Opening Statement of Commissioner Rostin Behnam before the Market Risk Advisory Committee

December 4, 2018


Good morning and welcome to the CFTC’s Market Risk Advisory Committee’s (“MRAC” or “Committee”) third and final meeting of 2018.  As we edge closer to a new year, I have begun to reflect on the work of this Committee that started twelve months ago, and I am both proud of the accomplishments, and equally optimistic and excited for 2019.  As our markets continue to grow, evolve, and innovate in an atmosphere of increasing geopolitical tensions, there will be new questions and issues to address.  This Committee continually demonstrates a deft ability to adapt itself by addressing the most pressing and challenging market risk issues of the day.

I want to thank Chairman Giancarlo and Commissioners Stump and Berkovitz for being here today and for their contributions to this discussion.  We have a full day ahead, including the introduction of the newly formed Interest Rate Benchmark Reform Subcommittee.  I want to thank and acknowledge the MRAC members who volunteered to moderate panels today.  I also want to thank each of the speakers for their willingness to travel to Washington during the holiday season and contribute to this important conversation.

I want to thank the Commission staff who will be speaking today—some of whom also traveled to be here.  I would also like to thank Margie Yates, her team, and all of the Commission staff who work behind the scenes to make these meetings come alive and run smoothly.

Finally, I would like to thank Alicia Lewis, the Committee's Designated Federal Officer.  Three meetings deep in a short twelve months, Alicia keeps core logistics running smoothly and helps formulate and shape the topics, issues, and discussions that make all of the MRAC meetings so valuable and insightful.

The Agenda

The Interest Rate Benchmark Reform Subcommittee

Today’s agenda begins with Tom Wipf, Vice Chairman of Institutional Securities at Morgan Stanley and our newly appointed Chairman of the Interest Rate Benchmark Reform Subcommittee.  Tom has more than forty years of experience as an industry leader, and has served in multiple capacities at Morgan Stanley in New York, London, and Tokyo.  Over the years, he has held several key roles at the U.S. Treasury, the Federal Reserve Bank of New York, and currently serves as a member of the Alternative Reference Rates Committee (“ARRC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”), which will be particularly relevant to his role as the Subcommittee Chairman.

The last meeting of the MRAC in July introduced benchmark reform as a key topic of interest not only to MRAC members, but also to anyone who has a car or small business loan, student loan, mortgage, or credit card. [1]  As highlighted by Chairman Giancarlo in remarks last week at the 2018 Financial Stability Conference,[2] despite huge improvements in the governance process to produce LIBOR, the market for unsecured inter-bank term lending that underlies LIBOR has dried up, and the regulatory mandate compelling LIBOR submissions has an expiration date.[3]  Fortunately, there are coordinated initiatives underway specifically targeted at addressing the myriad of impending issues specifically related to the derivatives market.  Chief among these initiatives is the ARRC, which is tasked with leading and directing the transition away from LIBOR to SOFR, the Secured Overnight Financing Rate.

At the MRAC’s July meeting, three panels focused on:  (1) the role of interest rate benchmarks in the economy, the impetus for LIBOR reform, and the current status of global reform initiatives; (2) the development of SOFR and SOFR derivatives; and (3) the impact of LIBOR reform on legacy derivatives contracts, the development of fallback language, and key risk management and governance considerations for market participants.  Following the meeting, the Commission voted to establish the Interest Rate Benchmark Reform Subcommittee to provide reports and recommendations to the MRAC regarding efforts to transition U.S. dollar derivatives and related contracts to SOFR and the impact of such transition on the derivatives markets.[4]

I was overwhelmed by the number of highly qualified nominations to the Subcommittee, and it was difficult to make selections.  I strived to ensure that the membership represents a diversity of viewpoints.  I believe the twenty-one (21) individuals chosen to serve will participate actively and engage one another as they develop and work towards the Subcommittee’s goals and objectives.  Tom will kick off today by reporting on the Subcommittee’s first initiatives.

My goal is to use the Subcommittee to complement the work of the ARRC by providing additional insight into the potential challenges leading up to the 2021 end of compelled LIBOR, identifying the risks for financial markets and individual consumers, and, above all else providing solutions within the derivatives space. My expectation is that the Subcommittee’s work—and that of the Commission itself—will recognize the critical importance of benchmarks while demanding integrity and reliability.

I have spoken publicly on this issue several times since July, in various forums.  I intend to continue to engage as wide an audience as possible to ensure that market participants, both business and legal; the global regulatory community, lawmakers, and the general public are aware of the impending issues and timeline, and know that I am available as needed on any matters that will serve to navigate a smooth transition.

