SPEECHES & TESTIMONY

July 24, 2018

Statement of CFTC Chairman J. Christopher Giancarlo Regarding the Proposed Rule on Segregation of Assets Held as Collateral in Uncleared Swap Transactions

After more than four years of administering the final rules in subpart L of Part 23 (Commission Regulations 23.700-704), CFTC staff have observed that the detailed requirements of these regulations have been difficult and burdensome for swap dealers to satisfy.  The requirements have also caused some confusion by end user counterparties who rely on our markets to hedge commercial risk.  These observations were supported by comments made in response to the Commission’s Project KISS initiative.

Congress mandated that counterparties of swap dealers be given a choice regarding whether or not they elect the protections that come from segregation of initial margin collateral, which I support.  Part of this important decision is protected by making sure the counterparty clearly, and easily, understand its rights.  It appears that very few swap counterparties have exercised their right to make that choice.  Part of the reluctance may be because that choice is accompanied by a range of overly complicated regulatory requirements and obligations.

The swaps market is a marketplace of professional market participants. It is closed to retail participation.  Public policy is not well served by imposing prescriptive consumer and investor protections in markets that exclusively serve professional market participants.

This proposal looks to reduce the burdens, costs and confusion that have proved counterproductive and discouraged the election of segregation.  This proposal will also make it more efficient for counterparties, such as pension funds, insurance companies, and community banks, to be able to elect segregation and receive those protections while hedging their risk in the swaps markets.

As part of the proposal, the Commission would permit more flexibility in custodial arrangements and margin investment.  Rather than the current prescriptive requirements of the regulation, it would leave it up to commercial negotiation by professional trading counterparties.  Another change is removing the overly prescriptive requirement that initial margin segregation be invested pursuant to Commission Regulation 1.25, in the anticipation that doing so could encourage more segregation elections.

Enabling the election of segregation is a bipartisan goal, starting with a unanimous Commission rulemaking by a previous commission.  Now with time and experience, we see that this goal could be more easily met, and changes to the rules are appropriate to better further these important public policy objectives.

I support this proposed rule from the Division of Swap Dealer & Intermediary Oversight.  I look forward to hearing comments on the proposal.