United States: CFTC Chair Massad Reports On Clearing, Cybersecurity And Swaps

Last Updated: September 30 2016
Article by Nihal S. Patel

Most Read Contributor in United States, September 2017

CFTC Chair Timothy Massad outlined CFTC developments concerning (i) the strength and stability of clearinghouses, (ii) technological changes and innovations in the marketplace, and (iii) remaining rulemaking required by the Dodd-Frank Act.

  • Clearinghouse Resiliency, Recovery and Resolution Planning. Chair Massad expects the CFTC to finish the first phase of clearinghouse stress testing "later this fall" and that the CFTC will issue a public report of results once completed. He also stated that the CFTC has made final recovery and wind-down plans for systemically important clearinghouses "a top priority for the fall" that he expects to be completed by the end of 2016. Additionally, Chair Massad confirmed that the CFTC is continuing to work with international working groups to address clearinghouse resilience and recovery issues, implementation of these standards, resolution planning for clearinghouses, and "interdependencies" among clearinghouses and their members.
  • Technological Changes. In response to "misunderstandings" associated with proposed Regulation Automated Trading ("AT"), Chair Massad emphasized that the intention of the proposal is not to require large numbers of firms to register only for the sake of doing so, but that a registration requirement is needed when "some of the biggest traders in our markets are not currently subject to [CFTC] oversight." Moreover, he argued that the CFTC's "desire has never been to require that source code be turned over . . . routinely," but rather to ensure that the CFTC staff members "have access when necessary." Chair Massad indicated that he will have more to say on this issue in the coming weeks as the CFTC prepares a supplemental proposal.
  • Margin for Uncleared Swaps. While Chair Massad expressed "disappointment" with the EU decision to delay their rules, he defended the decision of U.S. regulators to move forward, noting (i) that the September 1 date applied directly only to the largest swap dealers, (ii) that the delay will be "short" because the EU is committed to minimizing it, and (iii) a duty for U.S. regulators to ensure full implementation of U.S. laws.
  • De Minimis Threshold. Chair Massad observed that the CFTC currently is considering his request to delay the implementation of a lowered de minimis threshold for swap dealers. He explained that the threshold is in need of "further study," and that the CFTC should complete its rule on capital for swap dealers beforehand. Mindful of further deadlines in the near future, Chair Massad also said that the CFTC will "explore alternative actions," in the event that the EU delay is not short.
  • Capital Requirements for Swap Dealers and Major Swap Participants. Chair Massad opined that capital requirements for swap dealers and major swap participants should not use a "one-size-fits-all approach," yet they also should maintain consistency with bank regulator requirements, where possible.
  • Cross-Border Application of Swap Rules. Chair Massad indicated that in the fall, the CFTC will consider a rule to address transactions by swap dealers that are "arranged, negotiated or executed" in the United States.
  • Swap Execution Facilities and Data Reporting. Chair Massad noted that he will ask the CFTC to "consider some proposed rule changes to improve trading on swap execution facilities that are consistent with the no-action letters . . . issued over the past couple of years," along with "additional proposals to improve swap data reporting."

Chair Massad delivered his keynote remarks before the SIFMA Annual Meeting.

Commentary / Nihal Patel

It appears that the CFTC is exploring "alternative actions" regarding the upcoming uncleared swap margin deadlines. It is clear that there was some difficulty in implementing the September 1 deadline. Extending a new rule set to a much larger group on the revised deadline of March 1 will raise new and different issues. If dealers are unable to transact with each other, their customers will have less access to liquidity. If swaps are more expensive to trade for dealers, they will become more expensive to trade for their customers.

Mr. Massad encouraged the CFTC to take action now to extend consideration of the de minimis threshold for swap dealer registration. Certainty on this front is fundamentally necessary for firms in the swaps business to make informed decisions as to whether to manage their books to avoid registration or take the plunge and register with the CFTC. It would be unfortunate to wait until the last minute on this issue, as the CFTC has done on a number of other regulatory fronts (e.g., issuing no-action relief for the September 1 swap margin deadline on . . . September 1).

As to Mr. Massad's comments on Regulation AT to address "misunderstandings," these seem to be directed to his colleague, Commissioner Giancarlo, who criticized the proposal's "broad scope" and "hazy objectives." Mr. Giancarlo also referred to the regulation as "regulatory empire building" and, while speaking at a conference hosted by a Washington-based think tank, he called the proposal "a classic Washington maneuver."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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