June 4, 2018

Commodity Futures Trading Commission Open Meeting

Key Topics & Takeaways

  • Indemnification: The final rule on indemnification was unanimously agreed to in a 3-0 Commission vote. The rule promotes information sharing without compromising confidentiality, requiring swap data repositories ensure swap data is made available to entities the CFTC deems appropriate, both domestic and foreign. The CFTC will determine whether an entity is the appropriate recipient of the swap data and other regulators will be able to access the information should the CFTC deem them appropriate. The swap data information sharing should improve global oversight and transparency and will require each entity to have a confidentiality agreement with the CFTC setting forth the scope of the jurisdiction relating to swap data, giving the CFTC control of the process and the ability to continue to evaluate the scope of jurisdiction.
  • Volcker Rule: Regarding the Volcker Rule proposal, Commission staff explained that the proposal seeks to tailor the application of the rule based on the size and scope of the bank entities trading activities, with specific aim to reduce compliance obligations for small and mid-sized firms that do not have large trading operations. The proposal was agreed to in a 2-1 vote, with Chairman Behnam dissenting.
  • De Minimis Threshold: Based on analysis, Commission staff believe maintaining the current $8 billion de minis threshold is appropriate. The proposal was agreed to in a 2-1 vote, with Chairman Behnam dissenting.

Speakers

Opening Statements

Chairman J. Christopher Giancarlo, CFTC

In his opening remarks, Giancarlo spoke on the three issues being discussed at today’s meeting: a final rule on swap dealer provisions, a proposed rule amending the Volcker Rule, and a proposed rule on swap dealer de minimis calculations. He first discussed the swap dealer indemnification rule, noting that previously foreign regulators have been unwilling to provide swap data repository (SDR) information and how it has inhibited dealing with systemic risk across the markets. Giancarlo noted that Congress amended the Dodd-Frank Act to remove the indemnification provisions, and that while the original inclusion of the requirement in Dodd-Frank was “well-intentioned” to protect the data in SDRs, there has been public interest to allow international regulators to share and access information. He then stressed that the EU’s General Data Protection Regulation (EUGDPR) cannot be implemented in a way that inhibits information sharing, adding that while it has “laudable objectives,” it could have a dangerous impact on the global market.

Regarding the Volcker Rule, Giancarlo commented that after four years of experience since the rule has been implemented, there has been growing concern that the U.S. regulators did not create an “ideal rule,” resulting in confusion over acceptable activities and “heavily complex” compliance burdens. He noted that the draft proposal tailors the rule’s application based on a firm’s risk profile, size, and the scope of their trading activities, takes a risk-based approach, and will reduce reporting, recordkeeping and compliance where appropriate, as well as addressing the market making bias that is in the current rule. Giancarlo also stressed that the CFTC and other Volcker Rule regulatory agencies are re-indorsing the rule and its prohibition on bank proprietary trading with depositor funds, adding that the proposal is a collaboration with the other four regulators (Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency (OCC), Securities and Exchange Commission (SEC) and Federal Reserve).

Lastly, Giancarlo spoke about the swap dealer de minimis calculation proposal, explaining that the decisions was originally supposed to happen a year ago but that he put it off an additional year to ensure CFTC staff adequately analyzed the trade data. He explained that after careful analysis, it was determined that moving the de minimis threshold from $8 billion to $3 billion will not have an appreciable impact on marketplace coverage, and that the decrease will lead to unnecessary burdens for non-financial companies engaging in small amounts of swap dealing to manage their business risk. Giancarlo noted that the proposed rule will appropriately balance the mandate of registering swap dealers engaged in large enough activities to warrant oversight while not impact community banks and agriculture co-ops that do not pose systemic risk, and that the proposal will exclude swaps of insured depository institutions (IDIs) made in connection with loans. He concluded that the proposal incorporates feedback from his fellow commissioners and CFTC staff, and that he is committed to finalizing the rule by the end of the year. 

Commissioner Brian D. Quintenz, CFTC

In his opening statement, Quintenz stressed the importance of appropriately and specifically calibrating the registration threshold, noting his reservation of the continued reliance on a one-size fits-all (OSFA) notional value test for swap dealer registration. He argued that the notional value is a “poor” measure of activity and a “meaningless” measure of risk, adding that the criteria for determining swap dealer registration should be more correlated to risk. Quintenz continued that any notional value should be combined with additional measures, such as dealing counterparty count and dealing transaction count, to determine a de minimis quantity of swap dealer activity, mitigating false positives. He explained that when the $8 billion threshold was first established in 2012, it was set without having swap data, but that CFTC staff has analyzed swap data and estimated the impact of a higher or lower threshold on swap dealer registration, adding that the data supports maintaining the current $8 billion level. Quintenz voiced his support for the IDI exemption and his overall support for the proposal, adding that he looks forward to the feedback received.

