Remarks of Chairman Heath P. Tarbert at Fintech Forward 2019: Exploring the Unwritten Future

October 24, 2019

As Prepared for Delivery

Good morning everyone, and thank you, Brian, for the introduction. It’s my pleasure to welcome all of you to the CFTC’s second annual Fintech Forward conference.  After last year’s success, we’re excited for this to be a recurring event that brings innovators and regulators together.

I want to thank the entire team at LabCFTC as well as the Office of Customer Education and Outreach, the Office of Data and Technology, and our Logistics and Operations team for their hard work in pulling together this great event. In particular, I want to give a special thanks to Brian Trackman, Shivon Kershaw, and Meredith Scialabba.  Putting on this event has been a true team effort, and these individuals really stepped up. So thank you.

Today’s conference not only coincides with DC Fintech Week, which I spoke at on Monday.It also overlaps with our 27th annual international regulators symposium.  So today, we have nearly 100 representatives from 49 international jurisdictions in attendance. Welcome to all of you. Let’s give them a big round of applause.

The U.S. derivatives markets are a key part of the global financial system.  While the CFTC is the primary regulator of these markets, we can’t do this work alone.  We collaborate at the federal and state level as well as internationally.  Coordinating with our international partners helps reduce systemic risk, avoid market fragmentation, protect customers, and promote basic international standards.  It can also help us as regulators keep up with the rapid pace of technological change in our markets.  That’s why today I’m pleased to announce the CFTC has joined the Global Financial Innovation Network also known as GFIN. Also joining us together in this partnership are the SEC, the Comptroller of the Currency, and the FDIC.

GFIN grew from a 2018 proposal by the UK Financial Conduct Authority to create a global fintech sandbox.  The idea was to provide a more efficient way for firms to interact with regulators as they seek to develop, execute, and distribute new technologies.  GFIN has also created a new framework for cooperation between financial services regulators on innovation-related topics so they can share different experiences and approaches.  It’s an absolute necessity that we work together to plan for the ever changing world of technology. So it makes perfect sense for the CFTC to join this important effort.

For this exciting announcement, we’re joined by Laura Navaratnam from the UK’s FCA. Laura is the manager of the FCA’s Innovation Hub.  We’re honored for you to be here representing the FCA.  The FCA has done a tremendous job organizing and leading GFIN.  We are proud to now be a part of it.  In recognition of your organization’s leadership, I’d like to present the FCA with the Chairman’s Award for Regulatory Excellence.

Cross-border efforts like this are another step forward to help regulators plan for the ever changing world of technology.  They also help advance our mission, which is to promote the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.

Of course, nurturing fintech innovation doesn’t just mean more international cooperation.  It also means making it more of a priority within the four corners of this building.  To seize the unwritten future, we need to look inward as well as outward.  As I’m sure many of you saw, two weeks ago I brought on Melissa Netram from Silicon Valley-based Intuit to lead LabCFTC.  We’re really excited to have her.

LabCFTC may be relatively new, but fintech innovation isn’t.  Technological innovation has been happening in our markets for years.  For example, Globex started in 1987 enhancing mainframes and data technology; farmers now use data and technology including integrating satellite imagery to forecast and make decisions on production; and combining patterns and trends in AI helps traders and investment advisors.

History has shown that progress depends on how regulators respond to innovation.  As famed economist Ludwig von Mises said, “Progress is precisely that which rules and regulations did not foresee.”  So, bringing together regulators and innovators is essential for the responsible development of these cutting-edge products.  Ultimately, the long-term success of our economy is in the balance. We must get it right.

The CFTC started LabCFTC to help meet that challenge.  It’s the agency's focal point to engage with fintech innovation and promote fair competition.  It also serves as our in-house think tank to help us be a 21st century regulator.  Because of its importance, I’m pleased to announce that I will be making LabCFTC its own operating office, reporting directly to the Chairman.

