Introduction

Good morning and welcome to the first virtual meeting of the CFTC’s Market Risk Advisory Committee (MRAC or Committee) of 2021.  I want to thank Commissioners Quintenz, Stump, and Berkovitz for joining today’s meeting.  I also want to thank and acknowledge the MRAC members, the subcommittee chairs, and the speakers who will participate in today’s panels.

I would like to extend my gratitude to Nadia Zakir, the MRAC Chair for her leadership, Alicia Lewis, the Committee’s Designated Federal Officer, for her commitment to making the MRAC and its subcommittees a success, and David Gillers, the Committee’s Alternate Designated Federal Officer, for his dedicated support of the Climate-Related Market Risk Subcommittee.  I would also like to welcome our new members, Angie Karna, Managing Director at Nomura Securities, and Chris Dickens, Managing Director, Chief Operating Officer, Global Markets, Europe, the Middle East and Africa (EMEA) at HSBC.

Before we begin, I would like to take a moment to comment on recent market dynamics.  With respect to precious metals, I want to reiterate that we are closely monitoring recent activity in markets and on social media.[1]  We are also closely following the tragic loss of life, limited clean water, and power outages in Texas.  We are monitoring irregularities in the Texas energy markets following last week’s freeze, specifically where there is a federal nexus with CFTC regulated markets and listed products.  We remain prepared to do whatever is necessary to protect the integrity of our markets.  And, I also want to extend our thoughts and deepest sympathies to those who have experienced the most tragic of losses.

Flexing Forward

The full Committee last convened in July.  I ended my opening remarks by acknowledging that 2020’s challenges and uncertainties did not present without attendant opportunities.[2]  Throughout these last months, I have been inspired by the MRAC and subcommittee members’ continuous engagement in their various work streams amid the ongoing pandemic, the trickle-down impacts of regulatory and administrative change, and perhaps the most unpredictable of all, shifting policies, practices, and procedures on the individual “home-slash-work” front.

Carving out the time and space to focus on issues like interest rate benchmark reform, clearinghouse risk management, market structure, and the overarching impact of climate change on our financial markets—issues our members have dedicated themselves to for the better part of my 3+ year tenure as the MRAC sponsor—may actually serve as a comfortable respite.  However, adding on the various external stresses and the need to comprehend and incorporate new variables has certainly augmented the experience of addressing market structural concerns as we flex forward into 2021.

Indeed, as we have already witnessed these last few months, with so many inputs, new market entrants, and means of intermediation—or the absence thereof, our markets as a system are fragile in the sense that they are programmatically susceptible to what seem like implausible reactions to increasingly diverse externalities.  With structural concerns across the financial markets making headlines, the Commission has remained ever vigilant in carrying out its mission and mandate, and will absolutely continue to do so under my leadership.

Regarding the most recent events in the precious metals and energy markets, I am personally, along with dedicated staff throughout the agency, communicating with fellow regulators, exchanges, and stakeholders to address any potential threats to the integrity of the derivatives markets, evaluating in real-time structural and transparency concerns.  We at the CFTC continue to employ heightened alertness in surveilling these markets for fraud and manipulation.

Moreover, it can never be repeated too often: derivatives markets play a critical role in the everyday lives of all Americans.  This is especially true when it comes to the production and supply of reliable and low-cost energy.  At a time of many challenges across the country resulting from the Covid-19 pandemic, last week’s extreme weather events in Texas and surrounding states created unimaginable burdens for millions of Americans.  Though perhaps not at the forefront of everyone’s thoughts when nearly half of Texas’ residents remain without drinkable water, and thousands remain without electricity, this Arctic blast highlighted weaknesses in our energy infrastructure that will likely be challenged and stressed more often in the future as a result of more frequent extreme weather events.  As we collectively act to restore normalcy and stability in our lives and to reignite economic and employment productivity and growth, I commit to taking any and all actions to ensure the CFTC contributes to this administration’s efforts by ensuring our markets remain transparent, fair and efficient, and fulfill their core responsibilities of price discovery and risk management to ensure reliable and low-cost energy for all Americans.

