Chair Massad Provides a CFTC Regulatory Update on Clearinghouse Risk, Margin and Automated Trading (with Lofchie Comment and Delta Strategy Group Summary)
CFTC Chair Timothy Massad summarized recent developments in the regulation of the financial markets.
Chair Massad discussed measures intended to strengthen and enhance the stability of clearinghouse entities, how to encourage greater risk management and recovery, and resolution planning for clearinghouses.
Chair Massad stated that the CFTC is working closely with the E.U. and the European Securities and Markets Authority on issues of regulatory equivalency for clearinghouses. The E.U. has not yet granted equivalence to U.S. clearinghouses, however, Chair Massad said he remained confident in the "ample basis" for the E.U. to declare equivalency.
Chair Massad also addressed issues pertaining to margin, including a rule on margin for uncleared swaps that "plays a key role in the new regulatory framework." He stated that the CFTC's proposed rule requires swap dealers to post and collect margin on uncleared swaps with one another and with certain financial counterparties. He observed that the proposal exempts commercial end users from these requirements, and that prudential regulators are expected to finalize their rules this week. Once the rules are finalized, he said, he expects to re-propose rules related to capital requirements for swap dealers and major swap participants.
In his speech, Chair Massad also focused on automated trading. He detailed a number of measures that the CFTC has adopted to address concerns associated with automated trading, including certain risk-based limits, and requirements to screen orders automatically for compliance with such limits. However, he noted, the CFTC remains concerned about minimizing the potential for disruptions and other operational problems that may arise. Additional proposals will follow, which will include requirements for pre-trade risk controls and other measures with respect to automated trading. These requirements likely will apply regardless of whether the automated trading is high or low frequency, he said.
Finally, Chair Massad discussed issues pertaining to data reporting and harmonizing, as well as to the standardization of reporting in general. He stated that the CFTC's work in this area will create a "simple, consistent process" for the reporting of cleared swaps. It also will address the risk of having duplicate records at multiple swap data repositories, he said.
Chair Massad delivered his remarks before the Risk USA Conference.
Lofchie Comment: It is good that the CFTC and other regulators are facing up to the massive centralized risks they have created through the forced use of clearing corporations, instead of pretending that central clearing magically eliminates risks. Of course, merely facing up to a problem does not mean that one can solve the problem, nor is it obvious that tweaking clearinghouse rules can alleviate the danger caused by the centralization of so much risk in so few locations.
Click here to view the speech summary prepared by the Delta Strategy Group.
See: CFTC Chair Massad's Remarks.