Until this announcement, LabCFTC had been housed within the Office of General Counsel.  I want to thank Dan Davis, the CFTC’s general counsel, for overseeing this initiative these last two years.  I also want to thank my predecessor, Chairman Giancarlo, as well as Daniel Gorfine for their vision and leadership in support of LabCFTC.

In its new capacity, LabCFTC will continue to be focused on innovation by serving as a point of entry for innovators interested in the CFTC’s regulations, ensuring our employees stay current about the latest technology, and enhancing technology that could help CFTC processes, including enforcement and fighting market manipulation.

Our agency’s vision is to be the global standard for sound derivatives regulation.  I want the agency to be the resource for you to help identify ways those technologies could fit into the current regulatory structure.  Now that LabCFTC’s success has been demonstrated, we want to solidify its position within the agency.  Now it will take on an even bigger role here at the CFTC and be a critical link to innovators for years, and perhaps decades, to come.

All of these announcements underscore the strong commitment this agency will have to innovation on my watch.  From blockchain to digital assets to cybersecurity, the CFTC has an important role to play in shaping the unwritten future.  Steve Jobs said that “innovation distinguishes between a leader and a follower.”  I couldn’t agree more.  I am fully committed to taking steps so we don’t miss out on the benefits of innovation.  And we must do so while strengthening our derivatives markets.  This requires that the CFTC thoughtfully balance these two objectives.  So how do we do that?  The best way to strike that balance is through a principles-based approach to regulation.  This is a hallmark and unique feature of the CFTC's regulatory heritage.  I’ll be talking more about this issue tonight at a lecture at Harvard’s Kennedy School of Government.  But here it is in a nutshell.

Principles-based regulation essentially means we set the destination but leave it to our registrants to find the best path to get there.  This approach allows flexibility for our markets to take advantage of new technology and other advances.  Yet it still retains fundamental regulatory mandates so everyone knows what is expected of them.  Technology moves much faster than regulation – we need to set the parameters so innovation and technology can thrive responsibly.  If we the regulator better understand the innovations in our markets, we can make sure we have the right mix of principles and rules to strike that balance.  That’s why coming together to discuss these issues like we are today is so important.

The stakes can’t be any higher for regulators to get this chapter right.  My hope is that conferences such as Fintech Forward can be a positive contribution toward a brighter, more prosperous future.  Your agenda today will take you through the intersection of our markets and artificial intelligence, digitization and custody, big data and cloud computing, and global perspectives on these issues and more.  I’m excited for you to be here to explore the unwritten future together. It’s an honor to be here this morning. Thank you and enjoy the program.

Concurring Statement of Commissioner Dan M. Berkovitz

Proposed Rule Extending Uncleared Swap Margin Deadline for Certain Financial Entities with Smaller Swap Portfolios

October 16, 2019

I concur with issuing for public comment the proposed rulemaking (“Proposal”) to extend the swaps margining compliance deadline for certain financial entities that have smaller swap portfolios.

In general, I am not in favor of extending compliance deadlines when there has been a substantial lead-in period for compliance.  The compliance date being extended in the Proposal was set more than four years earlier.  However, in this instance, there are several factors that lead me to conclude that the Proposal will benefit hundreds of entities with smaller swap portfolios while having only a small impact on the systemic risk mitigation benefits of the initial margin requirements.

Variation and initial margin requirements for uncleared swaps reduce contagion and liquidity concerns by ensuring that collateral is available to cover swap losses if a party defaults.[1]  Two types of margin are required.  Variation margin covers current net exposure from day-to-day price movements for a portfolio of swaps.  The Proposal does not change variation margin requirements.  Initial margin covers estimated potential future exposures between the time a default occurs and when the swaps can be closed out or hedged.