Regarding the Volcker Rule, Quintenz voiced his pleasure that he proposal provides swap dealers and futures commission merchants (FCMs), for example, more flexibility in trading activities and simplifies rule compliance. He continued that the proposal tailors Volcker requirements on those entities with large trading operations and clarifies prohibited and permissible activities, adding his support for the public input request regarding key exceptions to the proprietary trading ban, and noted that the proposal is a good example of the five regulators working together. Lastly, Quintenz discussed the indemnification final rule that will remove the requirements SDRs face regarding information sharing with domestic and foreign regulators, allowing for global risk monitoring across the financial system. 

Commissioner Rostin Behnam, CFTC

In his opening statement, Behnam argued that the de minimis threshold should have been dealt with a year ago, but that he is pleased the public is now being engaged and that a final rule can be created. He continued that he has been “very impressed and intrigued” by the Office of Chief Economists through the analyses, and that he has personally met with stakeholders on this issue in addition to working on the issue for six years as counsel for the Senate Ag Committee. Behnam stated that although he has had an open-mind regarding the proposal, he cannot support it, claiming that the process was rushed out of fear that deadlines would be missed.

Regarding the indemnification final rule, he noted that it took over 16 months to go from a proposed rule to final rule with only one industry letter, showing how long “good rulemaking” can take, adding that there is a lot of work to do if the Chairman wants the de minimis final rule done by the end of the year. He noted that there will be more responsibilities for the Division of Market Oversight (DMO) due to the rule, adding the need for Congress to provide them “with the budget we need [to] fulfill our mission,” but lauded staff for always getting work accomplished regardless of constraints.

Behnam noted that last week, the Fed, FDIC and OCC all voted on the same proposed amendments before the CFTC today, and that the Volcker Rule is one of the core reforms from Dodd-Frank that was put in place after the financial crisis. He stressed his concern that any action in amending the Volcker Rule could encourage the return to risky activities that led to the crisis or possibly further the consolidation of power among a few financial institutions. Behnam continued to question the amendments to the Volcker Rule, noting the speed at which rules have been voted on and the time given to work through drafts, and stated that he will be unable to support the Volcker proposal as written.  

Final Rule – Amendments to the Swap Data Access Provisions of Part 49 and Certain Other Matters

Speakers

  • Amir Zaidi, Division of Market Oversight (DMO)
  • Dan Bucsa, DMO
  • David E. Aron, DMO
  • Owen J. Kopon, DMO

Aron explained that the final rule promotes information sharing without compromising confidentiality, adding that previously regulators have been unwilling or able to agree to the indemnification rules due to SDRs not giving them access to swap data. He stated that the rule will require SDRs to ensure swap data is made available to entities the CFTC deems appropriate, both appropriate domestic regulators (ADRs) and appropriate foreign regulators (AFRs). Aron noted the highly sensitive and propriety swap data that SDRs maintain, stressing the importance of only making the information available to ADRs and AFRs and that they appropriately access and protect the data. He continued that the CFTC will determine whether an entity is the appropriate recipient of the swap data and that other regulators will be able to access the information should the CFTC deem them appropriate, deciding through evaluations such as whether a Memorandum of Understanding (MOU) or other arrangement is currently in place. Aron explained that the swap data information sharing will improve global oversight and transparency, and that the final rules will require each ADR or AFR to have a confidentiality agreement with the CFTC setting forth the scope of the jurisdiction relating to swap data, giving the CFTC control of the process and the ability to continue to evaluate the scope of jurisdiction.

Kopon stated that one comment letter was received from three SDRs voicing support for several aspects of the rule, such as the process of determining whether an entity is appropriate and the publication of a confidentiality form. He continued that the SDRs raised concern over how to determine whether specific swap data falls within an ADR or AFR’s scope of jurisdiction, as there is currently not enough information to make such a determination but added that the CFTC is the best regulator to determine whether the data is within scope. Kopon explained that the final rules were made after conversations with the SDRs and that it is made clear that the SDR’s role is limited to applying specific parameters set out in the confidentiality agreement. Regarding compliance, he stated that the lead time will correlate with when the SDR receives an executed confidentiality arrangement, and they will then have six months to provide the data.

