CFTC Commissioner Mersinger Urges Regulators to Allow DCOs to Deposit Funds at the Fed
In a speech on the "needs of the real economy" and a focus on regulations "that work in practice," CFTC Commissioner Summer K. Mersinger encouraged regulators and legislators to allow derivatives clearing organizations ("DCOs") to "consider policy changes that would permit DCOs registered with the CFTC (regardless of their location) to have deposit account access at the Federal Reserve."
In her address at the World Federation of Exchange’s Clearing and Derivatives Conference 2023, Ms. Mersinger:
- argued that DCOs should be permitted to store USD-denominated collateral in a deposit account at the Federal Reserve, though she said that DCOs should not be given access to the discount window. She said giving DCOs the ability to store USD-denominated collateral in a deposit account at the Federal Reserve would permit DCOs to remain stable even in times of banking instability and market volatility;
- spoke about the challenge of balancing "responsible innovation" while ensuring customer protection and market integrity. She pointed to LedgerX LLC’s (a/k/a FTX) proposal for "non-intermediated" clearing "heralded" at the time "as an innovative approach offering promise for our industry." She said that FTX, which is now a bankrupt entity facing civil and criminal prosecution, is an example of how the CFTC must continue to consider the potential benefits of new product developments while being wary of the potential risks they can pose to the marketplace; and
- highlighted the importance of global harmonization and mutual recognition of comparable legal regimes, but said that "line-by-line assessments of whether each detail of a [regime] is identical" would not serve CFTC-regulated markets well. Instead, she re-emphasized support for the CFTC to continue to apply a "principles-based approach to regulation" rather than overly prescriptive rules.
Commentary
Given the government push for central clearing (now being pushed in Treasury repo markets by the SEC also), it would be sensible for the government to take a relatively straightforward added step to permit these systemically important entities to hold assets in a manner similar to that of other systemically important entities (i.e., banks).
On LedgerX's intermediation proposal, it's a bit unfortunate that that proposal is now often viewed as a per se bad idea due to FTX's broader failings. The comment file for the proposal is one of the better examples of giving regulators a wide variety of detailed and intelligent commentary (both pro and con) from industry groups, market participants, academia, and public interest groups (along with an army of individual traders). While it's obvious in hindsight that the idea had the wrong avatar, it's not obvious that the idea itself was bad. As Ms. Mersinger suggests, regulators should continue to give ideas that challenge market structure status quo room for consideration.