CFTC Commissioner Argues Basel III Will Damage Futures Markets

CFTC Commissioner Summer K. Mersinger asserted that the Basel III Endgame Proposal, if adopted, would have a significant negative impact on derivatives markets.

At the Basel World Federation of Exchanges ("WFE") WFEClear Conference, Ms. Mersinger argued that the Proposal would:

• disincentivize firms from offering client clearing services to derivatives end-users. Ms. Mersinger cited Futures Industry Association estimates that the Proposal could result in a 22% increase in capital requirements for client clearing activities, leading banks to either pass higher costs to customers and/ or decrease clearing services.
• weaken the clearing system by exacerbating the downward trend in the number of FCMs offering client clearing services. Ms. Mersinger noted that since January 2004, the number of FCMs registered with the CFTC significantly decreased, from 177 to 62, despite a dramatic increase in customer funds held by FCMs. Ms. Mersinger raised concern regarding clearing member failures: "With fewer members available amongst which a loss can be mutualized, clearing membership becomes a riskier activity."
• create systemic risk. Ms. Mersinger argued that a further decline in the number of FCMs could raise systemic risks, especially in scenarios where a clearing member defaults and customer positions need to be ported to another member. If the Proposal's effect is to reduce the number of clearing members, limits on their capacity could make porting positions of an insolvent FCM difficult, thereby increasing systemic risks, she said.
• have a negative effect on cleared derivatives markets. Ms. Mersinger warned that the proposal could lead to increased hedging costs and risks for derivatives end-users, such as farmers, ranchers, and businesses, potentially forcing them to leave some activities unhedged. She said that such a scenario could result in higher prices for essential goods and services, affecting not only the United States but also global markets.