Introduction 

Good morning and welcome to a virtual meeting of the CFTC’s Market Risk Advisory Committee (“MRAC” or “Committee”).  I want to thank Chairman Tarbert and 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 on today’s panels.   

I would like to also thank Nadia Zakir, the MRAC Chair, for her leadership, and Alicia Lewis, the Committee’s Designated Federal Officer, for her commitment to making the MRAC and its subcommittees a success.  Finally, I would like to recognize and welcome several new members to the MRAC and its subcommittees.  

Resiliency in Uncertain Times  

There are few words that could rightly illustrate the change that has occurred since we last met in December, 2019 when we were “kicking on the heels of 2020.”[1]  In the few short months since then, the Covid-19 pandemic has kicked back quite a bit, profoundly altering our country and the world.  Every day, nearly all of our decisions and actions are impacted by Covid-19, whether we are logging on for our virtual work experience, choosing a dress shirt for a Zoom meeting, or putting on a mask to venture out for groceries.   

This global health crisis has pushed us further down a path of economic crisis.  Comparable only to the Great Depression and the Great Recession, the last few months have demanded unparalleled fiscal and monetary intervention and broad based local, state, and federal action not seen before in history.  Social unrest has laid bare decades long racial inequity, which our country’s greatest leaders, like the late Congressman John Lewis, fought tirelessly for over many decades.  However, without addressing these issues directly, demanding action by each and every one of us, our country cannot achieve its highest ideals of life, liberty, and happiness.  I am hopeful that we emerge from the pandemic with a society that more accurately reflects these ideals for everyone.   

As this swath of uncertainty reshapes the future of our country on what seems like a daily basis, it is easy to forget that today, July 21^st, marks the 10^th anniversary of the enactment of the Dodd-Frank Wall Street Reform & Consumer Protection Act.[2]  Two short but challenging years after the 2008 financial crisis exposed the contagion that had built up within a system many believed to be failsafe, President Obama signed the landmark law that altered both the market landscape and scope of financial regulation. 

Many of the financial reforms enacted in the wake of 2008 served as well-placed shock absorbers during the extreme market volatility experienced in March of this year, shortly after the Covid-19 pandemic gripped its teeth on American soil.  The CFTC and its sister regulators demonstrated that a regulatory foundation, promoting financial stability by improving accountability through transparency and focusing on risk and risk transmission, is resilient in a time of crisis.  While the last several months have seen a host of targeted interventions, our core regulations remain solid.  And, while all of us have had to reconfigure our social and work lives, to reevaluate short and long-term goals, and to explore new means of accomplishing them, the lessons learned should further strengthen our conviction to support and advocate for policy that builds stronger, more resilient financial markets. 

Today’s Agenda 

It has been over seven months since we last convened the full Committee, but as the pandemic has demonstrated, with technology, we can keep things running pretty close to schedule.  Nothing pleased and impressed me more than hearing that the MRAC subcommittees, after a brief pause during the most difficult market and transition periods in March and April, continued to make progress.  This morning we will receive updates from the MRAC’s four subcommittees: Interest Rate Benchmark Reform, Climate-Related Market Risk, Market Structure, and Central Counterparty Risk and Governance (“CCP Risk”).  I would like to briefly address the latter three, and then provide more in depth comments regarding the Interest Rate Benchmark Reform Subcommittee and the work being done by the CFTC and other official sector bodies across the globe.   

Much of the discussion today, specifically from the CCP Risk and Market Structure subcommittees, will focus on the impacts the Covid-19 pandemic has had on market activity and structure, and elements of central counterparty clearing.  We will also hear from the Climate-Related Market Risk subcommittee Chairman, Bob Litterman, on their progress.

The Covid-19 pandemic—itself a harbinger of the potential consequences of climate change—has further solidified my view that financial regulators must prepare for the risks that climate change poses to our economy, markets, and public safety.  Tail risks – as we call them, although unlikely, are possible, and regulators, in concert with private market participants, must work together to build a more resilient and better prepared financial ecosystem for the future.  Incremental investments today can lead to better outcomes tomorrow.  On that note, I am pleased many institutions and political leaders are thinking about sustainability as the foundations for a new, stronger, more modern economy.  Closer to the CFTC and derivatives markets, just last week, the European Capital Markets Institute (ECMI) of the Centre for European Policy Studies (CEPS) in cooperation with the International Swaps & Derivatives Association (ISDA) published a paper on the role of derivatives in sustainable finance.[3]  Among other things, the paper highlights how the derivatives markets can help renewable energy innovators, manufacturers, and financial institutions – to name a few, hedge a suite of risks through derivatives products as each tackle climate change, and also meet strong demand for ESG related products.  I am hopeful that this becomes more than just the beginning.

