CFTC Chair Massad Cites Progress in Containing Risk
Commentary by Bob Zwirb
CFTC Chair Timothy G. Massad cited progress and financial resilience that "demonstrate the reforms we put into place are working." In a speech at the Fifth Annual Conference of the Office of Financial Research-Financial Stability Oversight Council, Chair Massad covered clearinghouse resiliency and swap data reporting and looked ahead at the CFTC agenda relating to emerging risk.
Clearinghouse resiliency. Chair Massad stated that central clearing does not eliminate risk, and "increased vigilance" is warranted to monitor possible new concentrations of risk. He asserted that:
- in the U.S., the CFTC has done a "major domestic overhaul" of clearinghouse oversight, including: (i) strengthening requirements regarding risk management and transparency; (ii) performing an extensive revision of the CFTC's rules after the passage of Dodd-Frank and incorporated international standards into its regulations; (iii) strengthening customer protection measures; and (iv) expanding and enhancing examination, compliance, and risk surveillance programs.
- on the international front, the CFTC is co-chairing an effort with the Committee on Payments and Market Infrastructures ("CPMI") and IOSCO to look into the following issues: (i) margin methodologies and the resources available to a clearinghouse in the event of a default, including "skin in the game" and the adequacy of "cover one" versus "cover two" standards; and (ii) standards for stress tests, which "are the critical element in measuring required levels of resources." The CFTC is also involved in efforts led by the Financial Stability Board to examine resolution planning for clearinghouses.
Improving data reporting. Chair Massad remarked that building an efficient system to collect and analyze market data "is an enormous undertaking, and there is more work to do." To address this challenge, the CFTC is: (i) proposing technical specifications for the reporting of 120 priority data elements; (ii) proposing actions to clarify reporting obligations with respect to cleared swaps and eliminate unnecessary reporting; and (iii) working with international regulators and the Office of Financial Research ("OFR") to develop effective means to identify swaps and swap activity by participant, transaction and product type throughout the swap life-cycle.
Chair Massad shared future CFTC actions to strengthen the financial system, such as the development of new proposals, which focus on making sure that the critical market infrastructure that the CFTC oversees – the exchanges, swap execution facilities, clearinghouses and swap data repositories – are adequately protecting themselves. In particular, Chair Massad noted three areas for further CFTC work to enhance market resiliency: (i) stepping up efforts to protect against cyber threats; (ii) proposing new rules to address the risks posed by the increased use of automated trading; and (iii) finalizing the CFTC’s proposed rule on the cross-border application of recently adopted rules on margin for uncleared swaps.
Commentary
Chair Massad observes that following the enactment of Dodd-Frank, the CFTC was tasked with bringing the $400-$600 trillion OTC swap market "out of the shadows." If that is the goal, then aren’t there less intrusive ways to go about this than to build, in the words of former CFTC Commissioner Bart Chilton, a "new exchange trading marketplace . . . from the ground up?" That is, if shining a light on the dark corners of the financial market is deemed necessary to prevent the next financial crisis, then isn't it reasonable to ask whether there aren’t simpler, less convoluted ways to achieve this? Wouldn’t just mandating swap data depositories for both cleared and uncleared swaps be enough?
Even if it is true, as both Chair Massad and the OFR claim, that reforms like mandatory clearing allow market participants and regulators to get more complete, accurate, and timely information on derivatives positions and trading prices, couldn’t this benefit be achieved, as economist Craig Pirrong argues, "by transaction reporting alone, without going the full monty to clearing, which also entails collateralization . . . and mutualization of default risk." Streetwise Professor, CCPs & RTGS: Devil Take the Hindmost? (Jan. 31, 2016).