A CFTC Office of the Chief Economist (“OCE”) analysis indicated that approximately 40 large financial enterprises are already required to exchange initial margin for uncleared swaps under regulations adopted by the CFTC and other regulators.[2]  Under the current rule, the so called “phase 5” entities, entities with average daily aggregate notional amounts (“AANA”) of between $8 billion and $750 billion on a consolidated basis, are required to have various margining and custodial agreements in place by September 1, 2020.  The Proposal does not change that deadline for financial end users that have an AANA greater than $50 billion.  Accordingly, entities with moderately large swap portfolios would remain subject to the original compliance date.  Only financial end users with relatively modest AANA levels would get an extension of the compliance deadline.

The existing implementation schedule is consistent with the original Basel Committee on Banking Supervision (“BCBS”) and the Board of the International Organization of Securities Commissions (“IOSCO”) international framework for margin requirements.  In July 2019, BCBS and IOSCO revised the framework to effectively recommend an extension of the phase 5 deadline in recognition of likely compliance delays given the large number of entities that would need to execute margining agreements to comply with the new initial margin requirements.[3]

The Proposal follows the revisions recommended by BCBS and IOSCO.  Other United States and foreign regulators have indicated they also intend to adopt extensions.  Consistency with other regulators, particularly with requirements like swap margining, helps reduce the likelihood of regulatory arbitrage.

I am concurring with the Proposal because the impact on systemic risk mitigation resulting from the partial one year delay is muted while the potential impacts on the hundreds of financial end users with smaller swap portfolios might be significant if they are not able to have margining documentation in place by the original deadline.  This is a data driven conclusion.  While about 40 entities have had to comply through phase 4, the OCE analysis estimates that around 700 entities with 7,000 swap arrangements would be included in phase 5.  Providing more time to hundreds of smaller users of swaps should help maintain the hedging capabilities of these market participants while they negotiate and establish the necessary margining arrangements.

The OCE analysis also provides critical data on the muted impact of the proposed change on systemic risk mitigation.  The estimated average AANA for phase 5 entities is $54 billion compared to an average $12.71 trillion AANA for entities in phases 1, 2 and 3, and $1 trillion for entities in phase 4.  The total estimated AANA for entities that would be subject to the one year 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 that the likely affect in providing the extension on systemic risk mitigation will be quite limited.

For these reasons, I concur in the issuance of the Proposal.

Supporting Statement of Commissioner Dan M. Berkovitz

Proposed Rule Excluding the European Stability Mechanism from Definition of Financial End User

October 16, 2019

I support the proposed regulation that would add the European Stability Mechanism (“ESM”) to the list of governmental entities excluded from the definition of financial end user in the Commission’s margin regulations.  The Commission has recognized for many years that entities established by governments like the ESM should be exempted from some of our regulatory requirements for financial entities.  These entities serve a governmental purpose that is not to speculate or profit from derivatives and therefor are less likely to engage in activities that would bring risk to the United States.  The ESM, an intergovernmental entity designed to assist EU member states in financial distress, would likely reduce systemic risk in the European Union.  If the 2008 financial crisis is any guide, reducing financial distress in one region of the world is likely to benefit the rest of the world, including the United States.

In addition, comity is an important consideration when regulating entities established by a foreign government for a governmental purpose.  The proposal will facilitate international comity and should encourage further cooperation.  Showing reciprocal, mutual respect for the important interests of other sovereigns is an important step to harmonizing regulation and facilitating global markets where appropriate.

Opening Statement of Commissioner Brian D. Quintenz before the Open Commission Meeting on October 16, 2019

Open Meeting on Proposed Rule: Amendment to Regulation 23.161 – Compliance Schedule Extension and Proposed Rule: Amendments to the Margin Rules for Uncleared Swaps – 23.151 and 23.157

October 16, 2019

Good morning. Mr. Chairman, thank you for calling this meeting.  The proposals before us today both address one of the key post-crisis reforms: the margin framework for uncleared swaps.  I support the first proposal, which provides smaller entities with an additional year to come into compliance with the uncleared margin regime.  However, as I will explain further below, I respectfully dissent from the proposal to exclude the European Stability Mechanism from the CFTC’s margin requirements for uncleared swaps.

