Opening Statement of Commissioner Brian Quintenz before the Open Commission Meeting

December 10, 2019

Good morning. Mr. Chairman, thank you for calling this meeting.  I support all three rulemakings before the Commission today.

Proposed Rule: Capital Requirements for Swap Dealers and Major Swap Participants – Reopening the Comment Period and Requesting Additional Comment

I have long said that finalizing capital requirements for swap dealers (SDs) and futures commission merchants (FCMs) is perhaps the most consequential rulemaking of the post-crisis reforms to get right.

The financial crisis exposed serious vulnerabilities in the financial system – uncollateralized, opaque, bilateral exposures which, under the right circumstances could have, and did, cause a panic and liquidity freeze due to concerns around that counterparty credit risk.  This panic, in my opinion, transformed a significant recessionary event into the crisis as we know it.  Importantly, since the financial crisis, global regulators and certainly those in the U.S. have implemented many policy reforms, like central clearing requirements and margin for uncleared swaps, designed to bring transparency to those exposures.

I have long lamented prior regulators’ implementation of the important swaps market regulatory reforms by viewing them in isolation of each other – calibrating each to try to think it alone could have prevented the crisis.  In fact, the elegance of the reforms is that they work together and build upon each other.

Therefore, in my view, it is wrong to think of capital in terms of what levels should have existed during the financial crisis that could have prevented it.  Very few capital regimes could have provided the market with enough certainty, given the size, nature, and opacity of these exposures, to remove the possibility of the panic, and the capital levels which could have done so would have rendered the entire swaps market obsolete and uneconomic.  Therefore, regulatory capital regimes implemented to respond to the last crisis need to respect the increased transparency and certainty which other reforms have already brought to the market.  I believe we are asking the right questions in this reopening to respect that progress in calibrating our own capital regime appropriately.

The final pillar of our Dodd-Frank Act reforms, capital ensures that firms are able to continue to operate during times of economic and financial stress by providing an adequate cushion to protect them from losses.  Just as important as the safety and soundness of individual firms, capital is designed to give the marketplace confidence that any given firm has a high probability of surviving the next crisis.

Capital requirements also create important incentives that drive market behavior.  The cost of capital may be the most determinative factor in a firm’s decision to remain, or become, a swap dealer, or to continue to provide clearing services to clients, in the case of an FCM.  If capital costs are too expensive, firms will restrict certain business activities, end unprofitable business lines, or, in some cases, exit the swaps or futures markets altogether.  As a result, over time, the swaps and futures markets would become less liquid, less accessible to end users, more heavily concentrated, and less competitive.  These are not the hallmarks of a healthy financial system.

Therefore, appropriate capital levels are directly linked to both the health and vibrancy of the derivatives markets and to the sustainability of the entire financial system more broadly.

To promote a vibrant derivatives market, I believe it is critically important that the CFTC finalize a capital rule that is appropriately calibrated to the true risks posed by an SD’s or FCM’s business.  I am pleased to support the re-opening and request for comment before us today.  This document solicits comment on the key issues the Commission must get right in the final rule to ensure that capital requirements are appropriate and commensurate to a firm’s risk.  I appreciate that market participants have commented on two prior capital proposals and the Commission will continue to consider all past comments in moving forward with a final rule.  Nevertheless, I hope commenters use this opportunity to provide the Commission with much needed data and quantitative analysis demonstrating the impact that various choices contemplated in this proposal would have on a firm’s minimum capital level – and, by extension, on that firm’s ability to participate in the market and adequately service clients.  Data will be vital to the Commission’s ability to evaluate various capital alternatives and identify those alternatives that would render certain business lines or activities uneconomic.  It will also be vital to the Commission’s assessment that the capital requirements established ensure the safety and soundness of the firm.

I welcome comments on all aspects of the reopening, but there are a few areas I am particularly interested in hearing from commenters.

