Monday, January 25, 2016

Massad Touts Recent Achievements, Discusses Early Priorities for 2016

By Joanne Cursinella, J.D

CFTC Chairman Timothy Massad presented his views on the Commission’s recent accomplishments and outlined some priorities for this year at the 2016 winter meeting of the ABA Derivatives and Futures Law Committee. Among the things he discussed were efforts in cybersecurity, registration of swap execution facilities, improving data registration, and margin requirements for uncleared swaps.

Cybersecurity. The Commission has proposed rules designed to make sure that the private companies, which run the core infrastructure under our jurisdiction—exchanges, clearinghouses, swap execution facilities and swap data repositories—are doing adequate evaluation of cybersecurity risks and testing of their own, Massad said. The proposals identify five types of testing as critical to a sound system safeguards program: vulnerability testing, penetration testing, controls testing, security incident response plan testing, and enterprise-wide assessment of technology risk. Such efforts are vital to mitigate risk and preserve the ability to detect, contain, respond to, and recover from a cyberattack or other type of operational problem, he added. The Commission hopes to finalize these rules before the end of the year after considering any feedback.

SEF trading. Massad announced the permanent registrations of 18 swap execution facilities (SEFs), which he called an “important step” in the progress toward the implementation of a new framework for trading on regulated platforms mandated by Dodd-Frank and the G-20 leaders. “It is bringing greater transparency, better price information and greater integrity to the process,” he added. The five SEFs that remain temporarily registered are being reviewed by the CFTC.

Massad pointed to research indicating that reforms put in place are working. Citing a recent report by the staff at the Bank of England noting that SEF trading has brought improved trading conditions, finding significantly lower transaction costs, and better liquidity. He said that notwithstanding the industry complaints about geographical fragmentation, they reported that this did not compromise liquidity.

Margin requirements for uncleared swaps. The Commission has adopted a strong final rule setting margin requirements for uncleared swaps. It is designed to reduce the risk that a default of a large financial entity would lead to further defaults by its counterparties, given the interconnectedness of our financial system, Massad said. The rule requires swap dealers and major swap participants to post and collect margin with financial entities with whom they have significant exposures. Further, it requires initial margin, which is designed to protect against potential future loss on a default, as well as variation margin, which serves as mark-to-market protection. The rule is “practically the same” as those adopted by the prudential regulators and very similar to the international standards as well as the rules that he expects Europe and Japan to adopt very soon.

Proposed rule on automated trading. Automated trading has brought many benefits to market participants –such as more efficient execution, lower spreads, and greater transparency, Massad said. But its extensive use also raises important policy and supervisory questions and concerns, he added. The Commission’s recent proposal focuses on minimizing the potential for disruptions or other operational problems that can be caused by automated trading and builds upon the steps the Commission and the exchanges have already taken on this front. The proposal requires pre-trade risk controls that facilitate emergency intervention in the case of malfunctioning algorithms. But it leaves the parameters of their limits to participants, since they should determine them, he said. The Commission hopes to finalize this rule in 2016.

Improving data reporting. Reporting of swaps transaction data was a key goal of the reforms agreed to by the leaders of the G-20 nations and one of the most important components of the Dodd-Frank Act, Massad said, and there is more work to do. In just one of the many CFTC actions, in December the staff proposed technical specifications for the reporting of 120 priority data elements. Public input is being requested on this and Massad hopes these rule changes can be finalized soon.

De minimis threshold. When the CFTC and the SEC wrote the “de minimis exception” it was without the benefit of much data. But we now have substantial information that we can use to have a discussion about what is the appropriate level at which to set the de minimis threshold, Massad said. The staff’s preliminary report, however, did not make a recommendation as to what the level should be. It instead explored the issues and invited public comment on the data, the methodology, and the issues discussed. Now, Massad said, the staff will begin the process of carefully studying the feedback received, producing a final report and making a decision on what, if any, action to take.

Priorities. Cybersecurity and automated trading will remain priorities, Massad said. There are efforts both domestically and internationally to look at a range of issues to make sure clearinghouses are strong and safe, including recovery planning if there is a problem at a CCP. Other priories include finalizing the proposed rule on the cross-border application of the recently adopted rules on margin for uncleared swaps, and reproposing rules related to capital requirements for swap dealers and major swap participants. Massad will also ask the Commission to consider a number of changes to enhance SEF trading and participation. It is his intention to formalize through rulemaking proposals a number of “no action” letters and guidance the Commission has provided. Massad said they will consider some additional issues, as well, such as whether the Commission should play a greater role in the “made available to trade” determination process.

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