The Interest Rate Benchmark Reform Subcommittee 

Turning back to today’s agenda, we will begin this morning with an update from 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”) convened by the Federal Reserve Board and the Federal Reserve Bank of New York.  One of my last public presentations was at the 2020 ISDA/SIFMA AMG Benchmark Strategies Forum.[4]  I used my time to provide an overview of the current efforts in the U.S., with a focus on the progress of the ARRC and our own Benchmark Subcommittee, and initiatives that were, at the time, upcoming.  These initiatives included ISDA’s decision to re-consult on how to implement pre-cessation fallbacks—a second opportunity to build consensus, and the MRAC’s sponsorship of a “table top” exercise in advance of the October 2020 “Single Step” proposals by CME Clearing and LCH Limited for the transition of discounting and price alignment interest (PAI) for certain products to the secured overnight financing rate (SOFR), scheduled for October 2020.  My word for that day was “progress,” and my message was borrowed from the ultimate Renaissance man, Bucky Fuller, who promoted working harmoniously—like the crew of a ship—toward the greater good and building new models when existing ones become obsolete. 

Bucky would be pleased that the pandemic has not slowed our collaborative and often cross-border efforts.  Indeed, he would be pleased to know that it has further encouraged us to move towards the end of LIBOR, and forward with a new model.  As Andrew Bailey, Governor of the Bank of England noted last week, the Covid-19 pandemic and the market turbulence that ensued further proved that LIBOR is not sustainable, noting “low levels of underlying activity make it fragile and more susceptible to liquidity and amplification effects in financial markets...and heavy reliance on expert judgement does impact its robustness and sustainability.”[5]  John Williams, President and CEO of the Federal Reserve Bank of New York similarly remarked that the pandemic confirmed the resilience of robust reference rates that are a fair representation of the underlying market, noting, “On a backdrop of enormous turmoil and uncertainty, both in financial markets and the broader economy, SOFR was a dog that didn't bark (or bite).”[6]  As has been true of so much of our progress over these last few years, this success may not have attracted headlines, but it demonstrates that during a tumultuous period, the new reference rates are a proven solution.   

I am pleased to report that on May 14^th, ISDA published a report summarizing the final responses to its consultation of pre-cessation fallbacks for derivatives referenced to LIBOR.[7]  The consultation asked whether the 2006 ISDA Definitions should be amended to include fallbacks that would apply to covered derivatives referencing LIBOR following permanent cessation of the benchmark or a “non-representative” pre cessation date, whatever occurs first.  A significant majority of the respondents, 91%, said “yes,” signifying substantial support for including pre-cessation and permanent cessation fallbacks without optionality or flexibility in the amended 2006 ISDA Definitions for LIBOR and in a single protocol for including updated definitions in legacy trades.[8]  Consistency across asset classes and markets was a central consideration among all respondents.[9]  Most respondents who raised this topic highlighted consistency in the context of including a pre-cessation trigger in the derivatives markets—in both cleared and uncleared markets—and in markets for other products.[10]  Respondents also brought up consistency to highlight the need for regulators and relevant authorities to coordinate and ensure a uniform approach would apply across markets.[11]  ISDA plans to publish a supplement to the 2006 ISDA Definitions and a protocol to allow firms to incorporate the fallbacks into new and legacy derivatives with a target launch date in the near future.[12]  The protocol will be voluntary, and will amend contracts only between two adhering parties, so it will be incumbent upon market participants to sign on. 

In June, the Interest Rate Benchmark Reform Subcommittee held a virtual table top discussion.[13]  During the five-hour interactive session, members used scenario analysis to identify areas that could strengthen the current discounting transition proposals. The exercise provided valuable insight into overall market preparedness.  We will hear from Chairman Wipf on the lessons learned from that exercise and any recommendations for potential action items that emerged. 

The ARRC recently acted on one such item.  On June 17^th, the ARRC filed a letter with the CFTC’s Division of Swap Dealer and Intermediary Oversight (“DSIO”).[14]  DSIO and Commission staff are monitoring the fluid situation relating to transition and the Single Step event, and their response, as always, will be nimble and appropriate.    

The Commission has also been working closely with ARRC on several related issues.  In December 2019, DSIO and CFTC’s Divisions of Market Oversight and Clearing & Risk issued staff no-action letters providing relief to market participants relating to the transition of swaps referencing IBORs.[15]  More recently, the ARRC requested each of the three CFTC divisions to consider revising the existing relief to better reflect new industry developments.  I am confident the Commission, in conjunction with the support of staff action, will continue to support appropriate relief to facilitate the transition.

There is still much to be done, and we are all continuing to explore our options and propose new solutions.  I have many times echoed the remarks of Governor Bailey that transitioning away from LIBOR should be market driven, and I have also acknowledged that regulators and authorities have a critical role to play.  I strongly encourage all market participants, large and small, to focus energy and resources – if you haven’t already – on transition away from LIBOR; it’s incumbent on market safety and soundness, and will result in more resilient financial markets.

Conclusion

As we move through 2020, I think the word of the year is “flexibility.” We have many challenges and uncertainties, but with these come many opportunities.  We need to embrace them all, and continue to move forward together.  I am hopeful that what results is an even stronger financial system, and a nation that truly reflects our highest ideals.

I look forward to today’s important discussion.