Friday, February 27, 2015

Chair Massad Highlights Recent CFTC Actions and Priorities

[This story previously appeared in Securities Regulation Daily.]

By Amanda Maine, J.D.

The global financial crisis demonstrated how excessive risk in the over-the-counter (OTC) derivatives market can contribute to systemic risk, according to CFTC Chair Timothy G. Massad. However, regulators must also make sure markets are able to function well and enable end-users to hedge risk. Massad discussed the CFTC’s efforts to achieve this balance in a recent speech to the Coalition for Derivatives End-Users.

Rule on margin for uncleared swaps. In September, the CFTC voted to propose a rule on margin for swaps that are not cleared through a central counterparty. At the time of the proposal, Massad said that the importance of international harmonization cannot be understated, a view he echoed in his speech. He stressed the importance of ensuring that the U.S. rules are as similar as possible to rules being considered by Europe and Japan. Massad said that the CFTC should be willing to consider changes to the proposed rule to ensure such consistency. He noted that the threshold for when margin is required under the proposed rule is lower than in the European and Japan proposals. Massad feels that even if it means increasing the threshold under the CFTC’s proposed rule, it should be harmonized with the overseas proposals. Massad expects the rule, which should be finalized by the summer, to incorporate a slight delay in its implementation timetable.

Cybersecurity. Massad also addressed the issue of cybersecurity, which he called “perhaps the single most important new risk to market integrity and financial stability.” According to Massad, the nature of the interconnectedness of financial institutions and market participants could lead to massive repercussions throughout the system in the event of an attack on a single institution.

While acknowledging the importance of implementing an effective cybersecurity policy, Massad said that the CFTC faces obstacles in doing so. He noted that many financial institutions spend more on cybersecurity than the Commission’s entire budget. Despite these limitations, the CFTC is taking steps to address cyber concerns, such as making them part of the core principles that trading platforms and clearinghouses must meet. Massad reported that the CFTC is also requiring those entities to develop and maintain risk management programs that meet certain standards. In addition, examinations have made cyber issues a focus by asking questions about whether the board of directors is focused on cybersecurity, if there is a culture present where cybersecurity is given priority, and if the policies adopted by the entity are actually being observed and enforced, Massad said.

Commercial end-users. Massad also highlighted several actions taken by the Commission that demonstrate that it has made it a priority to address the concerns of commercial end-users. Following the financial crisis, the agency was given many new responsibilities, including overseeing the implementation of a new regulatory framework for the OTC swaps market. Massad said that the CFTC is focused on fine-tuning the rules to make sure they work for commercial end-users. In September, the CFTC voted to amend its rules to benefit local, publicly owned utilities in the energy swaps market. The CFTC has also proposed rules addressing concerns of the agricultural community and the posting of collateral by smaller customers, and, after hearing concerns from market participants on some aspects of the rules, Massad said he expects that the rules will incorporate those concerns by the time they are finalized. In addition, Massad pointed out that Commission staff, having recognized that immediate reporting can undermine a company’s ability to hedge, recently granted relief from the real-time reporting requirements for certain less liquid, long-dated swap contracts.

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