On July 17, the Commodity Futures Trading Commission (CFTC) Global Markets Advisory Committee (GMAC) held a public meeting.
In her opening remarks, Committee Sponsor Commissioner Caroline Pham emphasized that global collaboration will be crucial to mitigate systemic risks in financial markets. Commissioner Kristen Johnson, Commissioner Summer Mersinger, and Commissioner Goldsmith Romero also gave brief opening remarks which all pointed to the need to consider treasury market reforms.
Below is a summary of the meeting prepared by Delta Strategy Group.
OPENING KEYNOTE ADDRESS
Lynn Martin, President, NYSE Group and Chair, ICE Fixed Income & Data Services
- Enhancements made to designated contract market (DCM) and derivatives clearing organization (DCO) frameworks have been vital to mitigate high market volatility over the past two years. We can use technology to improve these structures, but it is important to highlight that collaboration across frameworks will be crucial to adapt to new technology and make ongoing improvements. We take the reliability and resiliency of our very seriously as well as the footprint of our cybersecurity and are committed to maintaining market transparency.
GLOBAL MARKET STRUCTURE SUBCOMMITTEE UPDATE
Michael Winnike, Director, Head of U.S. Market Structure, Global Trading Group, BlackRock
- We are in a period of heightened market volatility. It is crucial to recognize that Treasury market reform and derivatives markets are interconnected. The derivatives markets are critically important, and we should invest more to improve their safety.
PANEL I – TREASURY MARKETS REFORM: IMPLICATIONS FOR AND LESSONS LEARNED FROM DERIVATIVES MARKETS
Discussion:
- Brian Fitzsimmons, Head of North America Rates Securities Trading, J.P. Morgan
- Targeted incremental base for treasuries is a good idea. The correlation of futures and on-the-run Treasuries, even in times of high stress, is strong. We should carefully consider what the appropriate market caps are as well as the need for various dissemination delays. The approach to cap sizes for reported time should remain flexible. We need to look for incentives for clearing as it greatly benefits markets. Cross margining of Treasury cash and futures would also benefit market resiliency. We should adopt a ‘do no harm’ principle when considering policy that will add to market resiliency.
- Max Segal, Vice President, Global Trading, BlackRock
- An increase in repo funding has implications for other players in futures markets. Asset manager long positions have largely been absorbed by leveraged funds’ short positions.
- Isaac Chang, Head of Central Execution, Global Fixed Income, Citadel
- Increased central clearing of repo transactions will improve market liquidity. We need to think about the challenges of capacity for intermediation. We need increased cross margining. More all-to-all trading could deliver more resiliency to the market. The SEC’s dealer proposal is ultimately harmful. The proposal would artificially cap the amount of activity investment can undertake in U.S. treasuries, but we should be broadening market participation.
- Stuart Giles, Chief Strategy Officer, Tradition Americas
- It is important to be mindful of how much time it will take to implement Treasury market reforms. We can enhance liquidity by making sure we have a strong regulatory foundation to build off of.
PANEL II – SWAP BLOCK IMPLICATIONS ON MARKET STRUCTURE
Discussion:
- Tim Crowley, Senior Vice President, Portfolio Management, PIMCO
- Market depth is at its shallowest levels that it has been in the past decade. The larger the trade, the higher percentage of that trade is paid by the client in transaction costs.
- Michael Winnike, Director, Head of U.S. Market Structure, Global Trading Group, BlackRock
- Swap trading and the electronification of markets have had material benefits. We now have new forms of pre-trade price transparency, which is critical to note as transparency may change if we adjust block sizes. Liquidity could be shifted away from swap execution facilities (SEFs) with the new block thresholds. When volatility increases, so do transaction costs. Historically, transparency helps markets thrive. We recommend an additional study of appropriate block size.
- Tyler Wellensiek, Managing Director, Global Head of Rates Market Structure and Business Strategy, Barclays
- Dodd-Frank reforms added transparency, mandated clearing, promoted liquidity, and have given us a strong foundation to work from. The ability of clients to leverage their own market expertise to work discreetly with the liquidity providers of their choice is critical.
- Adam Lister, Interest Rate Swaps Electronic Trading Product Manager, Bloomberg
- There are many benefits of SEF electronic trading. We are seeing reduced block size activity in interest rate swaps but an increasing number of dealers in competition. The status of SOFR trading off-facility (block and non-block) is not yet easily observable compared to SEF data. It is difficult to predict the impact of proposed threshold increase without knowing ‘how’ they are traded.