Proposed Rule: Amendment to Regulation 23.161 – Compliance Schedule Extension

I am pleased to support the Commission’s proposal to extend the compliance schedule for uncleared margin to September 1, 2021 for entities with smaller average daily aggregate notional amounts of activity.  As our own Office of the Chief Economist noted, phase five 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.[1]  Recognizing the operational challenges associated with phase 5 implementation, BCBS and IOSCO revised the uncleared margin framework to include an additional implementation phase.  I am pleased that the agency, consistent with this revised international framework, is providing these smaller counterparties with additional time to come into compliance.  I also support the recent proposal by the US banking regulators to similarly extend the compliance period for smaller firms.

However, much more needs to be done.  First, it is critical that the CFTC, US banking regulators, the SEC, and our international counterparts adopt a coordinated approach with respect to uncleared margin.  The derivatives market is a global market and any differences in our respective approaches will result in increased burdens and operational complexities for firms.  This point was emphasized most recently at the Global Markets Advisory Committee (GMAC) meeting. Participants highlighted the numerous ways in which derivatives regulators across the globe have implemented conflicting timing, scope, calculation, and other requirements for uncleared margin implementation.  I believe we must work with our regulatory counterparts to eliminate these cross-border discrepancies.  Today’s rulemaking represents a first step of many more in that international harmonization effort and I will continue to support the work of Commissioner Stump through the GMAC to further align and rationalize uncleared margin frameworks globally.

Dissenting Statement by Commissioner Quintenz to the Proposed Exclusion for the European Stability Mechanism from the Commission’s Margin Requirements for Uncleared Swaps

In March 2018, I articulated my approach to our current regulatory relationship with our European counterparts in light of their refusal to stand by or re-affirm their 2016 commitments in the CFTC’s and European Commission’s common approach to the regulation of cross-border central counterparties (CCPs) (CFTC-EC CCP Agreement).[2]  Specifically, the absence of the agreement’s re-affirmation directly implied the agreement’s abrogation by the European Market Infrastructure Regulation 2.2 (EMIR 2.2).[3]  I therefore vowed that I would either object to or vote against any relief provided to or requested by European Union authorities until the agreement’s clarity was restored.  While the possibility still exists for a successful outcome to EMIR 2.2 that fully respects the CFTC’s ultimate authority over US CCPs, still no assurance has been given to remove that doubt.

I therefore dissent from today’s proposed rule to exempt the European Stability Mechanism from the Commission’s margin requirements for uncleared swaps.

The ESM plays an important role within Europe - an intergovernmental organization of the EU’s Eurozone member states that provides financial assistance to those countries.  The rule the CFTC is proposing to issue today would codify CFTC staff no-action relief permitting the ESM, unlike other financial entities, to enter into uncleared swaps with Commission-registered swap dealers without complying with the CFTC’s margin regulations.[4]  In proposing this rule, the CFTC has directed precious staff resources to provide legal certainty to an EU agency so that it may access CFTC-supervised swap dealers with significantly greater flexibility than numerous US firms.  Yet, we are taking this step while, and as I stated at last month’s Global Markets Advisory Committee meeting, the proposed implementation of EMIR 2.2 has actually increased the likelihood of the CCP Agreement’s nullification.[5]  It is entirely unclear if any of the five US CCPs currently authorized to access the EU[6] will ultimately be treated as domestic EU firms and forced to follow EU rules.

Subjecting a US CCP to the same level of EU regulation as an EU CCP would unilaterally render null and void an agreement originally based on regulatory deference and mutual respect between two authorities.  Even subjecting them to a re-application process under new or different criteria could nullify the 2016 agreement. And yet that re-application process is precisely the current expectation.