Bucsa concluded the presentation by discussing the benefits of the final rule, to include providing regulators with access to swap data which will help them understand the risks being assumed and the impact on markets. He continued that such information sharing will help improve early warning systems and reduce the probability or severity of a future crisis, stressing that such collaboration will result in optimized work among global participants.

Motion/Commissioners’ Questions and Discussion/Vote

Quintenz asked why certain ADRs and AFRs that have swap data reporting rules or oversight over SDRs were carved out of other applicable requirements. Aron replied that the same approach was taken by the CFTC in 2012, and that if an SDR is dually registered with the CFTC and another regulator, they should be able to access the swap data in that SDR pursuant to their own regime.

Quintenz then asked for clarification about the confidentiality arrangements, to which Aron replied that all ADRs and AFRs will have to sign the form, but that some regulators may have tweaks they want made to the form, and that if protections are not lost the CFTC can keep an open mind.

Behnam noted the request from SDRs to have sufficient lead time for implementation and asked if the rule addresses this. Aron replied that staff spoke with the SDRs during the rulemaking process and believes they are comfortable with the six-month date.

Behnam then asked how many entities will request the swap data and how quickly the requests will come in. Aron replied that U.S. Regulators and Prudential Regulators will probably be the first to request the data, adding that they do not expect to be flooded with requests right away. Bucsa added that it will be different for each regulator but that the CFTC will have to define the scope of jurisdiction using data fields and agree on a confidentiality agreement for each regulator.

The final rule was unanimously agreed to in a 3-0 vote. 

Proposed Rule – Revisions to Prohibitions and Restrictions on Proprietary Trading and Certain Interests in, and Relationships With, Hedge Funds and Private Equity Funds

Speakers

  • Matt Kulkin, Division of Swap Dealer and Intermediary Oversight (DSIO)
  • Erik Remmler, DSIO
  • Cantrell Dumas, DSIO 

Kulkin opened discussion of the proposal expressing that the Commission’s experience with the Volcker Rule showed that its complexity created significant compliance uncertainty for market participants and expressed that the proposed changes are meant to streamline the rule by eliminating or modifying requirements that “are not necessary to effectively implement the statute without diminishing the safety and soundness of banking entities.” 

Remmler went on to discuss specifics of the proposal, noting that the other U.S. agencies have, or will soon, adopt identical proposals.  He explained that the proposal is based on regulatory experience with the practical application of the Volcker Rule, including examinations, oversight and ongoing dialogue with market participants.  He further noted that the proposed changes are consistent with the statute.

Specifically, regarding CFTC registrants, Remmler stated that those most affected are the swap dealers that are banking entities, and that the proposed changes would streamline their day-to-day compliance requirements, and the dealing and hedging activities fundamental to their business – without diminishing the indented benefits of the rule.

Dumas explained that the proposal seeks to tailor the application of the rule based on the size and scope of the bank entities trading activities, with specific aim to reduce compliance obligations for small and mid-sized firms that do not have large trading operations.  Specifically, the proposal would establish three categories of bank entities based on their level of trading activities, providing for more appropriately tailored compliance requirements.  Dumas next stated that the proposal seeks to streamline and clarify certain definitions and requirements related to the proprietary trading risk prohibitions, risk mitigating hedging requirements and compliance program requirements.  Lastly, Dumas noted the proposal seeks public comment on several questions regarding covered fund activities and investments.

Motion/Commissioners’ Questions and Discussion/Vote

Giancarlo asked staff whether the proposal would still prohibit proprietary trading using banks’ depository money, should it be adopted.  Remmler responded that the proposal is consistent with the statute, which provides for prohibitions against proprietary trading.

Quintenz asked how the proposal would impact entities under the CFTC’s jurisdiction, and whether the smaller entities the CFTC oversees will have a more reasonable compliance regime.  Remmler explained that the large majority of the swap dealers and FCMs that are subject to the Volcker Rule will still be subject to comprehensive requirements, albeit in a streamlined manner.  He continued that swap dealers and FCMs with moderate or limited trading activity would have more tailored requirements, calibrated to their level of trading activity that the Volcker Rule intended to cover.

Quintenz next asked whether the potential changes regarding loan-related swap treatment in the Volcker Rule proposal and Swap Dealer Registration De Minimis Exception conflicted.  Remmler explained that the proposed treatment does not conflict, but rather are complementary in that they consider excluding loan-related swaps from regulations in recognition of their importance to the basic lending activities that banks undertake.

