CFTC Chair Massad Sets 2016 Priorities
Commentary by Steven Lofchie
CFTC Chair Timothy Massad highlighted the CFTC's accomplishments over the past year. In testimony before the U.S. House Committee on Agriculture, Chair Massad set forth key CFTC priorities in the months ahead.
Recent Accomplishments
Margin for Uncleared Swaps. The CFTC approved "a final rule setting margin requirements for uncleared swaps. . . . [O]ur rule does not require the collection of margin from end-users. It focuses instead on where some of the greatest risk exists – between large financial institutions, where the default of one entity would lead to further defaults by its counterparties, given the interconnectedness of our financial system."
Cybersecurity. "This past year, the Commission unanimously took action to enhance cybersecurity protection in our markets. The proposals identify five types of testing as critical to a sound system safeguard program: vulnerability testing, penetration testing, controls testing, security incident response plan testing and enterprise-wide assessment of technology risk."
Proposed Rule on Automated Trading. "Last November, the Commission unanimously proposed rules to address the increased use of automated trading. Today, almost all trading in our markets is electronic, and approximately 70 percent of trading in the futures market is automated."
Continuing to Support Commercial End Users
Chair Massad identified ongoing efforts with respect to: (i) simplifying recordkeeping requirements, (ii) volumetric optionality, (iii) relief for small banks and community development financial institutions, (iv) public utility companies, (v) customer protection / margin collection and (vi) reporting requirements for contracts in illiquid markets.
Improving Data Reporting
Chair Massad mentioned that CFTC staff had requested public comment on technical specifications for the reporting of 120 priority data elements. "We are seeking public input on this, which [is the culmination of] months of work to identify priority areas where standardization or clarification is needed." The CFTC also will "take a fresh look" at the de minimis threshold. The CFTC's November 2015 preliminary report explores these issues and invites public comment on the data, the methodology and the issues discussed.
Priorities for the Months Ahead
Trade Options. "I plan to soon ask the Commission to adopt proposed rule changes related to trade options, which are a type of commodity options. This proposal would eliminate the obligations of commercial participants to report trade options to swap data repositories. It would include eliminating the requirement to file 'form TO.'"
Continued Focus on Clearinghouse Resiliency. "There are considerable efforts going on domestically and internationally to look at a range of issues to make sure clearinghouses are strong and safe. This includes, in particular, stress-testing standards for [central counterparties], and recovery and resolution planning. We are also chairing the international working group that is looking at a variety of issues, including stress-testing, margin methodologies, and capital and recovery planning."
Cross-Border Margin Rule. "Soon, I will ask the Commission to adopt the staff recommendation on the cross-border application of our new rules on margin for uncleared swaps. I believe our final rule will draw a reasonable line that makes clear when we should take offshore risk into account. As with our broader margin rule, our proposal also recognizes the importance of harmonizing rules with other jurisdictions."
Improving Swap Execution Facility Trading. "This spring, I will ask the Commission to consider changes to our rules to enhance trading and participation. I expect this will include formalizing a number of the "no action" letters and guidance staff issued over the past 18 months through rulemaking proposals."
Position Limits. "I know there is great interest in these rules – and some concern. None of us currently on the Commission were in office when these rules were proposed, and therefore we are taking time to listen to end users and other market participants and consider the proposals very carefully."
Commentary
Chair Massad's priorities might be best considered in light of Commissioner Giancarlo's comment that the CFTC and the EU finally, finally, finally, reached an agreement about the treatment of clearinghouses in their respective jurisdictions. That is, a substantial portion of the CFTC's priorities reflect the need to reduce the overreach of the prior CFTC administration (which the current Chair refers to either as "fine-tuning" or "helping end users") and correct procedural problems with the ways in which the CFTC used to do business (under the name of "formalizing" no-action letters). Framing the priorities this way, however, raises questions about the appropriate level of funding for the CFTC. On the one hand, the CFTC is massively underfunded for its assigned tasks. On the other hand, the CFTC shows greater enthusiasm for rulemaking than for regulatory policy. Here is a litmus test: in light of developments in the energy market over the past five years, can the CFTC defend the position that speculators are capable of driving up the price of energy? If the CFTC can admit that imposing position limits on energy is an idea with flaws that are as transparent as the emperor's new clothes, then it will prove itself to be a regulatory agency that has turned a corner.
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