WASHINGTON, D.C. — The Market Risk Advisory Committee held a public meeting Dec. 10 during which the MRAC adopted three sets of recommendations for the U.S. Commodity Futures Trading Commission’s consideration. The reports and accompanying recommendations, detailed below, address (i) U.S. Treasury markets with a focus on effective risk management practices for the cash-futures basis trade, (ii) modernization of regulation governing cyber resilience and critical third-party service providers for central counterparties, and (iii) the potential benefits and limitations of formally adopting obligations to employ legal entity identifiers for beneficial account holders of certain intermediaries. 

According to Commissioner Johnson, "the MRAC’s success advancing three sets of recommendations adopted on Dec. 10 as well as the recommendations on derivatives clearing organization recovery and resilience and the report on concentration risk related to the declining number of futures merchant commissions adopted in April demonstrate the exceptional work of the members of the MRAC." The MRAC examines risks across our financial markets, including systemic issues that could threaten the stability of derivatives markets, and the risks associated with evolving market structures and the implementation of novel technologies across clearinghouses, exchanges, intermediaries, market makers and end-users. 

December 10, 2024, MRAC Meeting 

On Dec. 10, the MRAC held its last meeting of the year. The meeting consisted of thoughtful commentary and discussion on the following topics: the current state of the Treasury markets from the Honorable Josh Frost, Assistant Secretary for Financial Markets, U.S. Department of the Treasury; the importance of cyber resilience for market participants, central counterparties and the broader market and economy from Sanjeev Bhasker, Deputy General Counsel, Office of the National Cyber Director, Steve Pugh, Chief Information Security Officer, Intercontinental Exchange, and Don Byron, Head of Global Industry Operations and Execution, Futures Industry Association; the intersection of potential harm to the financial services sector from cyber threats and artificial intelligence from Todd Conklin, Chief Artificial Intelligence Officer & Deputy Assistant Secretary of Cyber, U.S. Department of the Treasury; and remarks addressing current topics in the area of climate-related market risk, including an update on FSOC initiatives from Sandra Lee, Deputy Assistant Secretary, Financial Stability Oversight Council, U.S. Department of the Treasury, the private carbon credit market and its use by corporations to offset CO2 emissions from Chris Odinet, Professor of Law & Mosbacher Research Fellow, Texas A&M University School of Law, and equity, sustainability, and the need to increase economic opportunity in rural areas and provide financial education and access to resources, knowledge, and networks needed to thrive in agriculture to underserved farmers from Kim Ratcliff, Chair, U.S. Department of Agriculture Advisory Committee on Minority Farmers; Board Member, Capital Farm Credit Advisory Committee; Treasurer and Board Member, Independent Cattlemen Association. 

After discussions, the MRAC voted to advance three reports and recommendations to the Commission on the following critical issues: 

1. The Treasury cash-futures basis trade and effective risk management practices. 

2. DCO system safeguard standards for third party service providers, including recommendations to build upon and incorporate the language, concepts and principles already set out in the System Safeguards Rule found in Part 39.18 of the CFTC’s regulations with respect to DCOs. 

3. Benefits and limitations of adopting legal entity identifiers for beneficial account holders of certain market intermediaries. 

Treasury Cash-Futures Basis Trade and Effective Risk Management Practices 

Over the course of the last two years, the Treasury Market Reform working group of the Market Structure Subcommittee examined the state of Treasury markets and further analyzed the Treasury cash-futures basis trade. The subcommittee examined benefits and risks associated with the basis trade and aimed to provide recommended effective risk management practices to address identified risks. The report and recommendations presented at the meeting and approved by the MRAC include the following recommended effective practices: 

• Market participants, including basis traders, futures markets participants, intermediaries, and others engaged in or providing intermediation for trades associated with the cash-futures basis — including the basis, long futures positions, and financing positions — should continuously assess and manage the risks associated with these trades including market, liquidity, counterparty credit, and other risks. These risks should be modeled, and a mark-to-market attribution analysis should be conducted. 

• Market participants should manage market risks that could affect the performance of their portfolios. 

• Market participants should evaluate and manage their liquidity risks, including the risk that margin costs increase rapidly and significantly, and that financing is reduced or becomes unavailable. 

• Market participants should appropriately monitor and manage counterparty credit risks associated with the basis trade or its intermediation, including through effective due diligence, onboarding, credit risk mitigants, and continuous monitoring process. 

Recommendations on DCO System Safeguards Standards for Third Party Service Providers 

The Technology and Operations working group of the Central Counterparty Risk and Governance Subcommittee examined cyber resilience and third-party risks for derivatives clearing organizations. The subcommittees recommendations, which were approved by the MRAC, propose specific amendments to DCO Rule 18, 17 C.F.R. § 39.18 (system safeguards), and incorporation of Annex F of the Principles for Financial Market Infrastructure: Assessment methodology for the oversight expectations applicable to critical service providers. As noted in the recommendations, the proposals seek to inform the Commission’s mission of promoting the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation. 

Recommendations on Legal Entity Identifiers at the Beneficial Account Holder Level 

The Technology and Operations working group of the CCP Risk and Governance Subcommittee also examined the concept of the Legal Entity Identifier to align the domestic regulatory framework with global standards that mandate the use of LEIs, or equivalent identifiers, by beneficial account owners for daily reporting by DCOs. The MRAC approved an amended recommendation that invites the Commission to host a roundtable. 

The subcommittee recommendations, which were approved by the MRAC, propose a roundtable to examine CFTC Reg. §39.19 (17 C.F.R. § 39.19) and whether CFTC Reg. §39.19 should be amended to align U.S. regulatory structure with global standards by mandating the use of LEIs, or equivalent identifiers, by the beneficial account owner (obtained and maintained by the beneficial account owner) for daily reporting by DCOs; as well as the impacts of the implementation of such a proposed rule and any affected rules.  

