Statement of Chairman Timothy Massad on the Financial Stability Oversight Council’s Update on its Review of Asset Management Products and Activities

April 18, 2016

I support the issuance of the Council's update on its Review of Asset Management Products and Activities. This report represents a great deal of work by the staffs of the agencies, and I want to first thank them all for their efforts.

I would like to say a few words about the leverage section. I endorse the report’s suggestion that we study further the implications of leverage with respect to hedge funds. The issues raised in this section of the report are particularly relevant to the work of the CFTC because of the role of derivatives. While we do not regulate hedge funds we, together with the SEC, regulate the derivatives markets.

The first challenge is the metrics we use to measure leverage. As the report notes, we do not yet have a good metric for leverage in this context. We have not yet “connected the dots” between the leverage metrics cited in the report and the amount of underlying risk that it represents. This is evident, for example, with respect to the use of “gross notional exposure.” This metric includes derivatives, but not in a manner that accurately measures risk. It measures notional amount, but does not take into account a variety of factors that affect risk, such as product type, offsetting positions, whether a transaction is cleared, or whether margin is collected. To analyze the implications of leverage, we need to take into consideration these and other critical market structure details.

CFTC made a preliminary analysis of the data we collect to identify hedge funds with the largest derivatives exposures. We found that most of the exposure relates to cleared derivatives. The funds generally had extremely low levels of uncleared derivatives, and the counterparties were typically large registered swap dealers. That preliminary review illustrates why more work is needed to refine the data and conduct in-depth analysis.

We must also keep in mind that the swaps marketplace is changing. We now require clearing of most swaps and reporting of all swaps. We are implementing margin requirements for uncleared swaps between swap dealers and large financial institutions. Trading on swap execution facilities is increasing. These steps have brought greater transparency to this market and a greater ability to address risk. And these and other regulatory reforms, taken together with changes in the marketplace, may be contributing to increased derivative activity on the part of hedge funds and other asset management firms.

So a first step is to work with and improve the data we are now collecting. This can also help us transition from an emphasis on collecting “historical” data on past quarterly periods to something closer to “real-time” analysis of exposures across cleared and uncleared positions. This will take time, and the process is ongoing, but I believe this is the type of work that is necessary to assess potential risk to our financial system.

Thank you. I look forward to working with other agencies as we continue this work.

Last Updated: April 18, 2016