FIA issued an updated version of its guide to the rules and regulations for U.S customer fund protections. The guide provides futures commission merchants and their customers with simple, easy-to-use information about how customer funds are protected in futures and cleared swaps markets.
Read the Guide
The Commodity Futures Trading Commission today held an open meeting to consider two rulemakings. This was the first public meeting held by Tim Massad, the new CFTC chairman. In his opening statement, Massad stressed that both rulemakings are designed to "minimize the burden" on commercial hedgers and make sure that the CFTC's regulatory scheme "recognizes the needs and concerns of commercial end-users who depend on the derivatives markets to hedge normal business risks."
Proposed Rule for Margin Requirements on Uncleared Swaps
The CFTC unanimously approved a proposed rule that would establish initial and variation margin requirements on uncleared swaps. The proposed rule is "very similar" to the proposals issued last week by the Federal Reserve and other U.S. banking regulators and generally tracks the standards recommended last September by international regulators through IOSCO and the Basel Committee, according to CFTC staff. The CFTC's version of this rule will apply to swap dealers and major swap participants that are not subject to the oversight of other regulators such as the Federal Reserve.
Under the proposed timetable for implementation, initial margin requirements would be phased in starting Dec. 1, 2015 for the largest market participants and ending Dec. 1, 2019 for the smallest. Variation margin requirements would be effective Dec. 1, 2015. The rules would permit collateral for initial margin to include cash, sovereign debt, government-sponsored debt, investment grade debt, including corporate and municipal bonds, equities, and gold. Variation margin, on the other hand, would be limited to cash.
The proposed requirements only apply to trades among swap dealers and other financial entities and do not apply to commercial end-users. The proposal includes a carve-out for financial entities that have less than $3 billion of gross notional exposure in uncleared swaps, which is a significantly lower level than what was recommended by the IOSCO/Basel Committee. This threshold calculation would be calculated at the consolidated corporate group level, rather than at an entity level, and would include physically settled foreign exchange swaps and forwards, even though these products are not subject to the proposed margin requirements.
Final Rule for Utility Swaps
The CFTC unanimously approved a final rule aimed at preserving the ability of natural gas and electricity utilities to enter into swaps transactions to hedge their risks. CFTC staff explained during the open meeting that the rule responds to concerns raised by utilities that the number of counterparties willing to enter into swaps with them has been reduced because some of these counterparties do not want to exceed the CFTC'sde minimis threshold for swaps with municipal utilities, federal agencies and other governmental "special entities," which would require them to register as swap dealers. That threshold is set at $25 million, much lower than the $8 billion threshold that applies to swaps dealing generally. The final rule permits a firm to exclude trades with "utility special entities" in calculating whether its trading exceeds the $25 million special entity de minimis threshold.
CFTC Chairman Massad said this rule is an example of the "fine-tuning" process needed for the regulatory framework established by Dodd-Frank. The final rule puts into a more permanent form the relief previously granted in a series of no-action letters that provided temporary relief.
Tim Massad, the new chairman of the Commodity Futures Trading Commission, today offered some insights on the ongoing discussions between the CFTC and European regulators on the issue of clearinghouse recognition.
In a statement given during an open meeting at the CFTC to discuss two unrelated rulemakings, Massad said he was "hopeful" that the two sides could reach an agreement soon. On the other hand, he reaffirmed the CFTC's view that "dual registration" is the right approach and urged European regulators to recognize U.S. clearinghouses "to avoid any potential for market disruption."
As required by the European Market Infrastructure Regulation, European regulators are assessing whether the regulation and oversight of clearinghouses in foreign jurisdictions is "equivalent" to the regulatory regime in Europe. If equivalence is not granted for the U.S. by Dec. 15, European banks that are members of U.S. clearinghouses will become subject to much higher capital requirements, which may cause some of these clearing firms to pull back from the U.S. markets. European regulators have indicated that the decision to grant equivalence to the U.S. is tied to a corresponding willingness by the U.S. to recognize European clearinghouses without requiring those clearinghouses to register with the CFTC or comply with duplicative CFTC rules.
Massad explained that in his view the dual registration approach is necessary in order to meet Dodd-Frank requirements and that this approach has worked well to protect customers. He also noted that two European clearinghouses are already registered with the CFTC, and he commented that dual registration has not prevented them from becoming globally important or attracting U.S. customers.
The main issue that is now being discussed, he said, is to make sure that dual registration "does not create conflicts and inconsistencies." He added that the talks are focused specifically on how to achieve the EMIR requirement for "effective recognition" within the dual registration framework.
"We are looking at whether particular regulatory objectives that we have can be met through the regulation and oversight of the home country regulator," Massad said. "We are also exploring ways to enhance cooperation in the joint supervision of dually registered clearinghouses. I am hopeful we can reach agreement soon."
On Sept. 16, a federal judge granted a motion to dismiss, in part, a lawsuit filed against the Commodity Futures Commission to overturn its guidance related to the application of Title VII in the Dodd-Frank Act to cross-border transactions. In addition, the court partially granted summary judgment for both the plaintiffs and the defendant, remanding some of the challenged rules back to the agency for further review.
