The CFTC Market Risk Advisory Committee ("MRAC") met on June 20, 2017. At the meeting, regulators and industry professionals addressed the following topics and events (see previous coverage):

  • a CFTC Division of Clearing and Risk presentation on risk surveillance of central counterparties ("CCPs");
  • how research and analysis contribute to the CCP regulatory framework; and
  • the potential impact of Brexit on financial markets.

CFTC Acting Chair J. Christopher Giancarlo noted that as designated clearing organizations ("DCOs") expand in size and scope, the CFTC must continue to account for the increasing complexity of regulating these entities efficiently. He asserted the CFTC's support for DCO expansion to international markets, and explained that expansion imposes the additional responsibility of collaborating with international regulators on risk management and compliance.

On Brexit, Mr. Giancarlo stated, the CFTC will remain committed to the CFTC-EC Equivalence Agreement for the regulation of CCPs:

"[The agreement is] an important signal to the markets and the international regulatory community of the ability of the United States and Europe to work together successfully on critical cross-border issues. . . . [W]hatever the outcome of the Brexit negotiations and the EU's internal discussions about how to supervise CCPs, we do not contemplate any change to the CFTC-EC Equivalence Agreement."

Commentary / Bob Zwirb

Perhaps the most salient points of yesterday's discussion of central clearing were made by Robert Steigerwald of the Federal Reserve Bank of Chicago, who emphasized the tradeoffs involved in attempting to deal with the risk of clearinghouse failure in the financial markets. For example, addressing the preference of regulators for central clearing over OTC methods of settlement, Mr. Steigerwald noted that the simplicity and transparency associated with the former is not always a virtue:

"You will all have seen the illustration showing opaque bilateral markets compared with the beautiful simplicity of centrally cleared markets. That illustration is true, but inadequate. There is hidden complexity in clearing arrangements, there's also hidden vulnerability as we saw in bilateral uncleared markets."

Mr. Steigerwald noted that while adopting mandatory clearing "represents a consistent and rational decision by policymakers," it may not be a panacea. For while clearing may mitigate credit risk, such risk "doesn't disappear," but instead "gets transformed" into liquidity risk. And while that may be "a sensible and reasonable tradeoff," it is not without consequences in a world where liquidity is needed immediately to "allow clearing operations to continue to operate in a safe and sound fashion," since such a policy:

"[c]hanges the system in ways that are quite unpredictable, it makes the system more interconnected, it creates what we call time critical liquidity needs, the ability to satisfy obligations with a high degree of time sensitivity. And here, there are other implications. We now recognize in this new environment the importance of liquidity alongside our proper concerns for solvency. The two are distinct, and need to be addressed distinctly."

Mr. Steigerwald also cautioned, as he has done in writing before, against relying upon regulatory tools used in other contexts (e.g., banking) to deal with risks presented by financial derivatives.

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