Statement of Acting Chairman J. Christopher Giancarlo before the Market Risk Advisory Committee Meeting

June 20, 2017

Thank you.

I apologize in advance that I have to leave at 11:15am today for previously scheduled meetings on Capitol Hill. I therefore will give a short opening statement.

Also, when I depart, my chief of staff will take my seat to give a further closing statement on my behalf.

Thank you Commissioner Bowen for convening today’s meeting. Thank you for your sponsorship of the Market Risk Advisory Committee.

I would note for our audience that this is the seventh meeting of the MRAC in little over two and half years. That is an enormous accomplishment. Kudos to you, Commissioner Bowen, and your staff, especially Committee Moderator, Petal Walker.

I have found these meetings to be well organized, carefully prepared and candidly discussed. They are enormously valuable to the work of the Commission. So, thanks also to all the members of MRAC, who give your time and expertise to make the discussion so valuable.

Today’s meeting will address many aspects of the increased use of clearing for swaps transactions.

As you may all know, the Commission is requesting additional resources that would strengthen our examinations capability. It will enable the staff to keep pace with the explosive growth in the number and value of swaps cleared by designated clearing organizations.

The size and scope of DCOs has increased enormously. So too has the complexity of the counterparty risk management oversight programs and liquidity risk management procedures of the DCOs regulation here and abroad.

This growth in volume has been accompanied by an increase in the complexity of products.

For example, the risks posed by credit default swaps differ from those posed by interest rate swaps. Accordingly, DCOs have developed a large number of individualized margin models and other risk management tools to address these risks. This, in turn, generates a corresponding increase in the complexity of the Commission’s oversight responsibilities.

While not on the agenda, I expect we may hear some discussion of the supplemental leverage ratio. I have advocated the following two steps to provide relief from the misguided application of the SLR toward swaps clearing:

    1. Exclude customer cash collateral held at the CCP from the bank’s leverage calculation.

    2. Take customer collateral held at the CCP into account in computing potential future exposure in a manner consistent with the Basel Committee on Bank Supervision’s standardized approach to counterparty credit risk.

I believe these suggested leverage rule changes will significantly reduce capital costs for clearing members.

By CFTC estimates, this potential reduction in capital costs for these clearing members could be as high as 70%; but these will translate into a small 1% capital reduction at the bank holding company level.

Assuming these savings are fully passed on to their customers, these reductions could translate into a three-fold increase in trading activity, especially hedge positions that are carried overnight.

I believe such a significant reduction in costs on a service imperative to managing systemic risk in swaps is entirely worth the trade-off of a miniscule reduction in balance sheet protection. The financial system will be safer and more stable for it.

It is apparent that many DCOs are expanding their services in other jurisdictions around the world. Those jurisdictions look to the Commission to provide insight regarding the effectiveness of the programs implemented by the DCOs.

The Commission supports market participant’s expanding international footprints through information sharing and compliance discussions with our counterparts in other jurisdictions in the areas of cybersecurity, liquidity risk management, default management and other high profile risk management issues.

Let me briefly comment on an issue that is the subject of the today’s final panel: the location of euro-denominated derivatives clearing in light of the circumstances of Brexit.

Last week the European Commission proposed an amendment of EMIR to regulate third-country CCP, including a process to introduce a CCP location policy.

I look forward to following the path of this legislative amendment as it is considered by the EU institutions.

I am respectful of the fact that this is an important regulatory policy development that needs to be made with care by European officials.

Nevertheless, I note that we are now upon the one year anniversary of the agreement between the CFTC and European Commission regarding CCP Equivalence.

That agreement was only reached through difficult and protracted negotiations. Throughout, the United States approached those negotiations with the utmost good faith and goodwill.

Since then, we have demonstrated our unwavering commitment to that agreement and view that agreement as an important signal to the markets and the international regulatory community of the ability of the United States and Europe to work together successfully on critical cross-border issues.

Therefore, whatever the outcome of the Brexit negotiations and the EU’s internal discussions about how to supervise CCPs, we do not contemplate any change to the CFTC-EC Equivalence Agreement.

I’d like to thank our speakers for sharing their time and expertise and everyone here for attending.

And, now on with the show!

Last Updated: June 20, 2017