CFTC Holds Global Markets Advisory Committee Meeting (with Lofchie Comment)

The CFTC held a Global Markets Advisory Committee ("GMAC") meeting. The Commissioners focused on issues related to clearinghouse safeguard assessments and the CFTC's proposal on the cross-border application of its margin requirements for uncleared swaps.

CFTC Commissioner Wetjen delivered the opening remarks. He noted that clearinghouses are at the center of the new market structure for cleared swaps and stated that global coordination of clearinghouses is "crucial." He also acknowledged that as clearing volumes increase, the concentrated risk in the cleared space must be addressed. In addition, he expressed his approval of the GMAC meeting and of other forums that address these sorts of concerns.

Lofchie Comment: The belief that mandated centralized clearing is a magic potion to eliminate risk is now a fading memory. Maybe it's time to get beyond tweaking the rules and give real consideration to those situations in which mandated clearing provides a clear benefit and those in which it does not.Regulators are beginning to understand some of the risks of central clearing but still are not focused on the most significant risk of all. The greatest risk of central clearing is not that clearinghouses themselves will fail (they are too big to fail and the government will have to bail them out). It is that during a period of market volatility and illiquidity, central clearinghouses raise margin levels. This drains liquidity from the system and motivates firms to sell their positions at a time when there are no buyers. It's the proven formula for an asset crash.

See: Webcast; GMAC Agenda; Commissioner Wetjen's Opening Remarks.