The eight percent risk margin amount.  We heard from many commenters that, of all the alternatives, the eight percent risk margin amount would act not as a capital floor as intended, but rather as the primary driver of firms’ capital requirements and as a potential binding constraint on their businesses.  Whereas FCMs are currently required to include in their minimum capital requirement eight percent of the margin required for their futures and cleared swaps customer positions, the 2016 proposal expanded the eight percent risk margin amount to include proprietary futures, swaps and security-based swap (SBS) positions for FCMs and for SDs electing the net liquid asset capital approach.  In addition to these proprietary positions being included in the risk margin amount, these FCMs and SDs would also be subject to capital charges on these proprietary positions.  I hope commenters can provide us with data showing the capital costs of including proprietary positions, for the first time, in an FCM’s risk margin amount.  To the extent possible, it also would be helpful to see how different risk margin percentages, or a different scope of products included in the margin amount, impacts the minimum capital requirements for an actual or hypothetical portfolio of positions.  I would also be interested to hear from commenters about whether it makes sense to remove the risk margin amount altogether for standalone SDs electing the net liquid asset approach or bank-based approach, given the other minimum capital level requirements in the proposal.

Model approval process.  The Commission must have a workable model approval process.  I am interested to hear commenters’ views on how the Commission or NFA should review or accept capital models that have already been approved by another regulator.  Should such models be granted automatic or temporary approval, while the Commission or NFA conducts its own review?

In closing, I have often worried that the accepted mantra on regulatory capital requirements has become “the higher, the better.”  Respectfully, I disagree.  There is a direct tradeoff between the amount of capital regulators require firms to hold to ensure firms’ resilience and viability, and the amount of available capital firms have to deploy in financial markets to support the market’s ongoing liquidity and health.  There is a balance necessary between capital levels that protect firms from losses on certain products, and capital levels that allow firms an economic benefit in servicing their customers’ risk management needs through those products.  I hope the feedback we receive from commenters on this reopening helps the Commission establish appropriate capital requirements that are commensurate to a firm’s risk and not detrimental to its clients.  I would also like to thank the staff of the Division of Swap Dealer and Intermediary Oversight for answering my questions and incorporating many of my comments into this document.

Proposed Rule:  Amendments to the Exemption from the Swap Clearing Requirement for Certain Affiliated Entities Regarding Alternative Compliance Frameworks for Anti-Evasionary Measures

I support today’s proposal to codify how affiliated swap counterparties have, for the past six years, complied with an important provision of one of the Commission’s exemptions from the swap clearing requirement.  The Commission’s swap clearing requirement has accomplished the important task of requiring financial institutions to centrally clear the overwhelming majority of the most commonly-traded interest rate swaps and credit default swaps through CFTC-supervised clearing organizations.  According to a Financial Stability Board (FSB) report published in October, at least 80% of interest rate swaps and credit default swaps executed in the U.S. are now cleared.[1]  Central clearing, through the posting of initial and variation margin with a clearinghouse, has greatly reduced counterparty credit risk in the swaps market, helping to support confidence in the financial markets.  However, carefully considered exceptions should ensure that uncleared products remain economically viable to provide market participants with flexibility in managing risks.  For example, entities belonging to the same corporate group regularly execute swaps for internal risk management purposes, and these swaps do not incur the same risks as those executed with unaffiliated counterparties.[2]  The Commission has also created exceptions to the swap clearing requirement for commercial end-users, financial institutions organized as cooperatives, and banks with assets of $10 billion or less.  As an additional point, I look forward to the Commission finalizing last year’s proposed exemptions for bank holding companies and savings and loan companies having consolidated assets of $10 billion or less and for community development financial institutions.

I believe the proposal before the Commission today strikes an appropriate balance between guarding against evasion, on the one hand, and providing flexibility for cross-border swaps activity on the other.  When affiliated financial counterparties exchange variation margin on all of their swaps with one another, on a worldwide basis, the risk that a U.S. firm can amass a critical amount of uncollateralized exposure abroad is greatly reduced.  At the same time, the proposal does not disadvantage U.S.-based institutions competing with foreign institutions located in jurisdictions whose swap clearing requirements are narrower in scope than the Commission’s.  I believe that today’s proposal functions rationally with the Commission’s rules for margining uncleared swaps on a cross-border basis, including in the context of inter-affiliate transactions, and I look forward to comments on this topic.

In addition, I note that today’s proposal would simplify the existing inter-affiliate exemption to reflect current market practices and eliminate complicated provisions that may never have been relied upon.  I hope the Commission’s next rulemakings similarly rationalize rules so that industry’s compliance becomes less burdensome and costly.


[1] FSB OTC Derivatives Market Reforms: 2019 Progress Report on Implementation (Oct. 2019),
(Appendix C, Table J),


[2] See the Commission’s original proposed inter-affiliate exemption, Clearing Exemption for Swaps Between Affiliated Entities, 77 Fed. Reg. 50,425, 50,426-50,427 (Aug. 21, 2012).