U.S. House Committee on Agriculture Holds Hearing to Examine the CFTC's 2015 Agenda
Commentary by Bob Zwirb and Steven Lofchie
The U.S. House Committee on Agriculture held a hearing to review the futures, options and swaps markets overseen by the CFTC. CFTC Chair Timothy Massad was the sole witness.
Chair Massad focused his testimony on the CFTC's key priorities for 2015 and on reviewing what it has accomplished since his time as Chair began. Chair Massad stated that the CFTC intends to make markets work for commercial end users and has undertaken actions to achieve this goal. The actions include, among other things: (i) proposing a rule on margin for uncleared swaps; (ii) amending its rules for transactions with special entities to allow local utility companies to hedge risks in the energy swaps market; (iii) proposing rules to exempt end users and commodity trading advisors from certain recordkeeping requirements; (iv) clarifying the CFTC's position on when forward contracts with embedded volumetric optionality may be excluded from being considered swaps; (v) harmonizing rules (such as those for certain commodity pools) with those of the SEC; and (vi) adjusting the settlement deadline for FCMs to post "residual interest" so as not to burden the margin collection process.
Chair Massad also outlined areas on which the CFTC will focus in 2015, including:
- the new regulatory framework for swaps;
- a harmonized cross-border framework;
- robust enforcement and compliance efforts;
- cybersecurity, information security and business continuity challenges; and
- retrospective regulatory reviews of CFTC rules.
Chair Massad also advocated for the CFTC FY 2016 budget increase, stating that the new budget is necessary in order to fulfill the CFTC's goals and responsibilities.
See: Hearing Notice; Webcast of Hearing; Chair Massad's Testimony.
Related news: U.S. House Appropriations Subcommittee Holds CFTC Budget Hearing (with Delta Strategy Group Summary) (February 15, 2015).
Commentary
Chair Massad's testimony represents a thoughtful survey of the very comprehensive regulatory framework that the CFTC is installing in the derivatives market. While Chair Massad appears open to critical feedback from market participants, that openness is limited to those parts of the regulatory framework that may need "adjusting," not to changes of a more fundamental nature.
It is refreshing to hear Chair Massad concede that "[o]f course, central clearing is not a panacea [and that] [c]learing does not eliminate the risk that a counterparty to a trade will default." In contrast with his predecessor, he rightly points out that the clearing mandate increases competitive concentration and market risk in an undesirable manner. As the Chair bluntly states: "The fact is that a small number of clearinghouses are becoming increasingly important single points of risk in the global financial system." Moreover, as he acknowledges, "[t]his is an issue that transcends swaps." Indeed, it is, as the issue has less than benign implications for the safety of the financial markets. Nevertheless, it appears that the Chair shies away from taking the next logical step, which would be to question whether the clearing mandate is necessary or good for the financial system.
With respect to SEFs, Chair Massad states that "[o]ur rules are new, and as we gain experience with their application in the marketplace, we will see what works well and what doesn't, and we will make changes as appropriate." This reflects the backward nature of Dodd-Frank rulemaking, which imposes rules on a new market before the market develops. Usually, it is the other way around. Similarly, the Chair's thoughtful discussion of cross-border issues does not address why the EU has flatly refused so far to certify U.S. clearinghouses as being subject to regulations equivalent to those of European CCPs.
Finally, the Chair discusses the CFTC's retrospective regulatory review, noting that the Commission has reviewed many of its regulations to determine the extent to which these regulations needed to be modified "to conform to the Dodd-Frank Act." One would hope that the next phase of the review would be to focus on those rules - both those that were on the books prior to 2010 and those that have followed Dodd-Frank - that impose costs which outweigh the benefits they provide.
Commentary
Quite a bit in Dodd-Frank and in the rules thereunder genuinely needs fixing. No doubt the process will continue for many years to come. Accordingly, it is good to see that "retrospective regulatory review" is high on Chair Massad's agenda. In a reasonable world (if that is not a contradiction in terms), "retrospective statutory review" would be high on the Congressional agenda as well, since it is a review that could be accomplished more easily if every attempt at a correction were not painted as an attack on The Night Watch.