U.S. District Judge Paul Friedman dismissed the part of the case challenging the cross-border guidance but ordered the CFTC to assess the costs and benefits of its extraterritorial application of a range of rules, including reporting and record-keeping rules, swap dealer registration requirements, the swap dealer definition and swap execution facility regulations. The judge explained that the CFTC's error was one of form and not substance, and it would need only to provide a reasoned explanation of why its consideration of the costs and benefits does not justify a change in the cross-border requirements. Further, the court granted summary judgment to the CFTC, affirming the challenged rules relating to large trader reporting, straight-through processing and clearing determinations.
The lawsuit was filed in December by the Securities Industry and Financial Markets Association, the International Swaps and Derivatives Association and the Institute of International Bankers. The organizations argued, among other things, that the CFTC did not follow required procedures when drafting rules when it issued its cross-border guidance.
WASHINGTON, D.C., August 28, 2014—FIA today published the fifth issue of FIA SEF Tracker, a periodic report on trading activity taking place on swap execution facilities. This issue provides data in two formats: a set of charts and tables that provide a visual representation of trends in market share and overall trading activity, and a spreadsheet with the underlying data aggregated on a weekly basis and sorted in various ways. Learn More
Responding to a request from the Technology Advisory Committee of the Commodity Futures Trading Commission, FIA and FIA Principal Traders Group submitted a joint letter on Aug. 4 suggesting that the CFTC should consider five principles as it examines ways to reform its market surveillance and oversight in a “technologically adept way.” The five principles are:
Continue to delegate “front-line surveillance” to exchanges;
Increase the analytical expertise of the CFTC staff;
Use existing reports to enhance cross-market surveillance;
Avoid the duplication of existing systems built or commissioned by exchanges
On Aug. 1, FIA submitted a letter to the Office of Foreign Assets Control, a division of the U.S. Treasury Department, to provide information concerning the FCM role in managing its customer positions in the futures markets and the potential market impact if an FCM customer with open positions becomes the subject of asset-blocking sanctions. In addition, FIA asked OFAC to consider adding a general license to the regulations implementing the Ukraine sanctions that would allow an FCM to liquidate the open positions of a customer that is a target of the sanctions or allow a clearinghouse to liquidate the open positions of a customer if the FCM is in default.
FIA submitted a comment letter to the Commodity Futures Trading Commission on July 31 in response to a request for additional comment on the agency’s proposed position limits rule and its proposed position aggregation rule. FIA focused its comments on the aggregation proposal and suggested nine changes that would address concerns raised by FIA members and other market participants. The letter also included proposed rule text provisions that reflect the suggested changes.
The Commodity Futures Trading Commission announced today that Commissioner Scott O’Malia will step down later this month. FIA issued the following statement in response to the announcement.
"On behalf of FIA, I want to thank Commissioner O’Malia for his energy, enthusiasm and commitment to public service," said FIA President and Chief Executive Officer Walt Lukken. "Scott was always willing to roll up his sleeves and dive into complex regulatory issues, and under his leadership the CFTC’s Technology Advisory Committee has developed into a remarkably effective forum for thoughtful discussion on the technological innovations that are transforming our industry. I also want to thank him for his efforts to bring the end-user perspective into the regulatory dialogue, particular with respect to Dodd-Frank, and for his emphasis on the value of empirical data in the rule-making process. I wish him all the best in the next phase of his career.”
FIA is the leading trade organization for the futures, options and cleared swaps markets worldwide. FIA’s membership includes clearing firms, exchanges, clearinghouses and trading firms from more than 25 countries as well as technology vendors, lawyers and other professionals serving the industry. FIA’s mission is to support open, transparent and competitive markets, protect and enhance the integrity of the financial system, and promote high standards of professional conduct. As the principal members of derivatives clearinghouses worldwide, FIA’s member firms play a critical role in the reduction of systemic risk in the global financial markets. FIA and its affiliates FIA Europe and FIA Asia make up the global alliance FIA Global, which seeks to address the common issues facing their collective memberships. For more information, please contact Heather Vaughan (hvaughan@FIA.org)at (202) 466-5460 or visit the FIA website at www.FIA.org.
FIA announced that Gerald F. Corcoran, chairman and chief executive officer of R.J. O’Brien & Associates LLC, has been elected as chairman of FIA. Two new board members were also chosen: Jan Bart de Boer, board member and chief commercial officer of ABN AMRO Clearing Bank N.V., and Raymond Kahn, head of futures clearing and head of agency derivatives services, Americas, at Barclays.
FIA today published the fourth issue of FIA SEF Tracker. This month’s report showed that overall volume in June was higher than any other month since the beginning of mandatory SEF trading earlier this year, driven mainly by increased trading in interest rate and credit products. Learn More
The CFTC further extended the public comment period for the proposed position limits rule, as well as the related proposal regarding aggregation of positions across commonly owned affiliates. The extension will run for 30 additional days after it is published in the Federal Register.
