SPEECHES & TESTIMONY

Opening Statement of Chairman Heath P. Tarbert Before the Global Markets Advisory Committee Meeting

September 24, 2019

Good morning, and thank you all for being here.  I would especially like to thank Commissioner Stump and her staff for convening this meeting of the Global Markets Advisory Committee (GMAC).  My thanks also to Andrée Goldsmith, the Designated Federal Officer for the GMAC, for organizing the meeting.  And of course, thank you to the Committee members for traveling from near and far and taking the time to share your valuable perspectives.

The topics for today’s meeting are vitally important.  Coherent and consistent oversight of central counterparties (CCPs) and margin for uncleared swaps is integral to robust and resilient derivatives markets.

EMIR 2.2                                                                                                                                           

There has been a great of deal of discussion and concern regarding implementation of EMIR 2.2 in Europe and the finalization of the tier 2 rules under EMIR 2.2.  The CFTC remains committed to working with the European Commission, the European Securities and Markets Authority (ESMA), and affected CCPs to maintain well-regulated, safe, efficient, and liquid global derivatives markets.

As currently envisioned, EMIR 2.2 could result in one or more U.S. CCPs being designated systemically important to the EU financial system.  Such a “tier 2” designation seemingly would, at a minimum, subject any such U.S. CCPs to direct supervision by ESMA and, at the extreme, require the relocation of any EU-derived business to an EU-based entity.  Direct supervision of U.S. CCPs by European regulators has the potential to introduce fragmentation into the U.S. financial markets through inconsistent and contradictory risk management requirements. [1] It also has the potential to increase systemic risk within the U.S. financial system.

Regulators undoubtedly have an interest in the potential for third-country CCPs to pose a systemic risk to their local jurisdiction.  However, I believe international regulators should create a regulatory structure that relies on cooperation and deference, without asserting extraordinary, extraterritorial jurisdiction over third-country markets.

I strongly encourage EU authorities to finalize EMIR 2.2 in a manner that strengthens financial stability while advancing home regulator deference so that CCPs and their members are not subject to conflicting and inconsistent regimes.

In the spirit of productive cooperation, earlier this month CFTC staff and I held a meeting with representatives from the European Commission to discuss cross-border regulatory issues related to derivatives.  We reaffirmed our mutual commitment to transatlantic cooperation among regulators.  We further agreed to continuing discussions aimed at achieving a practicable approach that provides for effective supervisory oversight on both sides of the Atlantic.  I look forward to continuing this international engagement with the benefit of input from my fellow Commissioners, CFTC staff, and this advisory committee.

Margin for Uncleared Swaps

The issue of margin for uncleared swaps offers another opportunity for regulatory cooperation, both internationally and with our fellow U.S. federal financial regulators.

On September 17, the U.S. federal banking regulators followed the Basel Committee on Banking Supervision and the International Organization of Securities Commissions[2] in proposing revisions to their margin rules that would extend by one year the compliance deadline for “phase five” counterparties, i.e., those with the smallest portfolios of uncleared swaps.[3]  CFTC staff has drafted a proposal to amend the corresponding deadline in the CFTC’s own rules.  I expect the Commission to vote in the near future on whether to issue this proposal.

These extensions would recognize that the final implementation phase will subject many relatively small entities to initial margin documentation and custodial and operational requirements for the first time.[4]  In the United States alone, this phase will expand the number of in-scope entities from 40 to over 700 and could require documenting and operationalizing nearly 7,000 initial margin relationships.[5]  Many newly in-scope counterparties need additional time to ensure that these arrangements are in place and operating smoothly for each such initial margin relationship.

Accordingly, I hope the Commission will join BCBS-IOSCO and our fellow U.S. regulators in granting a corresponding extension for phase five counterparties subject to our margin rules.

Conclusion

I look forward to hearing Committee members’ views on these important issues.  Your perspectives will greatly inform the Commission and staff as we continue to work in cooperation with our regulatory counterparts at home and abroad.

 

[1] Known inconsistencies include:

  1. EMIR requires 95% reinvestment of cash collateral not held at central banks, while U.S. rules do not.  Under U.S. rules, the cash collateral is available as a fungible, loss-absorbing resource.  EMIR’s requirement would thus disrupt the normal operation of U.S. CCPs. 
  2. Under EMIR, CCPs cannot accept letters of credit for initial margin.  Under U.S. rules, CCPs can and do accept letters of credit for initial margin for futures.  This difference would particularly affect agricultural and electrical power producers.
  3. EMIR requires segregation of margin accounts by customer, whereas U.S. regimes (e.g., “legally separate, operationally commingled” requirements and the Bankruptcy Code) do not. 
  4. Margin requirement:  2-day net (EMIR) vs. 1-day gross (U.S.).
  5. Most concerning is the potential for a CCP needing to answer to multiple authorities in a crisis.

[2] BCBS-IOSCO, Margin Requirements for Non-Centrally Cleared Derivatives 23 (July 2019).  Implementation of the margin rules is phased according to the average daily aggregate notional amount (AANA) of a counterparty’s uncleared swaps portfolio.  Under the BCBS-IOSCO approach adopted in the federal banking regulators’ proposal, the compliance deadline for “phase five” counterparties, i.e., those with an AANA between $8 billion and $50 billion, would be extended from September 1, 2020 to September 1, 2021.

[3] Federal Reserve Board, Office of the Comptroller of the Currency, Federal Deposit Insurance Corporation, Farm Credit Administration, and Federal Housing Finance Agency, Margin and Capital Requirements for Covered Swap Entities (Sept. 17, 2019) (notice of proposed rulemaking). 

[4] BCBS-IOSCO and the federal banking regulators recognize that the margin rules “should be phased in so that the systemic risk reductions and incentive benefits are appropriately balanced against the liquidity, operational, and transition costs associated with implementing the requirements.” BCBS-IOSCO, supra note 2, at 23; see also Federal Reserve Board et al., supra note 3, at 38 (adopting the extended BCBS-IOSCO timeline).

[5] Richard Haynes, Madison Lau, & Bruce Tuckman, Office of the Chief Economist, CFTC, Initial Margin Phase 5 (Oct. 2018), https://www.cftc.gov/PressRoom/PressReleases/7834-18.