The CFTC-EC CCP Agreement promoted cross-border markets and regulatory efficiency because the CFTC and the European Commission agreed on where and how to defer to each other’s regulatory regimes.  A rule like the one proposed today, or the relief provided by CFTC staff to Eurex Clearing last December (to which I similarly objected)[7] provides special accommodations to an EU institution by relying on the CFTC’s trust in our EU counterparts.  Such trust continues to be misplaced until the EU can provide assurance that the CFTC-EC CCP Agreement will be upheld.

Statement of Commissioner Dawn D. Stump for CFTC Open Meeting, October 16, 2019

Extending Compliance Schedule for Phase 5 of the Margin Rule for Uncleared Swaps

Regarding the exchange of initial margin (IM) for non-centrally cleared derivatives, now is a good time to step back and reflect on the past implementation phases and to explore in more detail the issues faced by market participants who have, or will in a future phase, become subject to the requirement.  This exercise is important, in my view, in order to understand whether there are actions that we, as regulators, can take to mitigate the potential compliance bottleneck that will be caused by an unprecedented number of market participants coming into scope in the last implementation phase.

In a paper published last year, the Commission’s Office of the Chief Economist concluded, among other things, that whereas Phases 1 through 4 captured just over 40 entities, Phase 5 could bring 700 entities in scope, which together encompass only 11% of the average aggregate notional amount (AANA) of swaps across all phases.  The Chief Economist’s report also found that over 75% of entities coming into scope in Phase 5 have AANAs of less than $50 billion, or just about 3% of AANA across all phases of the margin rule.  Phase 5 compliance, the study revealed, could require implementing nearly 7,000 IM relationships.[1]

In recognition of the unique challenges presented by the last implementation phase, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) worked together to ensure that this phase could be staggered and extended, while also seeking to clarify documentation requirements.  Subsequently, Commission staff issued an advisory clarifying that documentation requirements for uncleared swaps would not apply until a firm exceeds the $50 million IM threshold with a particular swap dealer,[2] and today we are proposing to amend the Commission’s uncleared margin rule to extend the compliance schedule to September 1, 2021, for entities with smaller average aggregate notional amounts of swaps.

In supporting this proposal, I would note that deadlines have a knack for surprising folks sooner than expected and at some point, prolonging the finish is no longer an option for these margin requirements.  That said I am supportive of this extension both for the benefit of the market and the regulatory agencies tasked with addressing the unique challenges presented by the final phase of implementation.

During a recent meeting of the Global Markets Advisory Committee, we learned that in addition to the tremendous operational efforts required of market participants, regulatory parameters more suited to the counterparties involved in earlier implementation phases may need to be refined for application in this final phase.  The issues are so vast that the Committee determined to recommend the creation of a subcommittee that can advise the Commission on considerations to prudently address these challenges.  I am hopeful that such a subcommittee will be up and running soon to assist us in addressing additional questions we may expect to confront in the final phase of IM implementation.

Margin for the European Stability Mechanism

The CFTC Margin Rule applies to swap transactions between Covered Swap Entities (CSEs) and counterparties that are swap dealers (SDs), major swap participants (MSPs), or financial end users.  The Commission is today proposing to expressly carve out from the definition of “financial end user” the European Stability Mechanism (“ESM”) such that uncleared swaps between a CSE and the ESM are not subject to the CFTC Margin Rule.  In so doing, we note that Europe has already determined to exempt the ESM under their own European Market Infrastructure Regulation’s margin rules for OTC derivatives not cleared by a central counterparty.  I believe that today’s proposal is an expression of respect by the CFTC for our European colleagues.  If they do not believe it is necessary or appropriate to impose margin requirements on these transactions, we should, in the interest of international comity, consider adopting the same approach.  But, as the proposal notes, reciprocity is a valid consideration here.

