Wednesday, November 16, 2016

Massad outlines areas of continued focus for derivatives regulation

By Lene Powell, J.D.

In remarks before CME Global Financial Leadership Conference, CFTC Chairman Timothy Massad said he does not expect a wholesale repeal of the Dodd-Frank Act in the next administration, though this is being cited as a priority of the Trump administration. Massad declined to give predictions on what rules might undergo changes under a new CFTC chairman, but he believes the areas of technological change, clearinghouse risk and market liquidity, and international coordination will continue to be areas of focus for the CFTC.

Progress on reforms. Massad emphasized broad agreement among commissioners in the agency’s Dodd-Frank rulemaking to date, saying fault lines have been about details, not goals. He noted that the CFTC has taken a number of actions to fine-tune the Dodd-Frank framework to address many end user concerns and focus regulation more strongly on areas of greatest risk, including uncleared swaps. The agency has also worked to harmonize rules domestically and internationally and to strengthen relationships with international regulators, which helped to resolve a longstanding dispute over clearinghouse regulation.

Massad said there are a “few things” he hopes the CFTC can complete in the time remaining before the turnover, but did not provide details.

Technology. Massad thinks the CFTC will continue to concentrate on technological changes in the markets the CFTC oversees. The agency focuses on cybersecurity in its examinations, and recently adopted rules requiring cybersecurity testing by clearinghouses, exchanges, and swap data repositories. The CFTC also recently hosted a cybersecurity exercise including participants from government agencies as well as CME, ICE, clearing firms, and trading firms.

The CFTC has modernized market surveillance tools and proposed rules to implement risk controls to reduce the risk of disruptions from automated trading, Massad said. Enforcement efforts have also been stepped up, and last week the CFTC settled its case against Navinder Sarao, whose spoofing activity is believed to have contributed to the Flash Crash of 2010. Other technological developments include the advent of blockchain. The CFTC is working on rules related to this, including looking at recordkeeping rules, which are outdated and will become more so if developments like smart contracts become a reality, said Massad.

Clearinghouse risk and market liquidity. Massad stressed the need for data-driven analysis and a focus on risk. He observed that any repeal that increases the risk of failure of a globally significant financial institution risks crashing the economy and requiring a bailout. Alternatively, repeal may involve reducing regulatory impact on smaller banks and commercial companies, which were not the cause of the financial crisis. Some have raised questions whether reforms have concentrated risk and created new systemic points of potential failure. Massad said the CFTC will release the results of stress tests of five clearinghouses on November 16.

Addressing concerns that capital requirements and limits on certain activities have constrained liquidity, Massad said that liquidity is shaped by many non-regulatory factors, including market structure, technological change, and general economic conditions. There are questions about how automated trading may be affecting liquidity, and many traditional commercial end users including agricultural end users are concerned about being able to hedge effectively. Other questions include what happens to liquidity during market stress and the effects of some capital reforms on the clearing member industry.

International coordination. Massad said he has made it a priority to work closely with other regulators on oversight and harmonization of regulations. Beyond Europe and the U.K., areas of coordination include China and India on possible recognition of clearinghouses, Japan and other regulators on automated trading, and Asian Pacific jurisdictions on a variety of issues.

In closing, Massad said he believes these areas of regulation will be important regardless of the political composition or leadership of the CFTC, and he hopes they can be addressed without partisan divisions.