At a meeting of the CFTC Market Risk Advisory Committee ("MRAC"), subcommittees presented reports and recommendations on Climate-Related Market Risk, Central Clearing Counterparty Risk and Governance, Market Structure and Interest Rate Benchmark Reform. Additionally, the MRAC discussed "diversity, equity, and inclusion in the derivatives."
The MRAC considered the following reports:
- Interest Rate Benchmark Reform Subcommittee Report, which, among other things: (i) detailed market and regulatory developments with regard to the transition from LIBOR and (ii) reviewed recent central clearing counterparty ("CCP") proposals for transitioning away from LIBOR.
- Climate-Related Market Risk Subcommittee Briefing Report, which (i) provided recommendations for steps that regulators can take for monitoring, managing and disclosing climate-related risks and (ii) identified related constraints, including insufficient data and analysis tools, common definitions and meaningful standards, international engagement by the United States and economy-wide pricing on carbon.
- Market Structure Subcommittee Recommendations Regarding the "Made Available to Trade" ("MAT") Process, which proposed recommendations for revising the MAT process, including (i) designating authority to the CFTC to determine if a swap is MAT, (ii) improving the CFTC's or swap execution facilities' criteria for making a MAT determination, (iii) updating the length of time it takes for a trade execution requirement to become effective following a MAT determination and (iv) providing additional trade execution exemption avenues for certain existing MAT swaps.
- Market Structure Subcommittee Recommendations Regarding the Swap Dealer Landscape, which recommended that the CFTC (i) consider exempting exchange-traded and cleared swaps from the de minimis registration calculation and (ii) explore additional modifications to encourage liquidity on swap execution facilities and derivative contract markets, including exempting from the de minimis threshold certain swaps (primarily foreign exchange options and non-deliverable forwards) that are exchange-traded but not cleared.
- Central Counterparty Risk and Governance Subcommittee Recommendations on CCP Governance, which recommended, among other things, that the CFTC adopt amendments to (i) CFTC Rule 39.26 ("Composition of governing boards") or 39.13 ("Risk management") to require derivatives clearing organizations to create and routinely schedule market participant risk advisory working groups in order to seek a broader range of risk-based views from market participants and (ii) CFTC Rule 39.24 ("Governance") to codify best practices for risk committees.
- Central Counterparty Risk and Governance Subcommittee Discussion Paper on Best Practices in CCP Margin Methodologies, which recommended that the CFTC (i) prioritize the outcome of reduced procyclicality, rather than the means of achieving it, in its flexible approach for supervising CCP management of procyclical margin requirements, (ii) enable CCPs to apply margin add-ons that take into account the effect of liquidity and portfolio concentration on expected closeout costs, (iii) promote the use of scheduled intraday variation settlement cycles to avoid "the accumulation of current exposures" at CCPs as appropriate, (iv) consider certain principles when evaluating a margin period of risk assumption, (v) establish a robust determination framework for CCPs with regard to end-of-day settlement prices and theoretical intraday pricing and (vi) enhance the transparency of CCP margin methodologies so that market participants can understand the reaction of models to certain market conditions for the purpose of liquidity planning and risk management.
In a statement at the meeting, CFTC Acting Chair Rostin Behnam noted that the CFTC is closely monitoring recent activity in the precious metals markets and irregularities in the Texas energy markets. As to benchmark transition, Mr. Behnam cited the market adoption of the ISDA 2020 IBOR Fallbacks Protocol as generally successful, but noted a "long tail of end-users with a small footprint in the swaps markets." He said that even firms with one or two open swaps should have a plan for transition and said that if there are large, active firms that have not adhered to the ISDA protocol, "relevant regulators and counterparties will be apt to take notice." Mr. Behnam also highlighted the reports of the various subcommittees and separately urged a more "fulsome dialogue" on the need to incorporate diversity and foster inclusion in derivatives markets.
Commissioner Dawn D. Stump emphasized the role of the MRAC as a "vehicle for change, challenge, and perhaps most importantly, debate and consensus." Ms. Stump stated that regulators are tasked with defining and supporting markets and participants with thorough regulatory efforts, particularly during times of economic turmoil and stress.
Commentary Nihal Patel
This was an Advisory Committee meeting with a lot of ideas for derivatives market participants to consider. Several points seemed notable, including:
- Mr. Behnam's comments on benchmark reform, particularly for non-dealer market participants. While not going so far as to say all market participants must adhere to the Protocol, he made it clear that having a plan of some kind is viewed as necessary. In addition, "more active" participants, to the extent they do not adhere to the Protocol, should have a ready explanation for regulators that inquire about benchmark transition;
- subcommittee suggestions for modifying the scope of transactions that count toward the dealer de minimis threshold. These seem well-considered, though it will be interesting to see if the new CFTC chair will pursue them. Many of these ideas were considered over the past handful of years but were unable to gain traction under Heath P. Tarbert's tenure; and
- the systemic risk aspects of how CCPs set margin requirements. This continues to be a significant issue and it seems likely that the new CFTC leadership will have an opportunity to address market participants' concerns.
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