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CFTC Commissioner Sharon Bowen Calls for Harmonizing Market Data, Enforcement and Clearing Regulation

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

CFTC Commissioner Sharon Y. Bowen outlined ways in which global regulators could harmonize the regulation of market data, enforcement and clearing. In a speech delivered at the 2017 Eurofi High-Level Seminar, Commissioner Bowen urged global regulators to:

  • "remove the regulatory barriers to data sharing across jurisdictions for the purpose of effective market oversight" in order to prevent the next financial crisis;

  • globally share information about "potential bad actors that are moving from market to market harming customers, lessening efficiency and bringing otherwise functional markets into disrepute"; and

  • address the "unfortunate outcome" of applying a capital charge to segregated funds used to secure cleared products that are "reducing the appeal and viability of clearing."

Commissioner Bowen stated that:

"[w]e should not punish markets and customers for the unpredictable decisions of a beleaguered electorate. Regulatory fragmentation does not help anyone; systemic risk has no platform or party. When a customer loses his life savings, it does not matter if he is a Republican or Democrat."

Commentary

The most notable part of the Commissioner's speech was her criticism of the position taken by banking regulators to impose capital charges on customers' segregated funds that are held by CFTC-regulated entities. Her opinion on this point likely reflects a near-unanimous consensus (leaving aside the opinions of the banking regulators themselves). Commissioner Bowen observes that there is some irony in the banking regulators' assertion of a position that may seem to strengthen the banks, but in fact is counterproductive for the system as a whole. That is an interesting point.

The Commission might consider whether certain other positions advanced by the CFTC that might seem beneficial to one class of regulated entity are, in fact, negative for the system as a whole. There are strong arguments to be made, for example, that pushing swaps toward central clearing creates material dangers for the system as a whole because (i) there is no limit to the ability of the central clearing corporations to demand margin and (ii) thus, in the event of a market downturn, these central clearing corporations may demand massive amounts of margin (because their demands cannot be limited by contract), which will drain liquidity and increase systemic risk. One may argue with this conclusion, but it is a similar line of inquiry as the concerns raised by Commissioner Bowen.

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