CFTC Chair Massad Discusses State of Derivatives Marketplace
Commentary by Bob Zwirb
CFTC Chair Massad discussed the CFTC's ongoing work in establishing a regulatory framework to reform the over-the-counter ("OTC") derivatives marketplace. He delivered his remarks at the North American OTC Derivatives Summit Conference.
Chair Massad championed the CFTC's work in mandating clearing for most interest rate and credit default swaps though he noted the need for greater clearinghouse resiliency. He added that recovery and resolute planning for clearinghouses are at the top of the CFTC's agenda and that Europe has "an ample basis" for declaring the U.S. clearing system to be equivalent to that of Europe.
Chair Massad also discussed efforts to ensure that banks maintain a "very strong capital base" by using a regulatory tool called the supplementary leverage ratio ("SLR"). He did not believe, he said, that exposures arising from clearing derivatives or that derivatives themselves should be exempt from the SLR. His concern, he stated, pertained to how the CFTC measures that exposure, and to the effect of the collateral that is collected from a customer for cleared derivative trades that is posted to and held by the clearinghouse.
Chair Massad also discussed the oversight of major market players. He noted that over 100 swap dealers are now registered and that the new framework requires swap dealers to comply with "strong risk management practices." He stated that the CFTC has been working closely with the banking regulators, who are also responsible for developing rules on margin for uncleared swaps. "I also expect that once we finalize the margin rules, we will repropose rules related to capital requirements for swap dealers and major swap participants," he said.
Chair Massad also touched on trading and data reporting, and noted that the CFTC will introduce proposals to address these two issues.
Commentary
It is encouraging to see Chair Massad acknowledge that central clearing "is not a panacea," and that "it does not eliminate" risk. Moreover, his emphasis on "making sure clearinghouses are strong and resilient" recognizes implicitly that central clearing creates its own set of risks. However, it is not clear that regulators will be able to manage this risk as it becomes larger and more concentrated over time. This issue is so important that regulators must approach it differently; they must think outside the narrow confines of their previous attempts to resolve it. Even so, central clearing is no longer being touted as a means to eliminate risk and that shows progress.
Chair Massad's point about the decline in the number of clearing firms also needs to be analyzed in depth. While his emphasis on ensuring the portability of customers when futures commission merchants ("FCMs") go out of business is important in theory, in practice, that's a bit like rearranging the chairs of the Titanic. The more relevant questions are these: why those numbers are declining at such an alarming rate, and what role regulation, particularly Dodd-Frank regulation by the CFTC, is playing in this trend - a question that the Chair's colleague at the CFTC, Commissioner Giancarlo, has addressed directly.