Today’s Agenda

Today’s meeting is an ambitious endeavor to hear from all four of the MRAC subcommittees and hold our first ever panel focused on diversity, equity, and inclusion in the derivatives industry and related markets.  First, Tom Wipf, the Chairman of the MRAC’s Interest Rate Benchmark Reform Subcommittee (Benchmark Subcommittee) and also Chairman of the Alternative Reference Rate Committee (ARRC) of the Board of Governors of the Federal Reserve System (Federal Reserve Board) will provide an update on the transition away from LIBOR (London Inter-Bank Offered Rate).  This subcommittee demonstrated exceptional effectiveness through 2020, perhaps most notably for leading the June 2^nd table-top exercise as a prelude to the PAI/discounting switch for LIBOR swaps by the clearing houses.[3]  The robust discussions provided the central counterparties (CCPs) valuable feedback on their proposed approaches, raised awareness among market participants and vendors, and from the CFTC’s perspective, helped highlight critical areas where regulatory relief would mitigate potential risks associated with the event.

Another milestone the market achieved was the successful launch of the International Swaps and Derivatives Association (ISDA) 2020 IBOR Fallbacks Protocol[4] to introduce robust fallback language for interest rate swaps.  The Protocol became effective on January 25, 2021.  The relevant CCPs simultaneously adopted the fallback language in their respective rule books for cleared swaps.[5]  CME is in the process of adopting appropriate fallback language into its rulebook for Eurodollar futures and options, which settle to the 3-month USD LIBOR.[6]  Based on CFTC staff analysis of information from ISDA and data from swap data repositories (SDRs), legal entities that account for close to 95% of gross notional outstanding—cleared + uncleared—in interest rate swaps (IRS) have adhered to the Protocol.  Digging deeper, 69% of notional outstanding of uncleared IRS now have the updated ISDA fallback language.

There is a long tail of end-users with a small footprint in the swaps markets.  Our expectation is that many of them will either close their swap positions or negotiate appropriate fallback language bilaterally with their counterparties.  But not having a plan just because the firm has 1-2 open swaps is not an option.  To the extent there are large, active firms who have not yet adhered to the Protocol, relevant regulators and counterparties will be apt to take notice.

Authorities have been highlighting the lack of robust fallback language in swaps contracts as a financial stability risk factor, for good reason. We want to make sure that robust contractual language is in place in case of a cessation of the reference rate.  There is much anticipation that cessation announcements by ICE Benchmark Administration and the UK Financial Conduct Authority will be made in the near future, and these will definitively put the end-game for USD LIBOR and other IBORs in sight.  For all practical purposes, the markets will most likely be shifting from USD LIBOR to SOFR (Secured Overnight Financing Rate) and other alternate reference rates in the coming months.

I am looking forward to hearing from the Benchmark Subcommitee on how the markets, especially the derivative markets, will shed the USD LIBOR habit.  Thanks to the close collaborative partnership with the ARRC and the MRAC subcommittee, CFTC has been at the forefront in terms of providing appropriate regulatory relief to facilitate this transition. We remain committed to supporting this effort.

Second, Bob Litterman, Chairman of the Climate-Related Market Risk Subcommittee (the Climate Subcommittee) will present on the Subcommittee’s September release of its report on Managing Climate Risk in the U.S. Financial System (the Climate Report).[7]  The Climate Report is receiving widespread recognition as the first-of-its-kind effort from a U.S. government entity to examine and argue for recognition that climate change poses serious emerging risks to the soundness and stability of the U.S. financial system, and that we need to move urgently and decisively to measure, understand, and address these risks.[8]

I gave the Climate Subcommittee a broad mandate: provide an analysis and recommendations regarding the existing and emerging risks and impacts of climate change on the financial markets.  The Climate Report has exceeded all expectations in tackling the challenges of how to safeguard the financial system in the face of the uniquely complex risks presented by climate change and how to facilitate the transition to a low-carbon, climate resilient economy.  Recognizing our unique circumstances in the U.S., which include a multifaceted system of financial regulation—and myriad regulators, the Climate Report will provide a resource to interested policymakers, regulators, and stakeholders as our nation begins the process of taking thoughtful and intentional steps toward building a climate-resilient financial system that prepares us for the decades to come.

In speaking about climate change and financial market risk, and what role policy makers should and could play, I have always highlighted the pioneering efforts of the Bank of England, the Network for Greening the Financial System (NGFS), and the Financial Stability Board, among others.[9]  Their work towards achieving sustainable finance and resilient markets, and publicizing climate-related financial market risks through dialogs among networks of their nations and members paved our way here today.  And consistent with these attributes, at the heart of the Climate Report, is the concept of partnerships.

