Thursday, January 22, 2015

Chairman Massad Praises Progress by U.S., Japan on Cross-Border Issues

[This story previously appeared in Securities Regulation Daily.]

By Lene Powell, J.D.

In an address to the Futures Industry Association in Tokyo, CFTC Chairman Timothy Massad talked about the interconnectedness of the global derivatives markets and the need for regulatory coordination on G-20 commitments. He announced the approval of the application of the Tokyo Commodities Exchange (TOCOM) for registration as a foreign board of trade (FBOT). The chairman also reviewed progress on derivatives oversight in Japan, Asia, and Europe.

TOCOM registration. The CFTC generally doesn’t regulate futures trading by U.S. persons on offshore exchanges, Massad explained. In the past, the CFTC has given relief from registration requirements for foreign futures exchanges to provide direct electronic access to people in the U.S. Now, the process has been formalized and foreign exchanges can register with the CFTC as FBOTs.

TOCOM said its regulatory regime under the Japanese Ministry of Economy, Trade, and Industry and Ministry of Agriculture, Forestry, and Fisheries satisfies CFTC requirements for registration. Under the order, TOCOM can give members or other participants in the U.S. direct access to its electronic order entry and trade matching system to trade futures contracts on metals, fuels, rubber, and agricultural commodities, and futures and option contracts on gold. The approval shows that the CFTC is committed to a coordinated regulatory approach that relies on foreign supervisory authorities and ongoing cooperation, said Massad.

In a statement, Commissioner Mark Wetjen applauded TOCOM’s registration, saying a cross-border approach to trading platform oversight incentivizes higher standards globally because foreign entities that want access to U.S. market participants must be subject to comparable supervision in their own jurisdictions. Wetjen said these same incentives apply to swap execution facilities (SEFs), and the CFTC should formalize a regulatory regime for foreign SEFs.

G-20 commitments for derivatives oversight. Observing that Japan has had rice futures for over 300 years, Massad said Japan has made good progress on the G-20 commitments for derivatives oversight, which were adopted in 2009 following the global financial crisis. One G-20 goal is increased clearing of swaps transactions. Globally, the percentage of swaps transactions that are centrally cleared is now about half, and has increased in the U.S. from 15 percent before the crisis to 75 percent today. Japan has had a clearing mandate in place for certain interest rate and credit default swaps since 2013.

As more clearing is required, clearinghouse supervision is a top priority, said Massad. A small number of clearinghouses have become single points of risk internationally, and regulators must work closely together on clearinghouse standards and strength, including margining standards, stress testing, recovery and resolution, and cybersecurity. Japan Securities Clearing Corporation has handled clearing for U.S. participants on a limited basis under temporary arrangement with the CFTC, and has now applied for registration.

Regarding oversight of swap dealers, Massad noted that the CFTC has recognized Japan’s regulations under substituted compliance determinations. A big task is to set margin requirements for uncleared swaps because not all swaps will be required to be cleared and margin requirements will help to mitigate the risk of uncleared positions. The U.S., Japan, and Europe have all proposed rules on margin for uncleared swaps. The rules are substantially similar, but have some differences that Massad hopes can be minimized.

Cybersecurity. The CFTC is “very focused” on cyber security because it is possibly the most significant new risk to financial stability, Massad said. Because of the interconnectedness of financial institutions and markets, a breach at one institution can have significant repercussions for the system as a whole. The CFTC is focusing on this issue in examinations, said Massad, and boards of directors and top management should be making it a priority.