By Kevin Kulling, J.D.
Responding to a Request for Information (RFI) from the Department of the Treasury seeking public comment about the evolution of the Treasury market structure, the Futures Industry Association (FIA) cautioned against imposing additional regulations and changes, noting that there is already a comprehensive regulatory scheme under the Commodity Exchange Act and the rules of the CFTC.
The FIA submitted the letter in connection with the RFI which sought comments on structural changes in the U.S. Treasury market and their implications for market functioning; trading and risk management practices across the U.S. Treasury market; consideration with respect to more comprehensive official sector access to Treasury market data; and benefits and risks of increased public disclosure of Treasury market activity.
Response to market volatility. Treasury’s RFI was an outgrowth of the Joint Staff Report; The U.S. Treasury Market on October 15, 2014, which analyzed a specific 12-minute window of unusually high volatility that occurred in the Treasury securities market and related Treasury and interest rate futures markets on October 15, 2014. The staff report did not identify a cause of the specific volatility.
FIA said that it was “critically important for the regulators to keep in mind that the U.S. futures exchanges, futures industry professionals and market participants are subject to comprehensive regulation under the Commodity Exchange Act and rules of the CFTC, including in the areas of trading risk controls, enhanced market surveillance and market data collection, as addressed in the RFI.”
The group said it was important for regulators to “avoid imposing additional unnecessary regulation” in these areas on the futures markets. FIA noted that the CFTC is addressing some of the same regulatory matters contemplated in the RFI through its pending Regulation AT rulemaking. FIA said it firmly believes that any future regulatory action addressing automated trading in the futures markets is the primary responsibility of the CFTC and the futures exchanges, as self-regulatory organizations, working together with the futures industry.
Electronic trading. FIA noted that the growth of electronic trading and the growing participation of principal trading firms are certainly part of the narrative explaining the evolution of the Treasury markets to their current state, but they may not be the only relevant factors. FIA encouraged Treasury to assess “other potential factors that may be shaping the Treasury markets,” such as whether regulatory capital constraints on banks or other market participants may be inhibiting their level of participation in the Treasury markets, potentially harming market liquidity.
FIA also said it encouraged Treasury, working closely with the CFTC, to consider whether there were any areas where regulatory requirements posed obstacles to the fair and efficient operation of the Treasury markets, or impeded market innovation that could enhance the interconnections among the segments.
FIA said it fully endorsed the step identified in the RFI for regulators to continue their efforts to strengthen monitoring and surveillance of the U.S. Treasury markets through interagency coordination related to trading across the various segments comprising those markets.
Treasury futures. FIA also said in its submission that Treasury futures are only segments of the broader U.S. futures markets, all of which are subject to extensive regulation. Singling out Treasury futures for special, additional regulatory requirements in the areas of risk control, market data collection, and market surveillance could be highly disruptive to the procedures and infrastructure that the exchanges and industry have already put in place to comply with their comprehensive regulatory obligations under the Commodity Exchange Act framework, the FIA comment said.
FIA said it has long supported the use of properly placed controls to mitigate disruptive trading events. FIA reiterated that it believed the CFTC and exchanges were best positioned to address trading risk controls for all segments of the U.S. futures markets, including the Treasury futures markets.