On November 6, the Commodity Futures Trading Commission (CFTC) Global Markets Advisory Committee (GMAC) held a public meeting.
Below is a summary of the meeting prepared by Delta Strategy Group.
GLOBAL MARKET STRUCTURE SUBCOMMITTEE UPDATE
Michael Winnike, Director, Head of US Market Structure, Global Trading Group, BlackRock (Co-Chair)
Brad Tully, Global Co-Head, Corporate Derivatives & Private Side Marketing, J.P. Morgan (Co-Chair)
New Block and Cap Size Recommendation
Wendy Yun, Managing Director, Goldman Sachs Asset Management and SIFMA AMG Representative
Discussion:
- New block sizes have significant potential impacts on end-users. Moving to a 67 percent test is a marginal increase, but it has increased block sizes significantly. We are concerned that these sizes could create wider spreads for markets.
- Block and cap sizes play a vital role in balancing the need for transparency and price discovery with liquidity. We remain concerned that heightened thresholds in certain asset classes have not been properly calculated and could decrease liquidity and increase costs. The CFTC should extend the implementation date for all asset classes until the end of 2024 and use this time to engage with industry to ensure these cap sizes are appropriately tailored.
End User Cross-Margining Across FICC and CME
Laura Klimpel, General Manager of FICC, Head of SIFMU Business Development
- Any clearing considerations will need to be reexamined if the SEC finalizes a rule to require central clearing in Treasury markets. We need to expand the benefits of cross-margining down to the end-user level to ensure that they are available for as wide of an array of market participants as possible. We must minimize credit exposure to FICC, CME, and customers generally. We plan to commission outside counsel opinions to ensure that cross-margin positions have the same protections as futures positions.
Discussion: Dave Olsen, Jump Trading, FIA PTG: Extending cross-margining to end users is a positive, but economies of scale can create monopolies in this space. The DTCC should consider what open access would be available to other providers that want to participate in cross-margining.
PANEL – BASEL III ENDGAME PROPOSAL: IMPACT TO DIREVATIVES MARKETS
Speakers:
- Lisa Galletta, Head of U.S. Prudential Risk, ISDA
o The Basel III Endgame Proposal is projected to cause an increase of twenty percent in capital holdings and increase trading activity by one hundred-seventy five percent.
- Jackie Mesa, Chief Operating Officer and SVP, Global Policy, FIA
o FCMs are consolidating and the majority of them remaining are bank holding company subsidiaries, which the capital rules impact. Current Basel III implementation strategies will exacerbate capacity challenges facing the clearing ecosystem while making central clearing more expensive for the end users. The fear of increased prices and lower capacity will raise costs or create lack of access for hedging for end users such as farmers and energy producers.
- Toks Oyebode, Managing Director, Regulatory Affairs, J.P. Morgan
o There is a need to make sure that derivatives activity conducted by banks, whether it is clearing or trading, is appropriately capitalized, but that needs to be done in a way that recognizes existing risk mitigants in the system.
- Jeremy Wodakow, Chief Revenue Officer, Cypress Creek Renewables
o The Inflation Reduction Act is intended to catalyze investment in renewable energy projects, promote domestic manufacturing, and bolster access to efficient and low-cost capital. The renewable energy space faces roadblocks from permitting delays, supply chain constraints and increased project costs stemming from equipment and rising interest rates.
o Tax equity would be quadrupled by these proposals which could incentivize banks to exit the renewable tax equity markets. This will undercut many incentives in the Inflation Reduction Act. The new requirements on derivatives, or the carbon valuation adjustment standards, are especially punitive for on-margin derivative transactions.
PRESENTATION: HIDDEN IN PLAIN SIGHT? DERIVATIVES EXPOSURES, REGULATORY TRANSPARENCY, AND TRADE REPOSITORIES
Steve Kennedy, Global Head of Public Policy, ISDA
- We need to create better access data sets across jurisdictions to ultimately make the data more usable and transparent. We can do so by curating data and analytics to “cleanse” and standardize data as well as encourage memorandums of understanding amongst regulators to mitigate against soiled data.
TECHNICAL ISSUES SUBCOMMITTEE RECOMENDATIONS
Global Default Simulation Recommendation
Teo Floor, CEO, CCP Global
- We commend the CFTC for the work that they have thus far provided to the industry in this collaborative default simulation. Support from authorities such as the CFTC is, is instrumental and highly valuable for all involved.
- CFTC should consider the inclusion of lessons learnt and best practices arising from its capacity building programs and some energy market regulatory homologues.
Money Market Funds as Eligible Collateral Recommendation
Tara Kruse, Global Head of Infrastructure, Data and Non-Cleared Margin, ISDA
- We recommend that the CFTC finalizes their Money Market Fund (MMF) Rule Amendment, which would remove the asset transfer restriction from MMFs. We encourage the U.S. prudential regulators to adopt a corresponding amendment and encourage EU policy makers to remove the third country fund restructure for eligible collateral cleared margin rules.
Improve Trade Reporting for Market Oversight Streamline potential 40% increase in CFTC Reportable Data Elements Recommendation
Tara Kruse, Global Head of Infrastructure, Data, and Non-Cleared Margin, ISDA
- We urge the CFTC to reconsider recent proposed rulemakings to expand swap data reporting requirements or limit the scope of additional data elements. The CFTC should advance analytical tools to optimize the use of the current and recently expanded data set and focus on impediments to data sharing.
Improve Trade Reporting for Market Oversight Improving Data Sharing and Systemic Risk Analysis Recommendation
Chris Childs, Head of Repository and Derivatives Services and CEO and President, DTCC Deriv/SERV
- There are significant differences in the data collected across different jurisdictions, and we recommend the CFTC assess and address data sharing issues under three key areas. The first is the governance, legal and regulatory framework; the second is access mechanisms and sharing processes to allow an amalgamated data set; and the third is identifying non-data-related processes and reporting.
- We recommend that the CFTC propose to the Regulatory Oversight Committee to work on creating a subset of the critical data elements that would be used for amalgamation. This can be then turned into a data extract specification that all repositories can develop, so that when the there is a need for data amalgamation, and the data coming from all trade repositories will be in a standard form.
DIGITAL ASSET MARKETS SUBCOMMITTEE UPDATE
Speakers:
- Caroline Butler, Global Head of Digital Assets, BNY Mellon
o We are working on two work streams focused on NFT’s and utility tokens and the digital asset infrastructure. We also look at optimal use of infrastructure, agnostic to whether it uses the underlying public chains or private chains.
- Sandy Kaul, SVP, Head of Digital and Industry Advisory Services, Franklin Templeton
o Taxonomy is a critical part of our recommendation because many times these are new assets, and the definitions are still becoming clear and becoming standardized. We feel that a common nomenclature is going to be an evolving part of the work, that that it will help to bring all of the work streams together.
o We are trying to focus in on where the nature of having tokenized the assets create potentially new areas of utilization or new interactions that we need to consider for the governance risk and controls framework.
o We are looking to the reconcile how decentralized and centralized entities work together in a regulatory framework and are considering how to create accountability and responsibility that would give confidence to the consumer protections that we need to make these functioning marketplaces.