With that said, I want to recognize and thank Tom for his willingness to serve in this important leadership role as Subcommittee Chairman.  Finally, I want to thank Chairman Giancarlo for his continued support of this endeavor.  The Chairman and I are in lockstep, and I am confident the Subcommittee’s work will produce deliverables that will be extremely valuable to the Commission, and ultimately global financial markets.

Central Counterparties (CCPs), Clearing, and Current Events

Turning to the primary issue of today’s MRAC, one of the core reforms outlined in the 2009 G-20 Pittsburgh Accord involved mandatory clearing of standardized swaps.  The Congress embraced this reform in Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act,[5] and the CFTC subsequently finalized a series of rules defining the clearing mandate.  Since March 2013,[6] the clearing mandate has led to a tectonic shift in the swaps market place.  According to data collected by the CFTC on U.S. reporting entities, by 2017, about 85% both of new interest rate swaps and credit default swaps were being cleared.[7]

The numbers speak for themselves.  I certainly believe—and I know I am not alone in this—there will always be room for improvement, and that we can all strive to set policy and market practices to further incentivize clearing, where appropriate.  As the financial crisis taught us, central clearing works.  While the unregulated OTC swaps market played a role in the credit crisis, the exchanged traded futures books of major financial institutions proved resilient, in part because of central clearing.

Today’s discussions will largely focus on topics and issues raised by MRAC members related to clearing and the roles and responsibilities of central counterparties (CCPs) in monitoring and managing the variety of risks arising from stresses including, but not limited to, a clearing member default.  The CFTC, along with its international counterparts, is continually confronting the challenge of building and maintaining the appropriate regulatory framework for clearing in and among a population of CCPs with unique risk profiles that will withstand routine shocks and demonstrate resiliency in a crisis.  As the financial crisis also taught us, we must cooperate, and provide predictability while remaining flexible in our approach to ensure the response is appropriate when addressing an actual crisis.[8]  As well, we must constantly examine and evaluate whether our rules effectively and appropriately allocate duties and burdens in and among CCPs, exchanges, intermediaries, and market participants.  Today’s panels aim to highlight how CCPs currently approach their duty to engage in strong risk management amidst our current regulatory landscape and how global and domestic standard setting bodies are analyzing our current structures in support of making any necessary changes.

Our first panel, facilitated by Robert Steigerwald from the Federal Reserve Bank of Chicago, will set the stage by providing an overview of current risk management and governance issues with a focus on the appropriate balancing of interests and incentives between the clearinghouse and its members, as well as the consideration of clearing member and customer viewpoints.

In our second panel, we will examine management approaches to non-default losses generally, as well as in recovery and resolution, and some of the scenarios in which they may arise.  One such scenario could involve a cybersecurity breach that creates non-default losses.  Cybersecurity, as an operational risk issue, is a concern that has been voiced by many on this Committee, and as newer, faster, and more pervasive technology permeates our market infrastructure, the chance of a successful cyberattack will likely increase.  If such an event occurred and caused losses at the CCP, should those losses be met from available CCP capital and other CCP assets?  Or should they be socialized amongst the clearing members?  Or partially covered by both?

The answers to these questions will likely depend on the CCP, but by having the conversation about how these losses can be dealt with, we will be in a position to better understand how to react when an operational, investment, or custodial risk becomes a reality, particularly where non-default losses occur in tandem with default losses.

In our third panel, we will discuss some of the most recent relevant reports from global standard setting bodies on the costs and incentives of clearing and the resilience, recovery, and resolution of CCPs.  Eight years after the first reforms were implemented, the accumulated data can be used to evaluate the effectiveness of the G-20 clearing mandate and related reform-based incentives.  Many of these reforms have proven effective by moving risk from over-the counter-derivatives away from the unobserved fringes of our financial markets and toward monitored institutions that conduct central clearing and data reporting.  This move has facilitated greater transparency into market risks and provided increased netting efficiencies.  As the reports have shown, however, these benefits have not come without costs, and there remain concerns regarding whether the regulatory structure properly accounts for risk in terms of capital, margin, and leverage. 

Oversight of Third-Party Service Providers and Vendor Risk Management

Our last panel of the day will introduce a new topic for MRAC and cover the oversight of third-party service providers and vendor risk management.  Exchanges, clearinghouses, intermediaries, Commission registrants and their customers employ a wide-array of vendors that provide a multitude of different services, and each relationship carries its own risks.  As all of these entities continue to increase the number and complexity of relationships with vendors through the outsourcing of business and regulatory compliance functions, registrants must ensure that they have appropriate management and control functions to address the associated risks.  At the heart of those relationships is the ability of market participants to know with whom they are doing business, both directly and indirectly, and what risks may arise from third-party service providers.  

