The CFTC Market Risk Advisory Committee debated (i) how well derivative markets are functioning for end-users, specifically, how effectively end-users and other market participants in different asset classes are able to find counterparties for transactions, receive accurate pricing and volume information, and otherwise access the markets and (ii) the current use of portfolio compression and the benefits and challenges posed by such activity in the derivatives markets.

The Delta Strategy Group highlighted key takeaways as follows:

  • Committee Members disagreed on whether post-trade anonymity on swap execution facilities ("SEFs") was necessary as it relates to the interest rate market, but generally agreed that package transactions still present challenges and operational complexities for SEF transactions.
  • Commercial end-users stressed that the utilization of SEFs will not immediately occur due to cost burdens and the threat of registration. They indicated that while an electronic marketplace presents many benefits, smaller firms face operational complexities, increased costs and additional staffing risks.
  • An Agriculture Committee member said that introducing brokers ("IBs") providing access to the market face challenges [because of] the increase in recordkeeping requirements and the lack of futures commission merchants ("FCMs") available.
  • On portfolio compression, panelists said registration is unwarranted for third-party compression service providers and that this service is purely analytical and reduces risk through means other than the reduction of gross notional and line items.

CFTC Commissioners also provided prepared remarks.

CFTC Chair Timothy Massad announced that he would ask the CFTC to consider a codification of the trading rules and other potential changes in order to enhance the trading and participation of SEFs. He noted the issuance of proposals on cybersecurity and automated trading, as well as CFTC efforts to finalize rules on position limits.

CFTC Commissioner Sharon Bowen posed questions to determine how well the derivatives markets are functioning:

  • How are market participants using SEFs? What are the positives and negatives of SEF use? How can we improve the ways in which SEFs function?
  • How are IBs being used today? Do CFTC rules, which were designed for past IBs, fit today's IBs?
  • How have changes in technology altered the ways in which participants access various markets? Have these changes introduced new risks and, if so, how can our rules identify those risks more accurately and regulate them more appropriately?
  • What have market participants experienced regarding volatility and liquidity?

CFTC Commissioner J. Christopher Giancarlo addressed the issue of diminishing trading liquidity, and specified that "a significant cause of reduced trading liquidity is the aggregate impact of uncoordinated regulatory policies of U.S. and overseas bank prudential regulators imposed in the wake of the financial crisis." He questioned whether the amount of capital constraint that prudential regulators impose on financial institutions is calibrated properly to the amount of capital that those institutions must deploy in order to support market health and vibrancy. As to portfolio compression, Commissioner Giancarlo remarked that it "should be incentivized, not penalized." He maintained that compressing legacy swaps and then treating them as new swaps is "inconsistent with no-action relief of the Division of Clearing and Risk." He urged the CFTC to reconsider that issue.

For a fuller description of the hearing and various testimonies, please see the linked Delta Strategy Group summary.

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