Turning back to our agenda, the Market Structure Subcommittee, led by Lisa Shemie, Associate General Counsel and Chief Legal Officer for Cboe FX Markets and Cboe SEF, and Stephen Berger, Managing Director and Global Head of Government & Regulatory Policy at Citadel, will present its final recommendations regarding the swap dealer landscape and the “Made Available to Trade” or “MAT” process for further consideration by the MRAC.

The Commission has focused much of its time and resources over the last decade on efforts to effectuate the Congressional mandates aimed at addressing the risks the previously largely unregulated swaps market posed to the financial system.  Throughout my tenure at the CFTC, I have considered whether the swap dealer definition and associated registration threshold calculation encompass too many entities whose activities are not significant enough to warrant full regulation under Title VII of the Dodd-Frank Act, and alternatively, whether they result in an undue amount of dealing activity falling outside of the regulatory framework.  While I remained judicious in my words and stated my legal interpretations and policy positions clearly on the matters as they came before me,[10] I remain neutral when it comes to new data, changing circumstances, and market evolution that may warrant reconsideration.

Similarly, I have had many years to explore the design and functioning of the MAT process.  As I have previously stated, addressing the MAT process could increase liquidity on swap execution facilities (SEFs), and could do so in concert with increased pre-trade transparency, and without dismantling aspects of the SEF rules that work well.[11]  I commend the Market Structure Subcommittee for working on key issues it believes may be impeding liquidity and diversity among liquidity providers trading on SEFs and designated contract markets (DCMs) and look forward to its presentations and submissions.

The Central Counterparty Risk and Governance Subcommittee (CCP Risk) will present the fourth and last briefing by the subcommittees.  Much of the discussion last July focused on the impacts the COVID-19 pandemic was having on market activity, structure, and elements of central counterparty clearing.  CCPs continue to demonstrate resilience through episodes of high volumes and volatility, managing market and operational risks and mitigating credit and liquidity risks.  Most recently, CCPs proved to be a crucial element in the financial market infrastructure in controlling the frenzied trading in GameStop, AMC Entertainment Holdings, and other stocks.[12]

However, despite clear evidence demonstrating the critical importance of central clearing to our financial markets—a key component of the post-crisis derivatives reforms—there remain sufficient and credible concerns that extreme liquidity demands during periods of high market volatility, as we experienced nearly one year ago, create additional stress to financial markets, and potentially financial stability risks.  These important questions and issues are being debated and discussed across the globe, and I remain committed to using the MRAC, and the key stakeholders participating on the Committee and its subcommittees to help inform any requisite, data driven policy making, aimed to reducing such market risk.

Today we will receive reports from CCP Risk Subcommittee Co-Chairs Alicia Crighton, Global Co-Head of Futures and Head of OTC and Prime Clearing Businesses at Goldman Sachs and representing the Futures Industry Association, and Lee Betsill, Managing Director and Chief Risk Officer, CME Group.  The first report sets forth recommendations regarding CCP margin methodologies across six-key elements of a robust margin framework, many of which CCPs are following today. The second report makes recommendations for improving derivatives clearing organizations’ (DCOs) governance arrangements through further enhancements to the effectiveness of CFTC governance standards by ensuring that DCOs’ management and their boards of directors have a formalized process to solicit, consider, and address input from varied clearing members and end-users before making decisions that could materially affect the risk profile of the DCO’s activity.  I am looking forward to receiving these final reports and fully appreciate these tremendous efforts.  To that end, I wish to highlight that the CCP Risk subcommittee is continuing its work on additional work streams addressing stress testing and liquidity, transparency, capital and skin-in-the-game, and default management.  These are all tremendously difficult issues, core issues that strike at the heart of market risk.  And consequently, they require careful deliberation, discussion, and ultimately time.  It is my expectation that as the Subcommittee reaches conclusions and consensus on these issues, they will report back to the full MRAC in future meetings.

We will end today’s meeting with a panel on diversity in the derivatives markets.  It is time to start a more fulsome dialogue on how the failure to incorporate diversity and foster inclusion in our markets may negatively impact our economic future and the competitiveness in our domestic and global markets.  As relayed by Congressman David Scott (GA) in remarks at a May 2019 hearing on the state of CFTC, “[D]iversity is a strength.  It will make your agency stronger not only by the varied viewpoints and backgrounds that women, LGBTQ employees and employees of color bring, but also through the credibility the agency will gain by accurately reflecting the diversity of our great country.”[13]

In April 2019, I issued a letter to our own Office of Minority and Women Inclusion (OMWI) seeking additional information as to how the underrepresentation of minorities and women, especially in management positions, at the CFTC could be addressed and remedied.[14]  I have continued to actively engage internally with our OMWI and with various affinity groups within the Commission organized to foster and support employee engagement, inclusion, and teamwork.  I have also supported legislative fixes necessary to bring our OMWI in line with our fellow federal financial regulators and to establish an internship program for students attending one of the nineteen 1890s Land-Grant Institutions and others, providing students at historically black colleges and universities with the opportunity to serve a semester-long program within varying divisions of the CFTC.[15]  These issues and the necessary legislative fixes remain a top priority and I will continue to advocate for necessary change in my new role as Acting Chair.

