Statement of CFTC Chairman Heath P. Tarbert in Support of Extending Relief for Initial Margin Requirements for Uncleared Swaps

March 18, 2020

Last night, the Commission voted unanimously to finalize a one-year extension of the initial margin compliance deadline for market participants with the smallest uncleared swaps portfolios.

Overview

I am committed to ensuring that initial margin remains a core risk-mitigating component of the global uncleared swaps market.  As of now, the CFTC’s initial margin requirements apply to the biggest 40 swap dealers, thereby covering approximately 97 percent of the U.S. portion of this global market.[1]

In tackling the remaining 3 percent of the U.S. market, phase five of our initial margin requirements would have expanded the number of in-scope entities from 40 to over 700 and required documenting and operationalizing nearly 7,000 initial margin relationships.[2]  Recognizing the operational complexity of this undertaking, the CFTC along with other regulators here in America and around the world proposed adding a sixth compliance phase, extending the compliance deadline by one year for entities with the smallest uncleared swaps portfolios.  There is universal agreement that this extension will mitigate rather than exacerbate risk.

This vote marks the ninth final rule passed by the Commission since I took office last July.  This rapid pace of progress would not be possible without the dedication of my staff, my fellow Commissioners and their staffs, and the agency staff as a whole.

But this is more than another feather in the cap of the Commission.  Approval of this rule is also one of nearly a dozen concrete actions the CFTC and its staff will have taken by week’s end to address the spread of the coronavirus and its effect on financial markets.

Integration with the CFTC’s Coronavirus Response

I recently laid out five key objectives for the CFTC to address this crisis:[3]

1. monitoring derivatives markets and their participants;
2. using our regulatory framework to promote orderly and liquid markets;
3. responding swiftly to changing conditions with practical, targeted relief;
4. communicating consistently and transparently with all stakeholders; and
5. maintaining our commitment to advancing strategic policy goals.

Providing extended relief for initial margin requirements for uncleared swaps clearly fits within the third objective—responding swiftly to changing conditions with practical, targeted relief.  Just as market participants must be committed to following the rules, the CFTC is committed to providing targeted relief where necessary during this historic period of market volatility and uncertainty.

Indeed, this rule gives many buy-side market participants needed time to put required custodial arrangements and documentation in place, which is becoming even more challenging now that many firms’ resources have been appropriately redirected to coronavirus response efforts.

We continue actively encouraging registrants to maintain an open dialogue with us to identify relief or other assistance needed to help ensure the industry can support orderly and liquid markets in the face of the coronavirus.

Importance of the U.S. Derivatives Markets

The real economy—and the everyday Americans who are part of it—depend on our derivatives markets to hedge their risks.  For example, American farmers beginning to plant their spring crops must be confident they can rely on orderly and liquid markets to hedge price risk.  Energy producers must be able to manage the risks of geopolitical developments affecting global supply and demand.  It is especially important in times of immense volatility that our markets operate as intended.

The principles and rules underlying the CFTC’s regulatory regime were developed to promote resilience in stressed market conditions such as those we are currently experiencing.  These principles and rules work, but only if market participants comply with them.  And we will continue to work with stakeholders to adapt these tried and true principles, as needed, to changing conditions.  Simply put, we stand ready to promote the continued resilience of the U.S. derivatives markets on which our nation and much of the world depends.

Conclusion

We face difficult and uncertain times. But I believe the CFTC, and the financial community more broadly, are equal to the challenge.  No matter what the world throws at us, the CFTC will continue to focus on its unique and important mission.  We have a tremendously dedicated staff who are rising to this moment.  The CFTC welcomes further engagement with stakeholders on any assistance the Commission can provide as we weather these challenging times together.
 

-CFTC-

Statement of CFTC Commissioner Brian D. Quintenz on Current Market Dynamics and Commission Actions Related to COVID-19

March 18, 2020

The CFTC is closely monitoring markets, participants, intermediaries, and infrastructure in response to the COVID-19 pandemic.  The U.S. financial markets remain the deepest and most liquid in the world, and the U.S. derivatives markets have provided enormous opportunities for businesses and industries to manage and hedge many of their commercial, economic, and financial exposures during this critical time.  It is absolutely imperative that these markets continue to be open and function as normal as possible to perform their imperative risk transfer function.  In the past few weeks, we have witnessed the resiliency of the cleared futures and swaps markets, with record volumes and tens of billions of dollars in margin payments, dwarfing what was exchanged immediately after Brexit, completed without default or delay.

