On June 4, 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 RECOMMENDATION
The Impact of the U.S. Bank Capital Proposals on End-Users that Rely on Cleared Derivatives Markets
Kyle Glenn, Global Policy, FIA
- Basel III Endgame and the Global Systemically Important Bank (GSIB) Surcharge Proposal will increase capital requirements by 80.5 percent total. FIA is keeping a close eye on the SEC’s recently adopted Treasury Market Structure Rules as they may interact with the bank capital rules that are expected to be implemented.
- FIA suggests that the CFTC continue to engage with the relevant U.S. bank regulators about the pending proposals and the impact they will have on the markets that fall under the CFTC jurisdiction, as well as conduct an independent study of the proposals to better understand the impact of the proposals, should they be adopted in their current form, on the users of derivatives markets, and organize a roundtable with U.S. bank regulators focused on derivatives markets.
Thane Twiggs, Chief Compliance Officer, Cargill Risk Management, Cargill
- Self-clearing is not a great option to ensure proper risk management as there is not enough capacity with the declining number of Futures Commission Merchants (FCMs). Basel III will impact people that we may not even anticipate and will penalize end-users of derivatives products.
PANEL – SWAP EXECUTION FACILITIES (SEF)
Panelists
Thomas Pluta, President, Tradeweb
- Markets have experienced new questions and considerations around the upcoming block size requirements set forth by the CFTC. Tradeweb encourages more transparency in the derivatives markets, and we urge the CFTC to continue this move toward more transparency. There is an immense opportunity for electronic swap markets to move even more electronic, and Tradeweb will continue to work closely with clients, regulators, and market participants to create a more efficient and transparent marketplace through the use of electronic tools.
Scott Fitzpatrick, CEO, Tradition SEF
- Despite being created for the purpose of liquidity concentration and formation, price discovery, and ultimately execution of swaps subject to a clearing and trading obligation, the majority of swaps executed on SEFs are not subject to the trading obligation.
Adam Lister, Interest Rate Swaps Electronic Trading Product Manager, Bloomberg
- While each Designated Contract Market (DCM) has its own set of rules of what is and is not permissible in each market, I would like to suggest that GMAC address the outstanding no-action relief to provide clarity on whether or not the CFTC objects in principle to the swap component of an invoice spread being traded on traded by self-execution methods. This would provide legal certainty and further conversations with DCMs in efforts to promote competition and transparency in line with the Commodity Exchange Act.
TECHNICAL ISSUES SUBCOMMITTEE RECOMMENDATIONS
Variation Margin Processes in Non-Centrally Cleared Markets
Tara Kruse, Global Head of Infrastructure, Data and Non-Cleared Margin, ISDA
- Following the global implementation of margin requirements for non-cleared derivatives, margin call, and settlement volumes have grown exponentially, raising the necessity for efficient collateral and liquidity management practices, especially during times of market volatility.
- The importance of streamlining variation margin (VM) practices is recognized by market participants through the increased use of standards and solutions and by the global regulatory community which has recommended areas for improvement of VM processes.
- Generally, as dealer banks and other market intermediaries conduct their regular due diligence and establish the boundaries that will govern their trading relationship, they should address the operational and legal challenges that could potentially inhibit a seamless exchange of margin and collateral calls during a period of stress.
- Firms should consider the advantages of standardization and automation of their non-centrally cleared margin processes to reduce frictions and the possibility of operational delays or failures. Depending on the firm’s trading profile, these improvements may facilitate collateral utilization within firms, especially in stress periods.
PRESENTATION: GLOBAL COMMODITY MARKETS
Speakers
Derek Sammann, Senior Managing Director, Global Head of Commodities, Options & International Markets, CME Group
- Over the last six to twelve months, CME has seen substantial increases in volume, participation, globalization, and client segment growth. CME metals, energy, and agriculture products markets have all increased in volume. CME has seen significant growth in open interest holdings, and the increasing proportion of risk being carried in options in our copper options market exceeds open interest in our copper futures market for the first time.
- There is an increasing trend towards the convergence of ag and energy products. Copper market activity has significantly grown, and CME predicts this trend will continue. CME has clearly defined pricing rules for agricultural markets. All client segments have increased their use of ag options leading to a healthy ecosystem of market participants. CME is concerned with how an increase in capital requirements will impact commercial end-users.
Joe Nicosia, LDC: How does CME handle trading activity reporting with overseas entities? Sammann: CME has the same requirements regardless of whether their position is the same. CME has teams locally on the ground to handle trading activity reporting communications and conversations.
John Murphy, CMC: Does CME plan to move into electricity and utility trading in Asian markets? Sammann: Yes, CME is looking at how to connect our portfolios.
PRESENTATION: CFTC OFFICE OF INTERNATIONAL AFFAIRS
Speakers
Andrea Musalem, Associate Director, Office of International Affairs
- On the topic of digital assets, there are three working groups finishing proposals on the regulatory approach to digital asset markets. This fall, the Financial Stability Board (FSB) and the International Monetary Fund (IMF) will jointly deliver a status report to the G20 on the progress of the implementation of the FSB and IMF crypto asset recommendations.
- Concerning Voluntary Carbon Markets (VCMs), the International Organization of Securities Commissions (IOSCO) published a discussion paper setting out key considerations for the sound functioning of these markets. The consultation report was well received, and responses submitted by stakeholders are being considered by the members of the Carbon Markets Work Stream as they look toward finalizing this work later this year.
UPDATES FROM SUBCOMMITTEES ON FUTURE AGENDA ITEMS
Global Market Structure Subcommittee
- The Global Market Structure Subcommittee will continue to reflect on a number of important themes at today’s meeting, including the impact of the pending U.S. bank capital proposals and the SEF framework.
Technical Issues Subcommittee
- The Technical Issues Subcommittee is likely to focus on trade reporting, U.S. debt ceiling disruptions, and unexpected market closures in the coming year.
Digital Asset Markets Subcommittee
- The Digital Asset Market Subcommittee is planning to build on the taxonomy framework to cover both the Non-fungible tokens and utility tokens. In addition, the Subcommittee is looking at proposing tokenized assets as eligible collateral, with a particular focus on money market funds.