Quintez then asked how CFTC Staff No-Action Letter 17-18, which granted relief to FCMs providing clearing services to customers of their affiliates from inadvertently violating the Volcker Rule, was impacted by the proposal.  Remmler explained that the proposal reinforces the relief provided by that letter.

Behnam asked why “demonstrably mitigate” language was removed and what the potential consequences might be.  Remmler explained the statute required hedging activity be designed to reduce risk but did not specify “demonstrably.”  He explained that since implementation, it has been shown that banking institutions have experienced delays in their ability to engage in hedging activity, as they needed to determine or assess whether they can demonstrate that both before and after they enter into the hedge that they are reducing risk.

Behnam next questioned why the proposal created three categories of bank entities based on trading activities.  Remmler responded that the different definitions are meant to recognize that certain foreign banking organization activity taking place outside of the U.S. was not meant to be subject to Volcker Rule requirements.

The proposal was approved 2-1 in a vote (Commissioner Behnam dissenting).

Proposed Rule – Amendments to Swap Dealer Registration De Minimis Exception

Speakers

  • Matt Kulkin, (DSIO)
  • Erik Remmler, DSIO
  • Rajal Patel, DSIO
  • Jeffrey Hasterok, DSIO 

Kulkin started the discussion with an explanation of the the key components of the proposal.  First, staff sought to provide for a permanent aggregate gross notional amount threshold of $8 billion for swap dealing activity entered into over the requisite time period. Second, staff established 3 exceptions from the inclusion of certain transactions in calculations: 1) swaps entered into with a customer by an IDI in connection with a loan origination; 2) swaps entered into to hedge financial or physical positions; and 3) swaps entered into as part of a portfolio compression exercise.  Third, staff developed a methodology used to calculate the notional amount for any group, category, type or class of swaps.  Finally, staff focused on three potential changes to the de minimis threshold which they would seek public comment on:  1) adding a minimum dealing counterparty count and minimum dealing transactions count threshold to a notional threshold test; 2) excepting swaps that are exchange traded and/or cleared from the threshold calculation; and 3) excepting non-deliverable forwards from the threshold calculation.

Hasterok highlighted that the proposal was informed by a data-driven analysis, using Part 45 transaction level swaps data.  He went on to explain that the staff’s goal was to use this data to identify likely swap dealers based on their aggregate gross notional amount (AGNA) of swaps activity, and to identify the depth and breadth of likely swap dealer coverage at various de minimis threshold levels.

Patel explained that using available data, staff analyzed the impact of lowering the threshold to $3 billion, maintaining the threshold at $8 billion or increasing the threshold to higher levels of $20, $50 and $100 billion. Based on this analysis, Patel stated that staff believes maintaining the current $8 billion threshold is appropriate.  Only a low percentage of applicable activity is not covered by Title VII requirements under the current paradigm, he noted. When lowering or raising the threshold, staff further found there would only be small changes in the AGNA and swaps transactions subject to Title VII regulation as compared to the $8 billion threshold.

Regarding non-financial commodity swaps, Patel explained that a number of methods could be used to calculate the notional.  He explained the proposal provides that the Commission may determine the methodology used to calculate the notional amount for any group, category, type or class of a swap for the purposes of the threshold calculation and would further delegate the authority to the Director of DSIO.  Patel stated the delegation of authority would help provide clarity to market participants in a timely manner.

Motion/Commissioners’ Questions and Discussion/Vote

Quintenz asked whether the current threshold is advancing the policy goal of servicing smaller end-users.  Kulkin stated he believed it is, and that staff was focused on promoting “ancillary” dealing in connection to other lines of business in the non-financial commodity space – but that such goals would be better served via the proposal.

Behnam questioned whether staff considered the potential downstream impacts to end-users should the $8 billion threshold not drop to $3 billion.  Kulkin explained that when looking at the data under a $3 billion threshold, there is very little additional market coverage scoped in, and a very low systemic impact.

Behnam next asked whether the proposals treatment of IDIs was in line with the statute.  Kulkin explained that its treatment of IDIs is consistent with the statute, and further explained that the CFTC has authority to promulgate regulations and establish additional factors that allow for exclusions.

Behnam then asked whether the Commission has coordinated with other U.S. regulators as it worked on the proposal.  Kulkin responded that drafts had been shared with both the SEC and U.S. Prudential Regulators, and that staff would continue to coordinate as the rule moves from the proposal stage to finalization.

The proposal was approved 2-1 in a vote (Commissioner Behnam dissenting).

For more information on this meeting, please click here.