During this panel, we will hear from the Office of the Comptroller of the Currency whose bulletin on the risk management of third-party relationships[9] is considered among many to be the eminent guidance on sound risk management across a variety of relationships.  We will also hear from a principal provider of services in our market and from our own supervisory staff as we explore the current regulatory guidance and tools at our disposal to evaluate, monitor and manage these risks, and consider whether the Commission’s current regulatory scheme works to mitigate risks posed to market participants by third-party service providers.

It is my intention that this afternoon’s panel discussion on risks related to vendor relationships will be the start of a longer conversation by this Committee and potentially a subcommittee, with the ultimate goal of providing the Commission with surgical recommendations – as needed – to ensure market safety, transparency, and resiliency.


As Chairman Giancarlo noted last week, market reform is a continuous, iterative process that requires constant and consistent communication, coordination, engagement, and evaluation.  As I have noted before, we cannot observe the current strength of the financial markets and expansiveness of the regulatory landscape and conclude that our job is done, or worse, that we can dial back our efforts under the guise of excess.  We must all remain vigilant and not limit our focus on the looming shadow of systemic risk to the tools we have.  We must examine all of the components in our systems and go beyond assessing and assigning a metric of risk.  We must strive to understand and actively monitor and manage the risk of each component at every system level and in every connection. 

As the risk footprints change or lead in different directions, our goal must be to respond through adaptation in our management and regulatory responses.  In the international clearing space, we have an interconnected, highly concentrated system comprised of other interconnected, somewhat less concentrated systems.  This is all governed by regulations held together by consensus-based principles aimed at preserving and strengthening financial stability.  Within that structure the points of potential default and larger, catastrophic failure are too numerous—and many too remote—to account for.  Nevertheless, we must persist in our analyses, and participate in coordinated efforts to better understand, better inform, and better address risk in all its forms.  This Committee is among those efforts and its ongoing operation and input contributes to our ongoing progress.

I am very excited about our agenda for today and want to again recognize the tremendous amount of work that has gone into planning this meeting and thank everyone for being here.


[1] Press Release Number 7752-18, CFTC, CFTC’s Market Risk Advisory Committee Announces Agenda for July 12 Public Meeting (July 10, 2018), https://www.cftc.gov/PressRoom/PressReleases/7752-18.

[2] J. Christopher Giancarlo, CFTC Chairman, Remarks before the 2018 Financial Stability Conference, Federal Reserve Bank of Cleveland, Office of Financial Research, Washington, D.C. (Nov. 29, 2018), https://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo61.

[3] Andrew Bailey, Chief Executive, Financial Conduct Authority, Speech at Bloomberg London: The Future of LIBOR (July 27, 2017), https://www.fca.org.uk/news/speeches/the-future-of-libor.

[4] Press Release Number 7819-18, CFTC, CFTC Commissioner Behnam Announces the Establishment of New Subcommittee of the Market Risk Advisory Committee and Seeks Nominations for Membership (Oct. 3, 2018), https://www.cftc.gov/PressRoom/PressReleases/7819-18.

[5] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 § 712(d), 124 Stat. 1376, 1644 (2010).

[6] See Press Release Number 6529-13, CFTC, CFTC Announces that Mandatory Clearing Begins Today (March 11, 2013), https://www.cftc.gov/PressRoom/PressReleases/pr6529-13.

[7] J. Christopher Giancarlo, Chairman, and Bruce Tuckman, Chief Economist, U.S. Commodity Futures Trading Commission, Swaps Regulation Version 2.0: An Assessment of the Current Implementation of Reform and Proposals for Next Steps, Whitepaper (Apr. 26, 2018) at 7, https://www.cftc.gov/sites/default/files/2018-04/oce_chairman_swapregversion2whitepaper_042618.pdf.

[8] See Rebecca Lewis, The Federal Reserve Bank of Chicago, Essays on Issues, Central Counterparty Risk Management: Beyond Non-default Risk, 2017 Number 289 (Oct. 17, 2017), https://www.chicagofed.org/~/media/publications/chicago-fed-letter/2017/cfl389-pdf.pdf.

[9] Office of the Comptroller of the Currency, Banking Bulletin 2013-29, Third Party Relationships – Risk Management Guidance (Oct. 29, 2013), https://www.occ.gov/news-issuances/bulletins/2013/bulletin-2013-29.html.