In remarks at the Federal Reserve Bank of Chicago's Fourth Annual Conference on CCP Risk Management, CFTC Commissioner Brian Quintenz raised questions about the CFTC oversight of central counterparties ("CCPs") and the challenges of maintaining a healthy clearing system.

Commissioner Quintenz explained that the CFTC is responsible for overseeing 16 designated clearing organizations ("DCOs" or CFTC-registered CCPs) in addition to various other market participants. He said that the CFTC oversees DCOs through three primary methods:

  • Review of applications and rule changes. DCOs must submit rule changes to the CFTC for review, and these rule changes cannot be implemented until the CFTC has "ample time to review" them. Two DCOs are designated as "systemically important" ("SIDCOs"). Rule changes submitted by the SIDCOs are subjected to heightened scrutiny in the form of a coordinated review by the CFTC and the Board of Governors of the Federal Reserve ("FRB").
  • Compliance examinations. In coordination with the FRB, the CFTC conducts annual exams of SIDCOs. Commissioner Quintenz explained that the FRB generally defers to the CFTC for such reviews, and the CFTC acts in a "strong leadership role." Other DCOs are subjected to periodic exams based on individualized risk assessments.
  • Risk surveillance. The CFTC conducts analyses of positions and margin information to quantify risk faced by clearing members.

Commissioner Quintenz considered a recent stress test measuring DCO liquidity as an example of a CFTC effort to monitor resiliency. He said that SIDCOs have access to Federal Reserve deposit accounts in order to avoid risks posed by utilizing commercial banks and to provide extra liquidity. He argued that such access should be extended to all DCOs. Commissioner Quintenz characterized the possibility of any DCO failing as "very remote," but explained that DCOs are required to develop extensive recovery plans to ensure appropriate preparedness and ability to effectively respond to market disruptions.

On systemic risk for DCOs, Commissioner Quintenz acknowledged that recent market consolidation has contributed to less diversified risk and, thus, more interconnected exposure. He underscored the supplemental leverage ratio as a particular point of concern, stating that it is a "palpable threat" to the clearing system. Commissioner Quintenz expressed that the use of the SLR reflects a "fundamental misunderstanding of central clearing," and presents a potential barrier to resolution, as it would potentially impede the ability to efficiently and quickly transfer customer positions. He suggested that the following two steps could contribute to remediation of the problems presented by the SLR:

  • excluding customer cash collateral held at a DCO from a bank's leverage calculation; and
  • using customer cash collateral held at a DCO to reduce a bank's potential failure exposure, in a manner consistent with Basel Committee on Bank Supervision's standardized approach to counterparty credit risk.

Commentary /Steven Lofchie

In the dispute between the banking regulators and the CFTC over the SLR, the CFTC has the better view. The very existence of the dispute, as well as its severity and the length of time it has continued, should give pause to those who believe that the "government" inherently knows best how to control risk. The reality is, no one knows for certain, and there is no absolute correct answer. (Notably, this dispute is not a matter of Republicans vs. Democrats; the former Democratic CFTC Commissioners were equally adamant in their views on the SLR.)

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