Each of the agency’s divisions is in constant communication with market participants, clearing members, exchanges, and clearinghouses, to ensure market infrastructure continues to function.  The Division of Market Oversight’s Market Intelligence Branch provides intra-day updates to the agency on significant market events across a wide range of products, including Libor-OIS spreads, IG and HY CDX spreads, equities futures levels and any related trading halts, agricultural products and the entire energy complex.  We continue to closely monitor the situation in real-time and stand ready to work with affected parties to minimize market disruption and unnecessary burdens.

In that vein, the Commission, under the strong, thoughtful leadership of Chairman Heath P. Tarbert, has taken action to provide targeted relief, where appropriate, from specific Commission regulations that are particularly onerous or even impossible to comply with due to social distancing, the execution of business continuity plans, or other preventative measures.[1]

In addition to supporting the issuance of regulatory relief necessary for firms to continue to provide services to their clients or access the derivatives markets, I also support the Commission’s final rule extending the compliance schedule for uncleared margin requirements to September 1, 2021 for entities with smaller average daily aggregate notional amounts of activity.  Recognizing the operational challenges associated with phase 5 implementation, BCBS and IOSCO revised the uncleared margin framework to include an additional implementation phase in July 2019.  The CFTC’s own Office of the Chief Economist noted that the onset of phase five under the current schedule would have brought approximately 700 entities into our margin regime, implicating around 7,000 relationships that would have to be negotiated to manage initial margin arrangements.[2]  I am pleased that the agency, consistent with this revised international framework, is avoiding any potential market disruption that could have occurred due to the practical, operational difficulties caused by a significant number of counterparties needing to begin posting and collecting margin at the same time.  Providing these smaller market participants with additional time to come into compliance will facilitate a smoother, orderly transition for the market into the uncleared margin regime. 

-CFTC- 

Statement of Commissioner Rostin Behnam on Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants

March 18, 2020

I vote to approve the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) decision today to extend the compliance schedule for the posting and collection of initial margin (“IM”) by swap dealers (“SDs”) and major swap participants (“MSPs”) for which there is no prudential regulator (collectively, “covered swap entities”) under the CFTC Margin Rule, 17 CFR 23.160, which implements section 4s(e) of the Commodity Exchange Act (“CEA”).[1]  As a seminal part of the policy response following the 2008 financial crisis, Section 731 of the Dodd-Frank Wall Street Reform and Consumer Protection Act[2] added section 4s(e) requiring the adoption of rules establishing minimum initial and variation margin requirements for all uncleared swaps entered by covered swaps entities.   

Among many universal commitments established by global leaders in the 2009 G20 Communique,[3] margin requirements for uncleared swaps remain a critical component of financial reform, specifically within the global derivatives markets.  As we learned during the financial crisis, margin provides confidence in times of market stress and volatility by ensuring that collateral is available to offset counterparty losses.   

Right now, we are collectively enduring uncertainty as a result of Covid-19.  As financial leaders are taking action and providing responses intended to address market stress, our progress is being tested as we operate within the new realities of communication and the work environment.  We cannot hesitate in our efforts to preserve market interests and protect customers and market participants in a timely, decisive manner.  It remains critically important that we ensure market continuity, transparency, and resiliency as we work towards normalcy.  

Today’s amendments align implementation of the CFTC Margin Rule with the framework issued by the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”).[4]  The amendments represent a cohesive, data-driven effort by the staffs of the CFTC, the Prudential Regulators—who have proposed similar amendments to the margin implementation schedule for SDs and MSPs subject to their regulations[5]—and international counterparts through the BCBS/IOSCO Working Group on Margining Requirements (“WGMR”) towards regulatory harmonization with respect to margin for uncleared swaps.   

Implementing the margin requirements for uncleared swaps is a challenge we have faced collectively.[6]  As global harmonization is a key hallmark of the 2009 G20 reforms, ensuring we remain vigilant to risks and responsive to real-world concerns articulated by market participants as we work together towards these feats of regulatory engineering will serve us all well into the future.  I commend the work of the our CFTC staff in demonstrating its analytical expertise in both validating the need for the sixth phase of compliance for certain smaller entities, and analyzing the risks of requiring such entities to remain in phase 5.   

