ecosystem, the results of any sorting, tiering, or screening test will be known contemporaneously with the test’s construction.  Said another way, it is impossible to construct such a tiering methodology while remaining blind to its ultimate results.

Therefore, we should judge this tiering exercise on its results. There are results which create a positive regulatory and market framework for the appropriate supervision of CCPs that operate across jurisdictions, and there are results which would create very negative regulatory and market consequences.  The earlier that I and my colleagues receive clarity on the outcomes of this tiering process, the more likely it is we can all work to avoid any negative outcome. Providing this clarity earlier rather than later is critical to ensuring that the CFTC, ESMA and the European Commission continue to have a productive engagement regarding EMIR 2.2 implementation.

I look forward to hearing the perspectives of our distinguished panelists on these important issues.

In closing, I would like to reiterate my thanks to all of today’s panelists and the GMAC membership for their participation, as well as to Commissioner Stump for organizing this meeting.

 

[1] Material swap exposure for an entity means that the entity and its margin affiliates have an average daily aggregate notional amount of uncleared swaps, uncleared security-based swaps, foreign exchange forwards, and foreign exchange swaps with all counterparties for June, July, and August of the previous calendar year that exceeds $8 billion.

[2] The fourth compliance date, September 1, 2019, brought into scope covered swap entities and covered counterparties exceeding $750 billion of average daily aggregate notional amounts.