Reciprocity can take on many forms, including mutual recognition of comparable regulations or the application of retributive jurisdictional assertions.  I prefer the former but will not rule out the latter should our own authority be disrespected.  That said I hold a great deal of hope for a structure of mutual respect, especially among jurisdictions that only 10 years ago, at the G20 Summit in Pittsburgh, agreed to work towards a common objective.  The proposal before us today is one example of the CFTC seeking to honor that commitment.  During the unfortunate events of the financial crisis, we learned that coordination among global regulators is critical and trust among us is essential.  Today, those lessons remain true, and we are reminded that disregarding this reality has the potential to weaken, rather than strengthen, the resilience of our global derivatives markets.

Opening Statement of Chairman Heath P. Tarbert Before the Open Commission Meeting on October 16, 2019

October 16, 2019

Good morning, and thank you for attending today’s open meeting of the U.S. Commodity Futures Trading Commission (“CFTC”).  We have two important items on the agenda: (1) a proposed rule to extend the compliance date for phase five of the CFTC’s margin rule for uncleared swaps (“Margin Rule”),[1] and (2) a proposed rule regarding the application of the Margin Rule to the European Stability Mechanism (“ESM”).

Phase five of the Margin Rule will subject many small entities to initial margin (“IM”) documentation and custodial and operational requirements for the first time.  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.[2]

Recognizing the operational complexity of this undertaking, the Federal Deposit Insurance Corporation (“FDIC”) and the Office of the Comptroller of the Currency (“OCC”) recently proposed to extend their compliance deadline for “phase five” counterparties by one year.[3]  This follows a Basel Committee on Banking Supervision-International Organization of Securities Commissions (“BCBS-IOSCO”) proposal for a similar one-year extension.[4]

I fully support today’s proposal to provide the same relief.  Without this extension, market strain and disruption may arise because so many newly in-scope counterparties are engaging the same limited number of entities providing required IM services.  Such services include, among other things, IM-related documentation, approval and implementation of risk-based models for IM calculation, and custodial arrangements.

Counterparties unable to operationalize adequate IM arrangements by the September 2020 deadline would be prohibited from entering into uncleared swaps.  They would thus be forced to rely on cleared products that may not adequately match their risk management needs, or forego hedging altogether.   Allowing such counterparties to be shut out from the uncleared swaps markets could harm liquidity and price discovery in these markets, in addition to impeding sound risk management.[5]

I do not take this proposed extension lightly, as initial margin is an important guard against counterparty credit risk.  However, the extension would affect only three percent of total swaps activity across all phases of IM implementation.[6]  Given that, I believe the proposed extension will mitigate rather than exacerbate risk.

I also support the proposed amendment to Regulation 23.151, which, if adopted by the Commission, will codify the exclusion of the ESM from the Margin Rule.  The Margin Rule requires a covered swap dealer or major swap participant (“swap entity”) to post and collect initial and variation margin for uncleared swaps that it enters into with (1) another swap entity or (2) a “financial end user.”[7]  Sovereign entities, multilateral development banks, the Bank for International Settlements, and similar entities are excluded from the Margin Rule’s definition of “financial end user.”  Despite its similarities to the aforementioned excluded entities, the ESM has not been carved out of the financial end user definition.  Like those entities, the ESM is an intergovernmental agency that supports Eurozone economies by making loans, purchasing bonds, and shoring up member banking systems.  All 19 Eurozone members are shareholders of the ESM, and all have contributed capital to support its success.[8]

In 2017, the ESM requested no-action relief to exempt swap entities from the Margin Rule for uncleared swaps entered into with the ESM.  The CFTC’s staff provided this no-action relief on July 24, 2017,[9] recognizing the unique and important role that the ESM plays in the European financial system.

I am pleased to support the proposed amendment, which, if adopted, will make permanent the existing no-action relief from the Margin Rule for the ESM.  Codifying the ESM’s relief from the Margin Rule would make the ESM’s existing no-action relief superfluous.  Accordingly, CFTC staff today will withdraw the ESM’s existing no-action letter and replace it with reissued no-action relief that will expire upon final Commission action on this matter, or by April 14, 2020, whichever comes first.

