Friday, February 02, 2018

Consensus and greater clarity regarding self-certification of new futures contracts apparent at MRAC meeting

By Brad Rosen, J.D.

The first meeting of the CFTC’s Market Risk Advisory Committee (MRAC) convened under the sponsorship of Commissioner Rostin Behnam in Washington, D.C. to explore the regulatory processes and statutory framework in connection with the listing of new products through the self-certification on CFTC-regulated designated contract markets.

The MRAC meeting came in the aftermath of a contentious dispute between stakeholders in the clearing firm community and the Chicago Mercantile Exchange, Inc. (CME) and the CBOE Futures Exchange, LLC over the self-certification and listing of Bitcoin related futures products in early December, 2017. The clearing firm community contended it was not given a meaningful opportunity to provide input and comment about the new and volatile products. This displeasure was reflected in an open letter from FIA CEO Walter Lukken to CFTC Chairman Giancarlo.

Commissioner Benham, in his opening remarks at the MRAC gathering, made clear that the purpose of the meeting was not intended to question the efficacy or usefulness of self-certification itself. Rather, he noted the overarching theme of the meeting was to focus on process, though observing “we are now living in an age that is not big on process, but often prefers to emphasize ‘likes’ and tweetable sound bites.” Importantly, Benham noted that the self-certification had served market participants, the CFTC, and the general public very well over the years. He pointed out that since Congress authorized the CFTC to establish a self-certification process for the listing of new futures products in 2000, exchanges have self-certified 10,628 new products, which has provided more risk management tools for commercial end-users across many different asset classes.

Chairman Giancarlo. In his remarks, Chairman Giancarlo addressed the self-certification process straight on, noting “it is DCMs and Designated Clearing Organizations (DCOs) - and not CFTC staff - that must solicit and address stakeholder concerns in new product self-certifications. Interested parties, especially clearing members, should indeed have an opportunity to raise appropriate concerns for consideration by regulated platforms proposing virtual currency derivatives and DCOs considering clearing new virtual currency products.”

In an effort to quell some of the concerns from the clearing firm community regarding the opportunity to provide comment and input, Giancarlo indicated that he has requested CFTC staff to add an additional element to its Review and Compliance Checklist for virtual currency product self-certifications which would require DCMs and Swaps Execution Facilities (SEFs) to disclose to CFTC staff what steps they have taken in their capacity as self-regulatory organizations to gather and accommodate appropriate input from concerned parties, including trading firms and FCMs. The Chairman recently made this same point at the annual conference of the ABA Section on Derivatives and Futures Law.

Commissioner Quintenz. Commissioner Brian Quintenz was also in attendance at MRAC, sharing his views which included that, “the self-certification process ensures that the market’s introduction of new products is not delayed by regulators’ political considerations. It reflects the government providing the market with the freedom and space to innovate outside of Washington bureaucracy.” He added, “I think we all benefit from that free market approach.”

The MRAC meeting provided many of the participants an opportunity to rehash and relitigate earlier positions and arguments, although the level of acrimony seemed to have significantly dissipated compared to the final month of 2017.

FIA position. Ed Pla, the Global Co-Head of Execution and Clearing for UBS, presented at the meeting on behalf of the FIA’s FCM clearing member community, and noted that FIA strongly supports the self-certification process as enacted in the Commodity Futures Modernization Act, but observed that while Congress provided exchanges with the extraordinary power to self-certify their products, this self-policing authority comes with reciprocal responsibilities that exchanges act in the best interests of the marketplace.

Pla further noted that the FCM community believes that the launch of the exchange-traded derivatives in cryptocurrencies would have benefited from more two-way dialogue among regulators, exchanges, clearinghouses and the clearing firms who will be absorbing the risk of these instruments during a default. Nonetheless, Pla stated that FIA applauds Chairman Giancarlo’s recent announcement to improve the self-certification process by requiring exchanges to show that the industry was properly consulted before the launch of such cryptocurrency products. Still, he noted that this undertaking “must be more than a ‘check the box’ exercise and allow for a healthy and rigorous dialogue with market participants.”

A view from the exchanges. The comments of Julie Winkler, Chief Commercial Officer for the CME, were representative of other MRAC participants appearing on behalf of the exchange community. She noted that the CME was looking at the Bitcoin futures product for nearly two years before launch and was engaged in close and ongoing communications with CFTC staff throughout about the contract as well as the underlying index which serves as the reference rate for the contract. She also noted the exchange solicited input and feedback from clients and firms as that helped in creating the contract that the exchange ultimately launched.