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

December 11, 2019

Introduction

Good morning and welcome to the CFTC’s Market Risk Advisory Committee (“MRAC” or “Committee”) meeting.  I want to thank Chairman Tarbert and Commissioners Quintenz and Stump for being here today.  I also want to thank and acknowledge the MRAC members and invited speakers who will participate on the panels today.  

I would like to extend a special thanks to Nadia Zakir, the MRAC Chair for her commitment and leadership.  Finally, and as always, I would like to thank and recognize Alicia Lewis, the Committee’s Designated Federal Officer, for all of her tireless, well executed, and thoughtful work.  There are many individuals who make advisory committee meetings run smoothly, efficiently, and with purpose; but, none deserve more recognition than Alicia. 

Subcommittee Updates

This morning we will receive updates from the MRAC’s three newest subcommittees: Climate-Related Market Risk, Market Structure, and CCP Risk and Governance.  The Commission recently approved each of these three subcommittees.  I appreciate my fellow Commissioners and their support and thank each of the subcommittee members for their willingness to serve and contribute to these critically important market issues.[1]  Although less than a month since Commission approval, I know each of the chairs will have important updates for the MRAC from each subcommittee.  With that, I will take a moment to thank each of the new chairs: Bob Litterman, Stephen Berger, Lisa Shemie, Lee Betsill, and Alicia Crighton for their leadership. 

The Interest Rate Benchmark Reform Subcommittee

Following the morning panels, the MRAC will receive a status report from the Interest Rate Benchmark Reform Subcommittee covering its three work streams: (1) the Initial Margin Working Group, led by Biswarup Chatterjee; (2) the Clearing Working Group, led by Marnie Rosenberg; and (3) the Disclosure Working Group, led by Ann Battle.  Tom Wipf, Chairman of this critically important subcommittee, and Chairman of the Alternative Reference Rate Committee (“ARRC”) of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) will lead the discussion.

I am proud of the accomplishments and progress made by the MRAC and the Subcommittee’s work and contributions to the larger efforts by our domestic and international counterparts, as we all collectively work to successfully transition away from the London Interbank Offered Rate (“LIBOR”).  As an important first deliverable in September, the MRAC approved plain English disclosures for new derivatives referencing LIBOR and other IBORS.[2]

This standard set of disclosures, prepared by the Interest Rate Benchmark Reform Subcommittee, is intended as a helpful example of “plain English” disclosures that market participants could use, as they deem appropriate, with all clients and counterparties with whom they continue to transact derivatives referencing LIBOR and other IBORs.  The disclosures inform clients and counterparties about the implications of using such products and provide additional transparency to the market.  That said, the “plain English” disclosures are not meant and should not undermine efforts to complete transition in an orderly and timely manner.  More generally, the disclosures provide a tool as we collectively work towards the end of 2021, when the Financial Conduct Authority will no longer sustain LIBOR.[3]

After the Interest Rate Benchmark Reform update, we will hear a discussion of the CFTC’s Office of the Chief Economist’s (OCE) and the Subcommittee’s findings on the uncleared margin impact of transitioning certain legacy IBOR-linked derivatives to risk free rates.  Specifically, Richard Haynes, a CFTC Supervisory Research Analyst will discuss an OCE-published CFTC research paper, “Legacy Swaps under the CFTC’s Uncleared Margin and Clearing Rules”.[4]  The paper provides important data about the landscape for legacy swaps, which are swaps executed prior to the implementation of the CFTC’s Title VII margin and clearing mandate.  I believe the paper’s conclusions cement the important role the CFTC and other regulators should play in providing critical market data and regulatory relief for market participants, where needed and when appropriate, as we collectively stride towards benchmark transition.  On that note, I believe the Chairman has an announcement to make in the near future that will validate the important role the CFTC and other regulators play in the benchmark transition effort.  And I thank the Chairman for working with me on these important issues.

The penultimate discussion will center on ISDA’s fallback consultations, including pre-cessation triggers and the parameters for benchmark fallback adjustments.  These are critically important issues, which have seen great progress in just the past few weeks alone.[5]  Among many other efforts since 2016, ISDA has spearheaded this critical work as part of the larger global benchmark transition effort, and the entire organization deserves recognition for excellent and timely work.

Many challenges remain that demand thoughtful consideration and eventual execution in order to globally harmonize transition away from LIBOR.  Discussions raise several issues, including most generally how to avoid significant market disruption if the Financial Conduct Authority, as the primary regulator of LIBOR, finds it to be non-representative.  Of note, the Financial Stability Board’s Official Sector Steering Group has encouraged consideration of a pre-cessation trigger as a step towards greater market certainty.[6] A second concern involves how non-EU jurisdictions, including the U.S., should respond if there is a determination under the European Benchmark Regulation that LIBOR, although still published, is non-representative of the underlying market.[7]

Finally, we will hear current proposals from the CME and LCH for transitioning price alignment interest and discounting for U.S. dollar over-the-counter cleared swaps to the Secured Overnight Financing Rate (“SOFR”).  I believe the MRAC’s Interest Rate Benchmark Reform Subcommittee can play an important role in hosting critical discussions and potentially table top exercises to game out the possible “big bang” transition.

As we kick on the heels of 2020, much work remains to be done in two short years.  The ARRC’s paced transition plan assumes significant transition to SOFR in 2020.  Operational readiness becomes crucial to ensure organizations have set a solid foundation internally to begin transition in earnest.  I remain committed to supporting this entire effort, working with market participants and my official sector colleagues to ensure the MRAC continues to play an additive role in addressing challenges in a thoughtful, measured way to ensure market continuity and stability. 

I look forward to today’s important discussion.