By Brad Rosen, J.D.
“The CFTC is at an inflection point, where strategic regulatory decisions are critically important to determine the future of market transparency, resiliency, and systemic risk”, declared Commissioner Rostin Behnam, the newest member of the Commodity Futures Trading Commission in his first official speech as a commissioner. Behnam made his long- awaited remarks on November 14 before the Georgetown Center for Financial Markets and Policy at George University, Behnam’s undergraduate alma mater. Behnam was sworn in as a commissioner on September 6, 2017.
In the speech, titled The Dodd-Frank Inflection Point: Building on Derivatives Reform, Behnam provided a sweeping foundational survey of the history of futures regulation in the U.S., starting with the Futures Trading Act of 1921 through the current day, with stops along the way that included the passage of the Commodity Exchange Act in 1936, the establishment of the CFTC in 1974, as well as the 2009 G20 Pittsburgh Summit, which laid the framework for regulating the over-the counter-derivatives markets and the passage of the Dodd-Frank Act in 2010.
Behnam noted that the 2008 financial crisis and weaknesses in the global regulatory system it revealed led to Congress enacting the Dodd-Frank Act, which largely incorporated the international financial reform initiatives for over-the-counter derivatives laid out at the G20 Pittsburgh Summit. These initiatives included: (i) moving standardized contracts to exchanges or electronic trading platform (when appropriate); (ii) mandatory clearing for most bilateral contracts through central counterparties (“CCPs”); (iii) reporting executed trades to trade repositories; and (iv) instituting higher capital requirements for non-centrally cleared contracts.
Behnam argued that it is critical for the CFTC to continue supporting key Dodd-Frank reforms in a manner that is both reflective and forward looking. By this he means it is important to reflect on both the success and failures of policy changes that have been made to date and to keep a vigilant eye on new challenges, innovations, and threats to the financial markets. Behnam asserted, “[o]ur mission is to protect the market and the public from fraud, abuse, and systemic risk”, and recalled, “[w]e cannot forget that millions of jobs were lost and homes foreclosed upon before we were authorized to take action.”
With respect to the further implementation of Dodd-Frank reforms, Behnam identified four areas where the commission needs to make further progress as follows.
Mandatory clearing of standard swaps. Following the implementation of the CFTC clearing mandate in 2013, more than 80 percent of interest rate derivatives and credit default swaps are now centrally cleared. However, mandatory clearing has raised new challenges and concerns with regard to the role and size of the global portfolio of cleared derivatives. Accordingly, aggressive efforts to monitor and consider the potential systemic repercussions of the clearing mandate need to be analyzed and pursued by commission staff.
Exchange trading of standardized swaps. The trading of standardized swaps on CFTC-regulated exchanges (designated contract markets or “DCMs”) or on multi-participant trading systems or platforms first established in the Dodd-Frank Act (swap execution facilities or “SEFs”) is another key area of reform. The main policy goal of the exchange trading requirement is to further transparency in the OTC markets. Like the clearing mandate, the exchange trading policy initiative is sound and the market has moved swiftly to adapt to the regulatory changes.
Swap data reporting. Before Dodd-Frank, there simply was little, if any, relevant market data regarding the size, complexity, and potential risks underlying over-the-counter derivatives. Through robust data collection, market risks and unexpected events can be better assessed and possibly predicted. However, given the CFTC’s limited resources and technology capabilities, the Commission does not have the bandwidth to seek to collect or maintain data that does not serve a proven purpose of protecting markets, market participants, and customers. Nonetheless, the CFTC must prioritize building on the current data requirements established in Dodd-Frank in a way that sets clear parameters for what data must be collected and submitted, when it must be submitted; and, equally important, what form the data must take.
Capital and margin requirements for non-centrally cleared swaps. Capital serves as a loss absorbency mechanism in times of extreme market stress. The CFTC has completed its margin rules, but has yet to finalize capital requirements for the swap dealers who are not prudentially regulated. Regulators must continually monitor market ecosystems to ensure that regulations, including capital and margin requirements, are properly set to ensure market resiliency, safety, and liquidity in times of market stress.
Key priorities. Behnam also stated two of his key priorities and objectives that he will focus on during his early days as a Commissioner. The first is his sponsorship of the CFTC’s Market Risk Advisory Committee (MRAC), the Commission’s open forum to examine risk across broad swaths of the markets. The second, and following in the footsteps of Chairman Giancarlo, Commissioner Behnam will embark on a listening tour across the country and meet with market participants, such as commercial manufacturers, financial institutions, and farmers and ranchers. The stated goal of this undertaking is to get a better understanding of the risk management challenges that these various end users encounter.