The extension of the compliance schedule for initial margin requirements for an additional year will accommodate roughly 700 entities and 7,000 relationships.  While that may seem monumental, the CFTC’s Office of Chief Economist estimates that these relationships represent a relatively small amount of swap activity; approximately three percent of the total average daily aggregate notional amounts of uncleared swaps and certain other financial products across all the compliance phases.[7]   

I believe it is important to highlight that today’s amendments seek to address transition risks by mitigating potential market disruptions due largely to limitations of service providers and related operational burdens associated with those approximately 7,000 relationships.  It remains my expectation that the large number of covered entities who will now fall into the sixth phase of compliance will work diligently over the next year and a half and that with the additional time and a clear demand for services, market participants and the entities they engage will focus resources on compliance.  

To the extent commenters identified additional and potentially significant implementation challenges, I appreciate CFTC staff’s ongoing commitment to monitoring these and other issues as they evolve.  Our open engagement and willingness to address appropriate concerns is a hallmark of our agency, and I believe it is one our greatest strengths.  We should continue to maintain our high standards as we move forward in any additional targeted, strategic modifications to the CFTC Margin Rules and others.   

-CFTC- 

Concurring Statement of Commissioner Dan M. Berkovitz on Final Rule Extending Uncleared Swap Margin Deadline for Financial Entities with Small Swap Portfolios

March 18, 2020

I concur with issuing the final rule to extend by one year the initial swap margin compliance deadline for financial entities with smaller swap portfolios.

As I noted in my statement when this rule was proposed, generally I am not sympathetic to requests to extend compliance deadlines when a long lead-in period has been provided.  The compliance date for swap margin rule compliance was set more than four years ago.  However, this deadline extension will benefit hundreds of entities with smaller swap portfolios while having only a limited impact on the systemic risk mitigation benefits of the initial margin requirements.

Importantly, the final rule does not change variation margin requirements that are already effective.  The extension in the final rule only applies to the initial margin requirement, which covers estimated potential future exposures.

Furthermore, the final rule only extends the deadline for financial end users that have average daily aggregate notional amounts (“AANA”) less than $50 billion.  A CFTC Office of the Chief Economist (“OCE”) analysis indicates that around 700 entities with 7,000 swap arrangements that need to be modified would be included in this group.  The final rule provides more time to these smaller users of swaps, which will help maintain the hedging capabilities of these market participants while they negotiate and establish the necessary margining agreements.

The OCE analysis also provides data on the muted impact of the final rule on systemic risk mitigation.  The total estimated AANA for entities that can use the extension is approximately three percent of the total AANA of entities subject to the margin rules.  In my view, this data is critical to supporting a one year extension as it indicates the likely effect on systemic risk mitigation will be quite limited.

Also, other United States and foreign regulators are adopting similar extensions.  The prudential banking regulators in the United States have adopted a margin rule deadline extension proposal that is substantively the same as the CFTC final rule.  At this time there is no reason to believe the prudential regulators will not adopt their proposal.

Finally, the current financial market turmoil resulting from the global coronavirus pandemic makes issuance of this relief to these smaller financial end users particularly timely. 

Accordingly, I concur in adopting the final rule.

-CFTC-

Testimony of Commissioner David D. Spears before the United States House of Representatives Committee on Agriculture Subcommittee on Risk Management and Specialty Crops 

May 18, 1999

Mr. Chairman and members of the Committee, I appreciate the opportunity to testify here today as you continue to gather information in preparation for CFTC reauthorization. My remarks, which represent my own personal views and not the official position of the CFTC, will be rather general in nature. As you know, the Commission expects to be joined very shortly by two new members, including a new chairman. When that new membership is in place, I expect our top priority will be to reach consensus on formal agency positions regarding a wide range of specific reauthorization issues. For now, I would like to share with you a few general thoughts on the inherent challenges of this reauthorization process and some of the policy considerations that are critical to meeting those challenges.

In my view, the primary challenge for today’s financial regulator is keeping pace with changes in the industry it regulates. This is especially true in the CFTC’s regulatory arena, where recent years have seen globalization of the financial markets, remarkable new electronic trading technologies, a bewildering array of new products, and challenges to US futures exchanges from both overseas and over-the-counter (OTC) competitors.

