CFTC Chair Massad and Commissioner Bowen Discuss Priorities
CFTC Chair Timothy Massad and Commissioner Sharon Bowen delivered remarks before the Futures Industry Association Expo where they discussed the CFTC's priorities.
Chair Massad stated that, although the CFTC has written nearly all of the rules required by Dodd-Frank, some rules have yet to be completed, including those on margin for uncleared swaps, capital and position limits. He also said the CFTC staff will soon issue a letter extending the no-action relief provided previously in order to phase in the requirement to trade MAT package transactions on swap execution facilities ("SEFs") executed as part of certain package transactions.
Additionally, Chair Massad discussed cross-border issues and reminded market participants that, while G-20 nations have agreed on basic principles for regulating swaps, there will be inevitable differences between the rules imposed by various countries. He also stated that the CFTC is aware of the upcoming expiration of the November 2013 no-action relief that was granted with respect to Dodd-Frank conduct requirements for foreign swap dealers engaging in certain kinds of conduct in the United States. According to Chair Massad, staff recommends that this relief be extended to give the CFTC the necessary amount of time to consider these issues.
Chair Massad also mentioned that the CFTC and the Europeans are continuing to discuss the harmonization of CFTC rules with European rules governing clearinghouses. He said that he approved of the European Commission's decision to postpone the imposition of higher capital charges on banks clearing through U.S.-based central counterparties. Additionally, Chair Massad reported that the CFTC is working closely with the Federal Reserve on major clearinghouse issues to make sure that clearinghouses "operate transparently, meet necessary standards and safeguards, and do not pose risks to financial stability."
Chair Massad briefly discussed cybersecurity, which he stated is an "increasingly important aspect" of the oversight of clearinghouses. He explained that the CFTC Core Principles have been modernized to address information and cybersecurity, and that the CFTC is conducting system safeguard examinations to ensure compliance with regulations requiring programs to address various aspects of cybersecurity. However, Chair Massad added, these examinations are "but one example" of a program within the CFTC that is not receiving adequate attention due to budget deficiencies. He expressed concern about the current CFTC budget and said that, in his view, the budget is not sufficient to allow the CFTC to fulfill its responsibilities.
Commissioner Sharon Bowen's concerns echoed those of Chair Massad in a number of respects. She emphasized that the CFTC must finalize a position limits rule. Commissioner Bowen also said that, while the CFTC must allow market participants to take reasonable risks, it also must guard against risks that endanger the entire financial system. Ultimately, she said, rules and guidance crafted by the CFTC must be easy to understand and fix the problems they were created to resolve.
See: Chair Massad's Speech; Commissioner Bowen's Speech.
Commentary
Chair Massad's remarks on cross-border issues are significant and give some insight into how the CFTC will handle these important questions. Non-U.S. banks have been waiting to learn whether CFTC staff would issue an extension of no-action relief from conduct rules for activities taking place within the United States. At this point, it would be very difficult, if not impossible, to comply with these requirements by the end of the year. So Chair Massad's indication that he supports an extension of the no-action relief is certainly welcome.
Chair Massad's comments about the limits of international harmonization, however, are potentially troubling. It's not certain whether the purpose of his remark was simply to acknowledge the practical difficulties or to prepare the industry for a significant letdown. Framing the issue in terms of the "inefficiencies" that derive from lack of harmonization partially misses the point. While unharmonized rules in some areas (e.g., business conduct standards, recordkeeping) may merely raise costs by imposing duplicative requirements, in other areas (e.g., margin) the risk may be contradictory requirements and/or extreme complexity. In these latter areas, the consequence of failure to harmonize is likely to be market fragmentation.