- Bhas Nalabothula, Head of U.S. Institutional Rates, Tradeweb
- Sustained high volatility has decreased the amount of block trades traded and processed on SEF’s.
TECHNICAL ISSUES SUBCOMMITTEE UPDATE
Speakers:
- Allison Lurton, General Counsel and CLO, FIA
- Tara Kruse, Global Head of Infrastructure, Data, and Non-Cleared Margin, ISDA
Discussion:
- The Subcommittee is considering solutions to improve efficiencies in post-trade processes, provide recommendations for global coordination of market events such as closures or drills, and identify other infrastructure issues to address the impact of cross border activity and access to markets.
- The Subcommittee will address ISO implementation variances between reporting regimes and provide validation standards for CDE beyond field/value guidance.
PANEL III – TOKENIZATION OF REAL ASSETS AND INSTITUTIONAL ADOPTION
Real-World Use Cases for Tokenization of Financial Products and Services:
- Julian Sevillano, Partner, McKinsey & Company
- Digital assets have demonstrated resilience through a period of extreme volatility, and there has been an emergence of non-crypto applications. Blockchain-based representation of real-world assets is growing as a key application of blockchain technology across traditional and new asset classes.
- Web 2.0 and 3.0 have some overlap but are equally distinct archetypes. Tokenization improves capital efficiency, expands access to new pools of capital with lower minimum investment required, and expands access to new secondary markets and greater liquidity. Challenges related to technology, economics, and regulation have limited tokenization’s potential to scale, but growing institutional interest could indicate a possible acceleration of adoption. Companies should consider reexamining underlying business cases, building out tech and risk capabilities, forming ecosystem relationships, and informing standard setting.
Impact of DLT in Global Capital Markets:
- Adam Farkas, CEO, Global Financial Markets Association
- Tokenized securities in capital markets could deliver game-changing efficiency and innovation. DLT-based capital markets are emerging, but critical barriers must be overcome. Going forward, we recommend the harmonization of global regulatory and legal framework, the enablement of interoperability with existing market infrastructure, the development of viable primary and secondary markets, and the advancement of technical challenges posed by DLT.
Facilitating Wholesale Digital Asset Settlement:
- Per Von Zelowitz, Director, New York Innovation Center, Federal Reserve Bank of New York
- The regulated liability network (RLN) concept envisions a theoretical market infrastructure to exchange and settle tokenized forms of money, such as central bank and commercial bank money. Such infrastructure could potentially join the benefits of emerging technology, such as tokenization, with the safety and stability of existing systems.
European Investment Bank Digital Bond Issuance:
- John O’Neil, Global Head of Digital Assets Strategy, HSBC
- The European Investment Bank (EIB) has issued the first ever sterling-denominated digital bond using blockchain on HSBC Orion. Investors should get involved to prepare firms for the growing number of digital bond issuances, to review and understand the legal structure and term sheet supporting a digital bond, and because there is minimal technology and operational change required to access the bond.
Discussion:
Perianne Boring, Chamber of Digital Commerce: There is a lot of opportunity with Web 3 and the Metaverse. There are many real-world applications beyond what we have seen so far for NFT technology in supply chains. We would love to offer our research to the Committee on this issue.
MEMBER PRESENTATIONS
Speakers:
- Sandy Kaul, Senior Vice President, Head of Digital and Investor Advisory Services, Franklin Templeton
- We have taken a positive attitude towards the digital asset space as we have developed our own digital wallet system. We also built our transfer agent system that operates on the public blockchain as well as developed a broad native digital asset practice.
- Tom Jessop, President, Fidelity Digital Assets
- We have recently broadened access of our products to individual investors. Weak market structure is more problematic than technology issues. We need more standards and cooperation among regulators in the digital asset space.
- Christopher Perkins, President, CoinFund
- While tokenization of financial products holds great promise to deliver utility to US trade markets, blockchain innovations, including developments of the proof-of-stake (PoS) consensus mechanism, have unlocked new financial benchmarks in crypto specific interest rates. U.S. market participants continue to be disproportionately at a disadvantage with a lack of regulation.
- Nicole Valentine, Fintech Director, Milken Institute
- We should be asking what role institutions should play in fueling innovation and what role innovation should play in helping institutions achieve their mission and purpose. Tokenization can be used as a tool for trust and inclusion.