As we take up the challenge of amending the CEA, I believe this committee’s most difficult task will be finding the appropriate balance between competing policy considerations. I believe the process of regulation should be a public/private partnership – a cooperative system that enables the US futures industry to grow and prosper. I recognize the industry’s legitimate concern over the competitive challenge they face from foreign markets and OTC competitors. I understand the need to reduce unnecessary regulatory burdens so they can meet that competition on a level regulatory playing field. But where will that level be? Achieving regulatory parity will entail difficult policy choices involving the structure of financial security, market integrity, and customer protection standards that have been the cornerstone of US futures regulation for over 70 years.

I recognize that the sophisticated, professional traders who account for the vast majority of financial futures volume do not need the same level of regulatory protections as smaller traders. However, we cannot forget that granting regulatory relief to those market professionals could lead to a two-tiered market structure. The second-tier, residual market, which would surely include a greater proportion of the agricultural contracts, could face diminished price discovery capability and proportionately greater regulatory costs.

I realize that OTC markets need legal certainty; and I strongly support CFTC cooperation, as part of the President’s Working Group on Financial Markets, to help provide that certainty. However, as noted in the Working Group’s Hedge Fund Report, efforts to provide legal certainty cannot ignore such factors as potential systemic risk from the activities of highly leveraged institutions.

I recognize that it makes no sense to saddle electronic trading systems with rules originally designed for open outcry trading pits. Over half of the CEA’s requirements for exchanges do not even apply to electronic systems. But switching to electronic trading will not turn everyone in the marketplace into a saint. Somebody will still need to take responsibility for protecting customers in the electronic marketplace from abusive trading practices and fraud.

As Congress tackles these difficult policy choices, I would like to stress one additional point. The Commission, US futures exchanges, and market participants all need and deserve a CEA that is flexible enough to allow for appropriate regulatory responses to changing circumstances. Let me give you an example of the benefits of flexible statutory authority. Last June, the Commission issued rules for an agricultural trade options pilot program. Those rules were drafted in the immediate aftermath of the hedge-to-arrive crisis. In my view, an understandable desire to avoid similar problems with ag trade options resulted in a program with too many regulatory bells and whistles. The result – exactly nobody signed up for the program. The good news, however, is that our staff is now hard at work drafting amendments to make the pilot program more user-friendly. We can do this because the CFTC’s broad statutory authority over options gives us the flexibility to adjust our regulations as needed. Also, when implementing these or any regulatory changes, the agency should apply a rigorous cost-benefit analysis. Bear in mind, however, that both the costs and the benefits of futures regulation are very hard to measure.

CFTC reauthorization has always been a difficult and controversial process. The stakes are too high to expect anything else. But reauthorization does not have to be a disagreeable or antagonistic process. I believe the best results can be achieved with an open mind and a cooperative attitude. In that spirit, I have held numerous meetings with representatives of the exchanges, the brokerage community and farm organizations aimed at better understanding the competing interests and seeking consensus where possible. I plan to continue that process as the reauthorization debate continues. I commend this committee for getting an early start on reauthorization issues and I look forward to similar cooperative efforts with the committee as well. I am confident that these efforts will result in a reauthorization bill that will enable the CFTC and the markets it regulates to meet the challenges of the 21^st century.

Remarks of Commissioner David D. Spears before the 20th Burgenstock Meeting of the Swiss Futures and Options Association

September 9-12, 1999

The views expressed herein are solely those of the author and do not reflect the views of the Commission or any division of the Commission.

I am honored to participate in the 20^th anniversary meeting of this international forum on derivatives markets. The US Commodity Futures Trading Commission believes that international regulators and representatives from the financial services industry must take advantage of forums such as this one in order to meet the challenges of the 21^st century.

In the past two years, there has been more change in the derivatives industry than in the last decade. Some have called these changes a "capital markets revolution." Electronic trading, for example, is rapidly transforming the industry by giving end-users unprecedented access to markets around the world. Just last month, in fact, the CFTC permitted US customers electronic access, through authorized futures brokers in the US, to derivatives markets in the UK, Germany, Australia, and France. US exchanges currently have terminals for trading US products in each of these locations, as well as in Japan, Singapore and Hong Kong--over 100 terminals in all. More such arrangements are anticipated.

