July 25, 2018

House Committee on Agriculture “Examining the Upcoming Agenda for the Commodity Futures Trading Commission”

Key Takeaways

  • EU/U.S. Regulatory Equivalency: In response to questions from Members on both sides of the aisle regarding the status of the EU’s desire to “reset” the regulatory equivalency scheme previously agreed to with the U.S. with regards to central clearinghouses, Giancarlo stated that there is an ongoing dialogue with the EU. He continued that while the EU Parliament has made small concessions, the current proposals would still require the imposition of EU laws on U.S. clearinghouses in some circumstances, thereby requiring the clearinghouses to follow both EU and U.S. law.
  • Transition from LIBOR: In response to a question from Ranking Member Peterson on whether a delay in the London Interbank Offered Rate (LIBOR) replacement could cause market disruption, Chairman Giancarlo explained that the LIBOR market is not a “real” marketplace anymore.  Giancarlo expressed that any LIBOR replacement will be the basis for many financial contracts and thus must be based on an actual sound marketplace.
  • Capital Requirements: Rep. Frank Lucas (R-Okla.) asked about the lack of offset for client clearing margin under the leverage ratio, to which Giancarlo stated that he is actively having conversations with Federal Reserve Vice Chairman of Supervision Randy Quarles on how capital requirements, especially the supplemental leverage ratio (SLR), are impacting market liquidity. Giancarlo noted that he believes that Quarles understands the problem and that this issue is on his to-do list. 

Witness

Opening Statements

Chairman Michael Conaway (R-Texas)

In his opening statement, Chairman Conaway expressed his interest in learning more about the CFTC’s activity toward accomplishing coordination and harmonization among international regulatory counterparts. Conway emphasized that when two jurisdictions have comparable rules, regulators should be able to defer to one another, and expressed concern regarding the current European policy proposals that would require foreign jurisdictions to comply with EU rules and cautioned that the EU continue to follow its equivalency agreement with the United States.

Ranking Member Collin Peterson (D-Minn.)

In his opening statement, Peterson highlighted the need for sound oversight and regulation of the derivatives markets. He stressed that these markets must function as intended and protect against any bad actors. He then expressed his appreciation for the CFTC’s efforts with respect to the final stages of implementation of the Dodd-Frank Act. Issues Peterson identified that were particularly important included the transition away from the London Interbank Offered Rate (LIBOR) and developments in automated trading regulations.

Testimony

The Honorable Chris Giancarlo, Chairman, CFTC

In his oral testimony, Giancarlo began with a brief overview of his priorities as Chairman. He noted the CFTC’s strong focus in supervising the American agricultural commodity futures markets, supplemented by its modern approach to economic research and market intelligence. He then mentioned the CFTC’s efforts in simplifying regulations through Project KISS and in engaging with advancements in technology through LabCFTC. Moreover, he explained that the CFTC engages in active cooperation with both U.S. prudential and market regulators, as well as international regulators. Giancarlo explained the utility of futures and swaps in agriculture and the broader U.S. economy, and highlighted the need for American markets to continue to be regulated under U.S. law by federal regulators with congressional oversight.

Questions & Answers

EU/U.S. Regulatory Equivalency and Brexit’s Impact

In response to questions from Reps. David Scott (D-Ga.), Bob Gibbs (R-Ohio), Rick Crawford (R-Ark.), Stacey Plaskett (D-V.I.), and Chairman Conway regarding the status of the EU’s desire to “reset” the regulatory equivalency scheme previously agreed to with the U.S. with regards to central clearinghouses, Giancarlo stated that there is an ongoing dialogue with the EU. He continued that while the EU Parliament has made small concessions, the current proposals would still require the imposition of EU laws on U.S. clearinghouses in some circumstances, thereby requiring the clearinghouses to follow both EU and U.S. law.

Giancarlo stated that the EU has not expressed specific concern with the U.S. regulatory regime and noted that many of the world’s most important products are traded on the Chicago Mercantile Exchange (CME), thus any issues between the EU and U.S. regimes will need to be addressed. Additionally, Giancarlo noted that one of the major challenges that will need to be addressed is how the EU will handle clearing trades because the London Clearing House (LCH) may not be an option after Brexit.