Earlier this month, the Federal Reserve Bank of San Francisco published its Framework for Change outlining its commitment to taking action towards racial and ethnic equity internally and in the communities it serves.[16]  The Framework recognizes that small, uncoordinated actions will not be enough; changes require many tools and a comprehensive strategy to create a sustainable, self-reinforcing cycle.  The Framework for Change will be supported by four pillars subjected to concrete, and measurable actions: evidence, practice, dialogue, and advocacy.  This is just one movement, and one model, but it is a positive sign that strategies are being implemented at the top.

Today’s conversation will focus on best practices for creating a culture of diversity, equity and inclusion (DE&I) in the derivatives industry through its firms.  Our distinguished panel will share strategies and successes in building and working with diverse teams; share approaches to starting dialogues about race in the workplace; and discuss actionable steps needed to become more inclusive and maximize a team’s potential.

Conclusion

Advisory committees like MRAC are vehicles for change, challenge, and perhaps most importantly, debate and consensus.  Transitions in our markets should ideally be market driven.  However, there is a role for the regulator in ensuring that there is transparency, equity, and commitment that leads to results.  Moreover, it is the province of regulators to define and support markets and market participants through comprehensive legislative and regulatory efforts and to provide firm and decisive leadership—especially in times of economic uncertainty and stress.  We as a nation have an abundance of existing law and regulation and a corps of regulators, SROs, advocacy groups, think tanks, and thought leaders to ensure that we utilize our resources and capital to the fullest extent.  As we continue to progress through 2021, it is my intention to support the momentum of the MRAC and its subcommittees towards addressing, exploring, and resolving the issues we will consider today.

Thank you and I look forward to today’s discussion.

[1] See, e.g., Press Release Number 8360-21, CFTC, Statement of Acting Chairman Rostin Behnam on Trading in Silver Markets (Feb. 1, 2021), https://www.cftc.gov/PressRoom/PressReleases/8360-21.

[2] Rostin Behnam, Commissioner, CFTC, Opening Statement of Commissioner Rostin Behnam before the Market Risk Advisory Committee (July 21, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/behnamstatement072120.

[3] See Press Release Number 8171-20, CFTC, CFTC Market Risk Advisory Committee’s Interest Rate Benchmark Reform Subcommittee Holds Table Top Discussion and Revises Membership (June 2, 2020), https://www.cftc.gov/PressRoom/PressReleases/8171-20.

[4] The ISDA 2020 IBOR Fallbacks Protocol is available at http://assets.isda.org/media/3062e7b4/08268161-pdf/.

[5]See Letter from Christopher Bowen, Managing Director & Chief Regulatory Counsel, CME Group to Christopher Kirkpatrick, Office of the Secretariat, CFTC, Re: Regulation 40.5(a) Submission of Rules for Commission Review and Approval – Modifications to Interest Rate Swap Products to Implement ISDA IBOR Fallback Provisions, CME Submission No. 20-517 (Dec. 8, 2020), available at https://www.cftc.gov/sites/default/files/filings/orgrules/20/12/rule120920cmedco001.pdf.  See also Letter from Julian Oliver, Chief Compliance Officer, LCH Limited to Christopher Kirkpatrick, Office of the Secretariat, CFTC LCH Limited Self Certification: SwapClear Pre-cessation Triggers (Dec. 1, 2020), available at
https://www.lch.com/system/files/media_root/LCHLTD%20Self-Cert_pre%20cessation%20triggers%20final%20v1.pdf.

[6] See Letter from Letter from Christopher Bowen, Managing Director & Chief Regulatory Counsel, CME Group to Christopher Kirkpatrick, Office of the Secretariat, CFTC, Re: CFTC Regulation 40.5(a) Request for Approval. Amendments to the Three-Month Eurodollar Futures and Options on Three-Month Eurodollar Futures Contracts to Implement London Inter-bank Offered Rate (“LIBOR”) Fallback Provisions,

CME Submission No. 21-082 (Feb. 9, 2021), available at https://www.cftc.gov/sites/default/files/filings/ptc/21/02/ptc020921cmedcm001.pdf.