In a similar light, the CFTC’s staff is today providing the ESM with a reissued no-action letter relating to existing no-action relief from the swap clearing requirements of Section 2(h)(1) of the Act.[10]  It is my intention to take up a proposed rulemaking in the coming months that will codify the ESM’s relief from these clearing requirements.

The global nature of today’s derivatives markets requires that regulators work cooperatively to ensure the success of the G20 reforms, foster economic growth, and promote financial stability.  In 2016, for example, the CFTC and the European Commission (“EC”) entered into an agreement regarding requirements for dually registered central counterparties, and in doing so, took an important step in achieving cross-border harmonization of derivatives regulation.  And just last month, CFTC staff and I met with representatives from the EC, at which time we reaffirmed our mutual commitment to transatlantic cooperation.

The CFTC aims to lead by example, and the proposed rule before the Commission today is an opportunity to demonstrate our commitment to regulatory deference and support for efficient market activity.  The CFTC remains committed to working with the EC, the European Securities and Markets Authority, and other stakeholders to maintain well-regulated and efficient markets.  The proposed rule relating to the ESM is a step in that direction.[11]  As we go forward, it is important to recognize that deference is a two-way street: the only way to make it work is if it is mutual.

Deference not only facilitates greater cooperation between regulators, but also promotes stability, resiliency, and growth in our global derivatives markets.  I will continue to encourage our foreign counterparts to act in a manner that relies on cooperation and deference, so that duplicative or conflicting regulatory regimes do not stifle our markets or raise the prospect of financial stability risks.  By working together, we can promote sound and effective regulation without unduly constraining our financial markets.

When I first spoke to the employees of this agency after taking office, I said that action would be the watchword of my chairmanship.  We have had an impactful first 90 days, and these proposed rules build on that important work.  I look forward to their advancement by the Commission.

Thank you.

Statement of Concurrence by Commissioner Rostin Behnam

Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (Notice of Proposed Rulemaking)

October 16, 2019

I respectfully concur with the Commodity Futures Trading Commission’s (the “Commission” or “CFTC”) decision today to issue proposed amendments to its regulations that would align the implementation schedule for margin requirements for uncleared swaps applicable to swap dealers (“SDs”) and major swap participants (“MSPs”) for which there is no prudential regulator with the recently revised schedule issued by the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”).[1]  This proposal is also consistent with a recently proposed joint rulemaking by the Prudential Regulators that would similarly amend the margin implementation schedule for SDs and MSPs subject to their regulations.

The staffs at the CFTC and the Prudential Regulators, with feedback from market participants, have worked closely with our international counterparts through the BCBS/IOSCO Working Group on Margining Requirements (“WGMR”) towards a smooth transition, actively engaging to address implementation risks alongside market developments and ongoing regulatory evolution.  I commend the work of the WGMR and in particular, the members of our CFTC staff.  I believe today’s proposal appropriately harmonizes and addresses the various impacts of legal frameworks on effective segregation and collateral arrangements, on risk-based model approval and implementation, and with respect to different derivatives products and different types of entities.  As I have said before, implementing the margin requirements for uncleared swaps is a challenge we face collectively.[2]  As global harmonization is a key hallmark of the 2009 G20 reforms, ensuring we remain vigilant in working together towards these feats of regulatory engineering will serve us all well into the future.

As proposed, the extension of the compliance schedule for initial margin requirements for an additional year does not alter our expectation that the large number of covered entities who will come into the scope of compliance on September 1, 2021 will continue to diligently work towards compliance.  Whereas our goal with this proposed rulemaking focuses on transition risk-- mitigating potential market disruption due largely to the limitations of service providers and related operational burdens -- I will maintain high expectations that with additional time and a clear demand for services, market participants and the entities they engage will focus resources on compliance as opposed to relief.