Transition from LIBOR

In response to a question from Ranking Member Peterson on whether a delay in the London Interbank Offered Rate (LIBOR) replacement could cause market disruption, Chairman Giancarlo explained that the LIBOR market is not a “real” marketplace anymore.  Giancarlo expressed that any LIBOR replacement will be the basis for many financial contracts and thus must be based on an actual sound marketplace.

Capital Requirements

Rep. Frank Lucas (R-Okla.) asked about the lack of offset for client clearing margin under the leverage ratio, to which Giancarlo stated that he is actively having conversations with Federal Reserve Vice Chairman of Supervision Randy Quarles on how capital requirements, especially the supplemental leverage ratio (SLR), are impacting market liquidity. Giancarlo noted that he believes that Quarles understands the problem and that this issue is on his to-do list.

Regulatory Harmonization

Lucas brought up the memorandum of understanding (MOU) between the CFTC and Securities and Exchange Commission (SEC), to which Giancarlo stated that he and SEC Chairman Jay Clayton have made this a priority and that they are meeting regularly. Giancarlo noted that there are two categories of issues: practical issues, such as harmonizing forms being submitted to both agencies and margin requirements for similar products, and longer-term issues, such as core requirements for swaps execution, reporting, and clearing. Giancarlo noted that this will take some time, but he hopes that there will be news on this in the coming weeks and months.

Volcker Rule

Lucas discussed the House-passed bill making the Fed the primary regulator of the Volcker Rule. Giancarlo stated that when seven regulators weigh in on any given rule, it makes the task difficult. He did note that different perspectives are important regarding the impact of rules because one regulator may not account for how their perspective impacts the regulatory area of another agency. Giancarlo noted that there are often different perspectives between market regulators and prudential bank regulators, so if the driving force is on the prudential side, concerns of market activity might not be fully accounted for.  Giancarlo added that while challenging, it is a process that needs to be streamlined and harmonized.

De Minimis Threshold

In response to a question from Rep. Ann Kuster (D-N.H.) on the de minimis threshold, Giancarlo explained that the CFTC analyzed the impact of dropping the $8 billion threshold to $3 billion but found that while larger firms were captured at the $8 billion level, when lowering to $3 billion only small/community banks or local utility companies were captured, so they decided to stay at $8 billion.

LabCFTC

Rep. Austin Scott (R-Ga.) asked about the status and goals of LabCFTC, to which Giancarlo noted that there have been over 200 engagements with innovators, from small startups to large financial services providers and that LabCFTC is now the “front door” into new regulatory fintech developments in the marketplace.

Position Limits

When questioned about the status of the position limits mandate by Rep. Al Lawson (D-Fla.), Giancarlo noted that the CFTC is “making progress.” He noted that the original proposal was put out years ago but was too narrowly crafted, so the CFTC is working on a new position limits proposal with the goal of releasing it by end of this year or early next and will reflect the concerns of the agriculture community.

Cybersecurity

Regarding cybersecurity, Giancarlo explained that the CFTC has been working on minimizing self-penetration by phishing attacks and that they conduct self-assessments within the Commission routinely. He noted that the CFTC just completed its third cyber exercise with a full agency-wide drill of an attack, jointly conducted with the CME, Federal Reserve and Treasury, focusing on the external marketplace they oversee.

Clearinghouses

Chairman Conway asked what the duty of the regulators are when a clearinghouse fails, to which Giancarlo noted that since clearinghouses are not banks, that the same approach cannot be used. He noted that the big difference with clearinghouses is that the goal is to keep the clearinghouses functioning, rather than wind them down. He noted that it has taken a while to be comfortable with the approach in Dodd-Frank and that the CFTC has spent a lot of time with the Federal Deposit Insurance Corporation (FDIC) to help communicate the unique nature of clearinghouses and the need to keep them functioning.

Swaps 2.0

In response to a question from Rep. Doug LaMalfa (R-Calif.) on Giancarlo’s “Swaps 2.0,” Giancarlo stressed the importance of regulatory harmonization in the U.S. and abroad for margin requirements, adding that white papers “win the battle of ideas” by getting points across, and that global forums with the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) help accomplish this, as well as conversations within the Financial Stability Oversight Council (FSOC). 

For additional information about this hearing, click here.