On June 24, the House of Representatives passed H.R. 4413, the Customer Protection and End User Relief Act, a bill to reauthorize the Commodity Futures Trading Commission through September 2018 and modify certain authorities of the CFTC within the Commodity Exchange Act. The legislation was previously approved on April 9 by the House Agriculture Committee with a unanimous voice vote, but support in the full House of Representatives was somewhat more divided with 265 members voting to pass the bill and 144 opposing it.
FIA released the third issue of FIA SEF Tracker, a periodic report on trading activity taking place on swap execution facilities. This month’s report shows an uptick in the volume of interest rate swaps traded on SEFs, a decline in the volume of credit default swaps, and a roughly unchanged amount of foreign exchange forwards traded on SEFs. Learn More
WASHINGTON, D.C., June 3, 2014—Walt Lukken, President and CEO of FIA, issued a statement today congratulating the new Commissioners and Chairman of the Commodity Futures Trading Commission. The Senate voted earlier today to confirm Timothy Massad as CFTC Chairman and Sharon Bowen and Christopher Giancarlo as CFTC Commissioners.
Walt Lukken, President and CEO of FIA, discussed global trends in derivatives markets in a keynote speech to government officials and industry leaders during the Shanghai Derivatives Market Forum in Shanghai, China.
Lukken discussed the opportunities and challenges inherent in the transition from over-the-counter trading to exchanges and clearinghouses. He stressed the value in the exchange and clearinghouse model for price discovery and risk management, but urged international regulators to stay alert to the risk that comes from concentrating risk in clearinghouses. In this context, he emphasized the importance of implementing international standards for financial market infrastructures and highlighted the critical role that clearinghouse member firms in funding the financial resources of clearinghouses.
He also stressed the importance of international regulatory cooperation to maintain healthy markets and encourage regulators to move towards mutual recognition or substituted compliance as a mechanism for cross-border regulation and oversight. “I am hopeful that regulators will find value in finding ways to cooperate that allows global markets to exist while effectively protecting the marketplace and its participants.
The Shanghai Derivatives Market Forum, now in its 11th year, brings together government officials and industry leaders to discuss the development of the futures industry in China. This year’s SDMF was co-hosted by the Shanghai Futures Exchange and the China Financial Futures Exchange. In addition to FIA’s Walt Lukken, the speakers included Jiang Yang, vice chairman of the China Securities Regulatory Commission, Tu Guangshao, executive vice mayor of Shanghai, Yin Zhongqing, deputy director of the financial and economic committee of the National People’s Congress, and Chen Youan, chairman of Galaxy Futures.
On May 27, FIA issued an updated version of its guide to the rules and regulations relating to customer fund protections in the U.S. The guide, which was first issued in February 2012, provides futures commission merchants and their customers with easy-to-use information about the relevant provisions of the Commodity Exchange Act and the rules of the Commodity Futures Trading Commission.
The guide describes the protections for customer funds held as collateral for futures and options traded on U.S. and foreign exchanges as well as collateral for cleared swaps. The updated version reflects the significant amendments to the CFTC’s rules that were adopted in November 2013 to enhance customer protections in response to the bankruptcies of MF Global and Peregrine Financial Group. It also reflects new rules governing the protection of collateral for cleared swaps that have been finalized since the first version of the FAQ.
“Since we first issued this guide, it has proven to be a valuable resource for FCMs and their customers in understanding the various rules and regulations that protect customer funds,” said Walt Lukken, president and chief executive officer of FIA. “The confusion after MF Global’s collapse demonstrated the need for a plain-English explanation of how customer funds are protected in futures and cleared swaps markets. This is a complex subject, and recent amendments to the CFTC’s rules have made it even more important to provide a simple yet precise explanation for all market participants.”
The Commodity Futures Trading Commission's Global Markets Advisory Committee held a meeting on May 21 to discuss cross-border regulatory issues. The advisory committee, which is comprised of industry representatives and other experts, has no rule-making authority, but both of the current CFTC commissioners attended the entire meeting and the discussion provided some insights into the agency's position on several key cross-border issues.
On May 16, FIA submitted a letter to ICE Clear Europe expressing concerns about a proposed mechanism for covering losses incurred by ICE Clear Europe in its treasury management activities. Under this proposal, ICE Clear Europe would set aside $90 million of its own capital to cover such losses, but if this amount is insufficient, ICE Clear Europe would allocate the remainder of the losses to its members. In its letter, FIA commented that the proposed rules, if applied to customer property, would violate certain regulations of the Commodity Futures Trading Commission. FIA also said that the proposed rules would create "undue and potentially unlimited and unquantifiable risk" for ICE members.
E-clips users: Please note that these news stories are drawn from independent sources. The FIA does not verify or endorse any of these articles, and takes no responsibility for their contents. Please contact Heather Vaughan at the FIA if you have any questions or suggestions regarding this service. (202) 466-5460
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