April 9, 2024, MRAC Meeting 

Earlier this year, at the April 9 MRAC meeting the MRAC members advanced two other reports submitted by the Market Structure Subcommittee and CCP Risk & Governance Subcommittees to be submitted to the Commission: 

1. Data and Analysis Regarding FCM Capacity Trends. 

2. Recommendations on DCO Recovery and Orderly Wind-Down Plans; Information for Resolution Planning. 

Data and Analysis Regarding FCM Capacity Trends 

A few years prior to voting to approve this recommendation, the FCM Capacity Workstream of the Market Structure Subcommittee began examining the current state of the market for FCMs. The workstream aimed to examine the structural changes that have occurred within the FCM industry over the last 20 years. To facilitate its analysis, the workstream assembled a database from reports prepared by the Commission. These publicly available reports contain, among other data, select financial information taken from FCM regulatory filings. The data looks at trends relating to the number of FCMs, activity over the years, client margins, and FCM capital requirements. 

The data reflects information for a 20-year period running from 2003 through 2023. Among other observations, the workstream noted industry consolidation as well as structural changes, including an increased concentration of bank-affiliated FCMs. The workstream also noted increased concentration among FCMs that are dually registered as broker-dealers.  

Recommendations on DCO Recovery and Orderly Wind-Down Plans; Information for Resolution Planning 

The MRAC also voted to approve the recommendations on DCO Recovery and Orderly-Wind Down Plans; Information for Resolution Planning at the April 9 meeting. This report and recommendation included five sets of recommendations for the Commission’s consideration, including the following:  

1. Implement Supervisory Stress Tests. Commission staff should adopt and implement supervisory stress testing of credit and liquidity risks for all DCOs. Commission staff should adopt and implement supervisory stress testing of operational and other non-default risks for all DCOs, leveraging industry exercises covering these risks, where appropriate. Commission staff should include reverse stress tests in their supervisory stress tests. The results of the supervisory stress tests should be made available to the public, in a level of detail determined to be appropriate by Commission staff, within a reasonable time after the stress tests have been concluded. Subcommittee members representing end-users, FCMs and academia believe these stress tests should be required to take place at least annually. Subcommittee members representing DCOs do not believe the frequency of reverse stress tests should be annual but rather the frequency of reverse stress tests should be determined by Commission staff. 
2. Require DCOs to Determine Recovery and Wind-Down Scenarios and Analyses. In the final rule, the text of CFTC Regulation 39.39(c)(2) should be amended to require that DCOs conduct scenario analysis that includes extreme but plausible scenarios that could trigger recovery or wind down. The final rule should retain the requirement that SIDCOs include in their plans an assessment of (1) the financial resources and tools available in the event of recovery and wind down, and (2) how they would address the scenarios identified that could trigger recovery and wind down. 
3. Support Inclusion of NDLs in Recovery and Resolution Planning for All DCOs. The Commission should retain the proposal to require a DCO that is neither a SIDCO nor a Subpart C DCO to maintain and submit to the Commission viable plans for orderly wind down necessitated by default losses as well as NDLs. The Commission should retain the proposed definition of NDL as applicable to all DCOs. 
4. Support the Provision of Data to the CFTC for Resolution Planning. Subcommittee members representing end-users, FCMs and academia believe the Commission and FDIC should develop an inter-agency task force to discuss the sharing of information for resolution planning purposes for DCOs. However, subcommittee members representing DCOs believe that coordination already occurs between the FDIC and the CFTC with respect to SIDCOs, an inter-agency task force is not necessary, and coordination can and will continue to occur through existing channels.
5. Set up an Inter-agency Task Force to Address Challenges to Porting of Customer Positions and Collateral During Recovery and Wind Down. The Commission should develop an inter-agency task force, which should include the National Futures Association, to discuss and address impediments to the porting of customer positions and collateral in the context of a DCO resolution and clearing member default. 

Conclusion 

Commissioner Johnson expressed thanks "to each and every member of MRAC and the subcommittees for their exceptional work this year in submitting important and thoughtful recommendations to the Commission. I want to thank the MRAC Chair, Alicia Crighton; Co-Chairs Alessandro Cocco and Elizabeth King of the CCP Risk and Governance Subcommittee; and Co-Chairs Ann Battle and Biswarup Chatterjee of the Market Structure Subcommittee for their leadership and efforts in providing these recommendations.  

"I also want to thank members of my staff who supported the MRAC and the subcommittees at each of this year’s meetings, including Tamika Bent, who served as MRAC Designated Federal Officer  during her service at the Commission and Danielle Abada who currently serves as MRAC DFO; Peter Janowksi, MRAC Alternate DFO; Rebecca Lewis Tierney and Julia Welch who served as MRAC  ADFOs of the CCP Risk and Governance and Market Structure Subcommittees during their service at the Commission; and Chris Lamb and Nita Somasundaram who currently serve as MRAC ADFOs of the Climate-Related Market Risk and Future of Finance Subcommittees, and the CCP Risk and Governance and Market Structure Subcommittees, respectively. I also would like to thank CFTC logistics and administrative staff and contractors who ensured that MRAC meetings ran smoothly and efficiently as well as each of the honored guests and subject matter experts who agreed to share their time with the MRAC." 

Commissioner Johnson noted, "it is an honor and a privilege to serve the Commission as the sponsor the MRAC and to facilitate engagement among the diverse stakeholders who serve as members of MRAC and the Commission as we build and reinforce our regulatory framework."