[7] Climate Related Market Risk Subcommittee (2020), Managing Climate Risk in the U.S. Financial System, Washington, D.C.: U.S. Commodity Futures Trading Commission, Market Risk Advisory Committee, available at https://www.cftc.gov/sites/default/files/2020-09/9-9-20%20Report%20of%20the%20Subcommittee%20on%20Climate-Related%20Market%20Risk%20-%20Managing%20Climate%20Risk%20in%20the%20U.S.%20Financial%20System%20for%20posting.pdf.

[8] See, e.g., Glenn D. Rudebusch, FRBSF Economic Letter 2021-03, Climate Change is a Source of Financial Risk, FRBSF Economic Letter 2021-03 (Feb. 8, 2021), https://www.frbsf.org/economic-research/publications/economic-letter/2021/february/climate-change-is-source-of-financial-risk/; Andrew Ackerman, Climate Change Poses Major Risk to Financial Stability, Study Finds, WSJ (Sept. 9, 2020), https://www.wsj.com/articles/climate-change-poses-major-risk-to-financial-stability-report-finds-11599668612.

[9] See, e.g., Rostin Behnam, Commissioner, CFTC, Remarks of CFTC Commissioner Rostin Behnam at the 56th Crop Insurance and Reinsurance Bureau Annual Meeting, Changing Weather Patterns: Risk Management for Certain Uncertain Change, Bonita Springs, Florida (Feb. 14, 2020), https://www.cftc.gov/PressRoom/SpeechesTestimony/opabehnam15.

[10] See, e.g., De Minimis Exception to the Swap Dealer Definition—Swaps Entered Into by Insured Depository Institutions in Connection with Loans to Customers, 84 FR 12450, 12468 (Apr. 1, 2019), https://www.cftc.gov/sites/default/files/2019-04/2019-06109a.pdf; De Minimis Exception to the Swap Dealer Definition, 83 FR 56666, 56691 (Nov. 13, 2018), https://www.cftc.gov/sites/default/files/2018-11/2018-24579a.pdf; De Minimis Exception to the Swap Dealer Definition, 83 FR 27444, 27481 (proposed June 12, 2018), https://www.cftc.gov/sites/default/files/2018-06/2018-12362a.pdf.

[11] See Swap Execution Facilities and Trade Execution Requirement, 83 FR 61946, 62141 (proposed Nov. 30, 2018), https://www.cftc.gov/sites/default/files/2018-11/2018-24642a.pdf.

[12] See, e.g., Philip Stafford and Joe Rennison, GameStop curbs put clearing houses under the spotlight, FT (Jan. 30, 2021), https://www.ft.com/content/29b4cc1f-a970-4cd7-b452-90d982aacfb9; Telis Demos, Why Did Robinhood Ground GameStop? Look at Clearing, WSJ (Jan. 29, 2021), https://www.wsj.com/articles/how-clearing-demands-grounded-the-wallstreetbets-stocks-for-a-day-11611966092?mg=prod/com-wsj.

[13] Press Release, House Agriculture Committee, Chairman David Scott Opening Statement at Hearing on the State of the Commodity Futures Trading Commission (May 1, 2019), https://agriculture.house.gov/news/documentsingle.aspx?DocumentID=787.

[14] See Press Release Number 7920-19, CFTC, CFTC Commissioner Behnam Issues Letter Regarding Diversity & Inclusion at the CFTC (Apr. 30, 2019), https://www.cftc.gov/PressRoom/PressReleases/7920-19.

[15] See CFTC Reauthorization Act of 2019, H.R. 4895, 116^th Cong. § 104 (2019), https://www.congress.gov/116/bills/hr4895/BILLS-116hr4895rh.pdf; To require the Commodity Futures Trading Commission to establish an Office of Minority and Women Inclusion, and for other purposes, H.R. 4257, 116th Cong. (2019), https://www.govtrack.us/congress/bills/116/hr4257/text

[16] Federal Reserve Bank of San Francisco, Confronting Inequity: A Framework for Change, SF Fed Blog (Feb. 4, 2021), https://www.frbsf.org/our-district/about/sf-fed-blog/confronting-inequity-framework-for-change/.