In addition to providing greater access to global markets, electronic technology also is spurring the creation of new types of markets and new opportunities for retail and institutional market participants. The Internet, for example, brings to the average customer the power to evaluate financial instruments and products in every corner of the globe. As some of you may know, the CFTC is currently examining a proposal for the first US Internet-based futures exchange. The proposed trading system, known as FutureCom, would offer cash-settled live cattle futures over the Internet.

Similarly, the Internet also is prompting brokers to change. Some are developing their own private networks to serve their customers. Others are refocusing their efforts on providing credit as opposed to execution services.

It is natural that the structure of markets and firms should change as the industry searches for cost-efficiencies and competitive advantages. Customers are using prime brokers to trade globally as well as to consolidate accounting for and managing their exposures in a single location. Money managers are providing sophisticated financial planning tools to their customers electronically. Futures industry associations are debating the future of intermediaries.

In addition, over-the-counter trading continues to expand. Data from the Bank for International Settlements suggests that OTC markets are playing an ever larger role--relative to organized exchanges--in financial derivatives. The BIS's most recent estimate puts the notional amount of outstanding global OTC derivatives at $80 trillion as of December 1998. The explosive growth in OTC markets has challenged organized exchanges to develop equally competitive products.

But it is not only the industry participants who must meet the challenges presented by all this change. Regulators must also meet market innovation with creative approaches, continually reevaluating regulatory systems in light of market changes. To do otherwise would be to neglect our responsibility to permit the markets to evolve without undue interference while at the same time protecting the public interest.

For example, the growth of electronic markets has prompted many regulators to explore more cooperative models for allocating regulatory responsibility in order to reduce unnecessary duplication. In addition to heightened cooperation, some of these models call for regulators to divide responsibility among themselves to ensure that regulation appropriate to the market and the transaction is in place. Cross-access agreements between exchanges from different jurisdictions, for example, have forced regulators from those jurisdictions to examine how best to allocate oversight responsibilities.

Like many of the regulators represented here today, the CFTC has struggled to strike the proper balance between market innovation and the regulator's mission to ensure fair and efficient markets. In the coming months, however, the CFTC will be especially immersed in these issues as a part of its periodic, statutory reauthorization process. Through this process, the US Congress evaluates the work of the Commission and examines the Commodity Exchange Act with an eye towards modernizing it, where necessary.

Certainly, the question will be asked whether we have been innovative enough. Even more fundamentally, our Congressional oversight committees intend to examine whether the Commission should operate as a "front-line" regulator or become more of an "oversight" agency. Interestingly, this idea seems to run contrary to the trends we have seen in other jurisdictions where regulators have had to consider the implications of exchanges converting to for-profit entities and potentially weakening their self-regulatory incentives.

I believe that during these reauthorization proceedings we will have a good story to tell our Congress about how international cooperative efforts are meeting the challenges of changing markets. To cite a very recent example, in considering petitions to place foreign market electronic terminals in the US, the CFTC received comprehensive information on regulatory systems used by other markets. This information clearly demonstrated a commitment to the same basic regulatory goals as those of the Commission.

Similarly, a recent CFTC survey of futures exchange and contract authorization standards and procedures in various jurisdictions found significant commonality among various regulatory approaches. Nevertheless, "regulatory parity" will definitely be on the Congressional agenda, and the Commission's efforts on this issue will continue to be discussed throughout the reauthorization process.

In this regard, despite a divergence of techniques, I am struck by how similar the regulatory goals of various international regulators are. This is not surprising to me because the CFTC has worked with many of its regulatory colleagues to promote common goals. In addition to the work done through this forum, the CFTC has participated in groups such as the International Organization of Securities Commissions (IOSCO) that are committed to developing common standards, benchmarks, and best practices.

By moving to harmonize international regulatory requirements and by cooperating with one another across markets and borders, regulators can more efficiently and effectively deal with expanding global markets and advances in technology. Of course, this requires that each of us understands the other's regulatory systems and assumes a degree of trust by each of us in the other's ability to implement them. Such understanding and trust is built on case-by-case experience in information-sharing and by managing cross-border market events.

In the months to come, the CFTC and its Congressional overseers will face some difficult issues. But none of the issues that will be debated in the US is exclusive to the US markets. We must all struggle to keep pace with changes so as to support robust, competitive markets without abandoning needed protections. Much has been accomplished to date, and I am optimistic that today's dialogue will advance our progress toward high standards and better cooperation.