CFTC Chair Timothy Massad Considers Central Clearing in an Evolving Market

CFTC Chair Massad outlined regulators' ongoing efforts with central clearing. He provided an overview of the regulatory framework in an evolving market.

Speaking at the CME Group's Financial Leadership Conference, Chair Massad acknowledged market criticism of the current regulatory framework and expressed his own concerns about clearing regulation. Chair Massad discussed the possibility of a clearinghouse failure including how the markets and the regulators would respond, and what might be done to alleviate the effects of that scenario. "Some have suggested that a potential solution is to have more than one clearinghouse for each product. This idea is attractive in theory, but it may be difficult to achieve. . . . " he said. Chair Massad also expressed concern about the unintended consequences of regulation: "Our actions affect how markets evolve, and a challenge is to avoid unintended consequences. And I think we need to be mindful of that as we address these very important issues pertaining not only to clearinghouse resiliency but to financial stability generally."

Notwithstanding these challenges, Chair Massad stated that the "[central clearing] model remains sound," and that "central clearing and clearinghouses will continue to play the vital role in the development of our markets."

He described the CFTC's continued efforts regarding clearing regulation, which he said includes strengthening the requirements in risk management and transparency, as well as focusing on recovery and resolution planning. He also provided information about the CFTC's work abroad with other organizations. Specifically, he mentioned the importance of the work of the Committee on Payments and Market Infrastructures and IOSCO, which involves looking at the margin methodologies and resources available to clearinghouses in the event of a default. He asserted that these efforts are a means to work through the concerns and questions he raised.

As clearinghouse regulation continues to progress, he said, it is important to keep the following in mind: (i) daily risk management, (ii) continuity of function in the event of a default and (iii) the importance of a robust clearing member industry. He argued that defining these aspects as pivotal to clearinghouse regulation will lead to the establishment of laws that are resilient and supportive of innovation.