In a speech last week before the annual FIA industry gathering in Boca Raton, Florida, Commodity Futures Trading Commission Chairman J. Christopher Giancarlo suggested that finalizing the swap dealer de minimis level, proposing a rule to better align current swaps trading rules with legislative intent, and working with other financial regulators to help ensure that the supplemental leverage ratio better reflects clearing members’ true exposure to customers' cleared derivatives would be key priorities for the Commission this year.
Separately, in their own speeches in Florida last week, CFTC Commissioners Rostin Behnam and Brian Quintenz each criticized the potential extension of the supervisory authority of the European Securities and Markets Authority over both EU and third-country clearinghouses, including the Chicago Mercantile Exchange and ICE Clear US. (Click here for background in the article “EC Proposes Two-Tier System for Classifying Third-Country CCPs; Certain Systemically Important CCPs May Be Required to Relocate to the EU” in the June 18, 2017 edition of Bridging the Week.) Mr. Behnam indicated that any change to the existing EU-CFTC practice of recognizing host regulator equivalence oversight “is unacceptable.” Mr. Quintenz said that the CFTC should retaliate against the European Union should it adopt the proposal, including beginning now by not granting requests for no-action relief by European national market regulators from various CFTC rules and orders.
In his presentation, Mr. Giancarlo also indicated that while he is committed to “moving forward” on a final position limits rule, he would not finalize rulemaking until it could be done “properly” by a full Commission of five commissioners. There are currently only three CFTC commissioners. The CFTC last proposed amendments to its position limits regime in May 2016. (Click here for background in the article “CFTC Proposes to Authorize Exchanges to Grant Physical Commodity Users Non-Enumerated Hedging Exemptions and Other Relief Related to Speculative Position Limits” in the May 27, 2016 version of Bridging the Week.)
Mr. Giancarlo – who voted against the last proposed iteration of Regulation Automated Trading – also indicated that he was “open” to considering whether there are parts of Reg AT that might serve as the foundation for a “new and truly effective rule.” However, he said that the goal “must be an effective rule, not just any rule,” and suggested no timeline for rolling out a new version of Reg AT. The CFTC last proposed a version of Reg AT in November 2016. (Click here for background in the article “Proposed Regulation AT Amended by CFTC; Attempts to Reduce Universe of Most Affected to No More Than 120 Persons” in the November 6, 2016 edition of Bridging the Week.)
The CFTC issued an order in October 2017 extending until December 29, 2019, the aggregate gross notional amount level of swaps activity an entity must exceed during the prior 12 months to require registration as a swap dealer to US $8 billion (click here to access the relevant CFTC order). Absent the order, the threshold would have decreased to US $3 billion. In his speech before the FIA, Mr. Giancarlo indicated that staff has now presented the CFTC commissioners with swap dealing data and analysis that he hoped would enable them to “reach a consensus” on an appropriate de minimis level prior to year-end.
In 2015, before he was nominated as CFTC chairman, Mr. Giancarlo issued a white paper that severely criticized the Commission’s swaps trading rules and proposed an alternative framework that he claimed more accurately reflected congressional intent. He recommended that, instead of continuing with overly proscriptive regulations governing SEF trading, the CFTC should encourage flexibility consistent with the congressional mandate. Before the FIA, Mr. Giancarlo indicated that he would present to the Commission for its consideration by year-end a rule proposal more aligned with congressional intent that would better permit US swap intermediaries to “fairly compete” globally.
The supplemental leverage ratio requires large US banks to set aside 5 percent of their assets as a guard against losses. Currently, these assets include cash posted as margin by customers for their swaps and other derivatives trading activity through the banks’ future commission merchant subsidiaries. Mr. Giancarlo has frequently voiced his opposition to this treatment and noted that the US Department of Treasury recently expressed its concerns about this policy too. Last week, Mr. Giancarlo indicated that “[w]e will work hard” with other regulators to address this treatment which he said “is not reflective of a clearing member’s true exposure to swaps.” (Click here for an example of Mr. Giancarlo’s stated views in the article “Acting CFTC Chairman Giancarlo Gives Rehearsal Speech to ISDA Prior to Senate Committee Confirmation Hearing” in the May 14, 2017 edition of Bridging the Week. Click here for background on Treasury’s views in the article “US Department of Treasury Recommends Modifications to Volcker and Bank Capital Rules, and Rationalization of Financial Regulation” in the June 18, 2017 edition of Bridging the Week.)
My View: Mr. Giancarlo’s priorities for the CFTC parallel recommendations of the Department of Treasury for the CFTC issued in two reports last year. (Click here for background in the article “Treasury Calls for Better Coordination to Improve SEC and CFTC Efficiencies; Recommends Review of SROs to Minimize Conflicts and Increase Transparency” in the October 8, 2017 edition of Bridging the Week.) It would be helpful for the CFTC to itemize in one location all the recommendations by Treasury as well as those identified as part of its Project KISS initiative, and give its views regarding which recommendations it is likely to pursue and by when. If nothing more, this will help remove some uncertainty regarding possible future developments and permit market participants to plan future operations more reliably. (For background on Project KISS, click here to access “Derivatives Industry Wishes Upon a CFTC KISS Star and Hopes Dreams Come True” in the October 8, 2017 edition of Bridging the Week.)