Thursday, February 28, 2019

CFTC Chairman Giancarlo provides insights into priority undertakings at the agency

By Brad Rosen, J.D.

SIFMA President and CEO Kenneth E. Bentsen, Jr. sat down with CFTC Chairman J. Christopher Giancarlo to explore a number of top matters under consideration at the Commission in the premier episode of its new video series titled A View from Washington.

In this first edition, Chairman Giancarlo provided insight into five timely CFTC undertakings, including an update on last year’s CFTC cross-border white paper, next steps on the proposed SEF trading rule, the final phase of implementation of initial margin, progress on inter-agency harmonization, and the chairman’s priorities in the remaining months of his tenure.

An update on the CFTC cross-border white paper. Giancarlo provided an update on the CFTC’s 2018 white paper, Cross-Border Swaps Regulation Version 2.0: A Risk-Based Approach with Deference to Comparable Non-U.S. Regulation. He noted that, based on feedback and discussions with fellow regulators and market participants, if a jurisdiction has adopted the G-20 accords it should be afforded deference, provided there is a rough degree of regulatory equivalence. The chairman further observed if the U.S. is going to regulate the rest of the world, then non-U.S. regulators will likely look to do the same.

Next steps in connection with the proposed SEF trading rule. Chairman Giancarlo indicated that the Commission is in the process of responding to feedback and concerns from market participants on the proposed SEF trading rule where the comment period was recently extended. Acknowledging the proposed rule received its share of constructive criticism, the chairman urged that the CFTC’s approach to swaps execution should encourage greater flexibility and innovation. He asserted that the CFTC should not dictate how swaps execution should occur as it currently does by virtue of its RFQ (request for quote) or order book requirement.

Giancarlo also identified three major concerns articulated by a broad cross section of market participants. First, there are concerns about how additional markets will be brought under the scope of the rule. Second, many believe that pre-trade communications should be permitted in the SEF execution environment. Third, many are concerned about issues surrounding impartial access, especially when a SEF can determine the eligibility of market participants. Giancarlo noted that the CFTC is committed to establishing the best regulatory framework with regard to SEF execution.

Final phase implementation for initial margin. Giancarlo also shared his view regarding the final phase of initial margin implementation, which is set for 2020, and the potential challenges market participants could have in preparing for this final phase. The chairman observed that around 1,000 new market participants may be brought into the new initial margin regime and that the Commission is very sensitive to issues around systematic risk. Giancarlo also indicated that the CFTC is working closely with other regulators in connection with issues concerning documentation and margin threshold amounts. He indicated that many of these matters remain on the table and may well be subject to further study.

A progress update on inter-agency harmonization. The chairman also provided his views on the progress of efforts for inter-agency harmonization between the SEC and CFTC, particularly given the joint jurisdiction over the swaps market. Giancarlo reiterated his commitment to this undertaking and noted that progress has been made on a number of fronts, although the government shutdown slowed up the process. The chairman also asserted that getting the pending SEF rules right is particularly crucial in light of these discussions and the potential impact on security swaps. In conclusion, Chairman Giancarlo is excited about the progress that has been made in this area and expects good things to emerge from this process.

CFTC priorities and the year ahead. Chairman Giancarlo explained that he has adopted both a backward looking and forward-looking focus as he looks at the year ahead and the completion of his tenure as CFTC chairman. As for looking to the past, the chairman noted significant progress being made on matters that have long been on the agency’s plate, such as updating SEF rules, cross-border matters, and reforms that have emerged as a result of the CFTC’s Project Kiss initiative that seeks to clean up 40 years of accumulated rules and regulations.

As for looking forward, Chairman Giancarlo unscored the importance of the agency continuing to modernize and become a quantitative regulator and to make greater use of data in all of the CFTC’s operations. The chairman pointed to the relatively recent establishment of LabCFTC, the Market Intelligence Branch, and the creation of the Chief Market Intelligence Officer position. In Chairman Giancarlo’s view, these and other measures will lead to better analysis across the board, and will spur the agency’s continued evolution to meet whatever challenges lie ahead.