CFTC Chair Massad Testifies before European Parliament in Brussels on Futures Margin and Global Harmonization

CFTC Chair Timothy Massad testified before the European Parliament Committee on Economics in Brussels, Belgium. In his testimony, he stressed the need to reconcile differences between the United States and European Union's rules on futures margin methodology, especially regarding the amount of margin that must be turned over to a clearinghouse.

According to Chair Massad, the CFTC has created an effective substituted compliance framework to augment the existing program for recognizing EU central clearing counterparties ("CCPs"). If the jurisdictions can work through the rest of their differences, he explained, then "we have a framework that is satisfactory to both the EC and the CFTC."

Chair Massad stressed the importance of working out differences between the European Commission and the CFTC's rules regarding margin methodology, with a particular emphasis on futures. He explained that under CFTC regulations, CCPs use a one-day gross margin requirement, while the new European regulatory regime requires a minimum two-day net margin amount, which allows clearing members to net the offsetting exposures of different customers, reducing the amount of margin that the CCP receives. Tests conducted by the CFTC showed that the one-day gross margining requirement resulted in materially higher margin collected by the CCP than did the European Union's two-day netted number.

Chair Massad also noted a major difference between house affiliates' treatment in the two regimes: the United States requires affiliate transactions to be in the house account, while Europe allows affiliates to be treated as customers.

Overall, Chair Massad stated, the CFTC's results show that "there is far more to be gained by requiring gross posting for all customers than by increasing the minimum liquidation period for house accounts." Additionally, he explained, the CFTC is concerned that charging different margins depending on who holds the product would create incentives to evade regulation, and could be "especially problematic if Europe and the United States continue to treat house affiliates differently."

Chair Massad admitted that many other issues must be considered when assessing the overall outcome of a legal and supervisory framework, including other differences between the European Commission and CFTC frameworks. However, he said, if the goal is to equalize key differences and the concern is financial stability, then focusing on customer margin and requiring gross posting and mandatory collection from customers should be the highest priorities. With respect to house accounts, Chair Massad stated, the differences between the treatment of the affiliates must be reconciled, and guaranty fund contributions also must be considered.

See: Chair Massad's Testimony.See also: Joint Statement of Chair Massad and European Commissioner Jonah Hill.