October 26, 2018

CFTC Commissioner Advocates for International Regulatory Cooperation

Commentary by Steven Lofchie and Nihal Patel

CFTC Commissioner Rostin Behnam advocated for international regulatory cooperation to address the risks posed by benchmark reforms, margin, Brexit, cross-border regulation and FinTech. In a speech at the 2018 ISDA Annual Japan Conference, Mr. Behnam weighed in on the following:

  • Benchmark Reforms. Mr. Behnam emphasized the importance for global regulatory authorities to work with one another as well as private sector entities to facilitate the transition away from various inter-bank offer rates. He praised the work being done by, among others, the UK FCA, Japanese regulators, and, in the United States, the public-private partnership of the Alternative Reference Rates Committee ("ARRC"). Mr. Behnam encouraged market participants to examine LIBOR-fallback language in existing contracts and highlighted the work of market participants and regulators to develop alternative contract language to facilitate this approach. He also broadly encouraged participants to transact in Secured Overnight Financing Rate ("SOFR")-referenced derivatives markets, noting that a move to SOFR could help avoid the consequences of "zombie LIBOR." Mr. Behnam noted that, while he is aware of "some preference" for continuing with LIBOR, regulators are generally "anticipating a clear and certain break from LIBOR." He also highlighted the work of the CFTC Market Risk Advisory Committee, in particular its Interest Rate Benchmark Reform Subcommittee. He expressed his hope that the subcommittee would "complement" the work of the ARRC.

  • Initial Margin. Mr. Behnam stated that the full phase-in of initial margin requirements in 2020 raises "a number of potential challenges for the marketplace." He stressed that the CFTC and U.S. bank regulators are listening to concerns of market participants about 2020 implementation and are gathering information to understand the situation to "avoid catastrophe." He highlighted the work and recommendations of, among others, ISDA and SIFMA, and while not committing to their suggested approach, said that the CFTC and other regulators would "bundle" efforts toward "appropriate recommendations and guidance."

  • Cross-Border Regulation. Mr. Behnam said that CFTC Chair J. Christopher Giancarlo's recent white paper announcing his vision of the agency's approach to applying its statutory authority over swaps activities to cross-border activities merely reflected his ambitions and views. Mr. Behnam distanced himself from the white paper, stating that he thinks the CFTC should build its internal consensus in accordance with formal, statutory procedures while considering the needs of and affording deference towards global regulators. He noted that the timing for turning the white paper proposals into formal rulemaking is "unclear," and noted that Mr. Giancarlo had suggested that it would be "several quarters" for such a sea change to progress. Mr. Behnam said that the sufficient time was needed, expressing his view that aspects of Mr. Giancarlo's proposals would depart from CFTC policy and "may even conflict with our governing statute and prior [CFTC] interpretations thereof or lead to gaps in certain protections afforded to U.S. persons transacting overseas."

  • FinTech. Mr. Behnam urged regulators to approach FinTech with "an open mind and a healthy respect for [regulators'] role in the markets."

Commentary

Commissioner Behnam's remarks included some pointed criticisms of CFTC Chair Giancarlo. In reference to the white paper that Chair Giancarlo published on cross-border regulation, Mr. Behnam asserted that CFTC commissioners ought to act only through formal Commission action, such as the issuance of concept releases or formal rule makings. 

There is nothing in the law that limits the ability of CFTC commissioners to take individual public stands on regulatory issues. If it were improper for a CFTC Commissioner to express a personal view, then it would be not only improper to publish a white paper, but also improper for a commissioner to deliver a speech or other public statement that has not been ratified by the entire commission. Both Commissioner Behnam's speech and Chair Giancarlo's white paper present the standard disclaimer that the views expressed are those of the author and not the views of the Commission or staff.

Financial regulation benefits tremendously from debates about policy that are backed by views as to market behavior and facts. Commissioner Behnam's disagreement with Chair Giancarlo's approach ought to focus on the substance of the Chair's well-considered views, and not with its existence.  

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Commentary

It is refreshing to see a CFTC commissioner (even one who might disagree on details and process with the Chair) advocate for the CFTC to take stock of its reforms, increase cooperation with overseas regulators, and "reduce the operational burdens and complexity of overlapping regulations where appropriate." From the perspective of someone who spoke at the ISDA Annual Japan Conferences in 2013 and 2014, when criticism of the CFTC cross-border approach was at its peak, the Commissioner's words reflect a notable change.

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