Saturday, October 18, 2014

Chairman Massad Addresses the CFTC’s Most Pressing Issues

[This story previously appeared in Securities Regulation Daily.]

By Matthew Garza, J.D.

In remarks before the Outlook 2014 conference, sponsored by the Managed Funds Association, CFTC Chairman Timothy Massad shared his views on two of the most pressing issues currently before the CFTC—tweaking the rules mandated by the Dodd-Frank Act, and cross border harmonization.

End-users. Massad said that it should be expected that rules as significant as those mandated by the Dodd-Frank Act would require clarification and adjustment, noting that part of the CFTC’s job is to make sure the rules do not impose undue burdens or unintended consequences on nonfinancial commercial companies that rely on the derivative markets, such as manufacturers and farmers. “They were not responsible for the crisis or the excessive risks that have come out of this market,” he stated.

To accomplish this, the CFTC has reproposed rules on margin for uncleared swaps to exempt end-users from the requirements. He said the CFTC was able to shift the views of banking regulators to bring their respective rules on the subject in line. The CFTC has addressed the ability of many local utility companies to access the energy swap market, and is now looking at other issues involving commercial end-users, such as contracts with embedded volumetric optionality and certain record keeping obligations. He said he expects the CFTC to act on those matters before year end.

Cross border harmonization. Massad said that he shares the concern of many that harm could result if derivative reforms adopted by different jurisdictions are not in harmony. He said the CFTC is making progress, but the OTC derivatives industry developed into a global industry without any regulation, so historical perspective on this issue is necessary to understand the challenges. He pointed out that the rules for securing bank loans aren’t the same in the states, and asked how many would expect the rules governing the sale of securities to be the same in all the G-20 nations. “Now we are seeking to regulate it through the actions of the various G-20 nations, each of which has its own legal traditions, regulatory philosophy, administrative process and political dynamics. There will inevitably be differences.”

The CFTC issued substituted compliance determinations for many of its rules last December, he said, and the agency expects to do more once other jurisdictions issue rules. He did say that he believes the E.U. should recognize the U.S. central clearinghouses as equivalents, but they have not yet issued any equivalence determinations. He said the E.U. believes that changes are necessary in U.S. treatment of clearinghouses that are located in Europe but are also registered in the U.S.

The U.S. dual registration regime has worked, he said, partially because the U.S. simply required that clearing of futures take place at clearinghouses that are registered in the U.S. and meet U.S. standards, which tie into U.S. bankruptcy laws. “We have seen this work in MF Global and Lehman most recently. We built our swap mandates on this framework of dual registration, and as a result, clearing of swaps for Americans largely takes place overseas.” He said that the issue is very important to the industry and he believes that the dual registration approach a good one. “Regulators must work together to make sure clearinghouses operate transparently and do not pose risks to financial stability.”