Opening Statement of Commissioner Brian D. Quintenz before the Open Commission Meeting on October 16, 2019

Open Meeting on Proposed Rule: Amendment to Regulation 23.161 – Compliance Schedule Extension and Proposed Rule: Amendments to the Margin Rules for Uncleared Swaps – 23.151 and 23.157

October 16, 2019

Good morning. Mr. Chairman, thank you for calling this meeting.  The proposals before us today both address one of the key post-crisis reforms: the margin framework for uncleared swaps.  I support the first proposal, which provides smaller entities with an additional year to come into compliance with the uncleared margin regime.  However, as I will explain further below, I respectfully dissent from the proposal to exclude the European Stability Mechanism from the CFTC’s margin requirements for uncleared swaps.

Proposed Rule: Amendment to Regulation 23.161 – Compliance Schedule Extension

I am pleased to support the Commission’s proposal to extend the compliance schedule for uncleared margin to September 1, 2021 for entities with smaller average daily aggregate notional amounts of activity.  As our own Office of the Chief Economist noted, phase five would have brought approximately 700 entities into our margin regime, implicating around 7,000 relationships that would have to be negotiated to manage initial margin arrangements.[1]  Recognizing the operational challenges associated with phase 5 implementation, BCBS and IOSCO revised the uncleared margin framework to include an additional implementation phase.  I am pleased that the agency, consistent with this revised international framework, is providing these smaller counterparties with additional time to come into compliance.  I also support the recent proposal by the US banking regulators to similarly extend the compliance period for smaller firms.

However, much more needs to be done.  First, it is critical that the CFTC, US banking regulators, the SEC, and our international counterparts adopt a coordinated approach with respect to uncleared margin.  The derivatives market is a global market and any differences in our respective approaches will result in increased burdens and operational complexities for firms.  This point was emphasized most recently at the Global Markets Advisory Committee (GMAC) meeting. Participants highlighted the numerous ways in which derivatives regulators across the globe have implemented conflicting timing, scope, calculation, and other requirements for uncleared margin implementation.  I believe we must work with our regulatory counterparts to eliminate these cross-border discrepancies.  Today’s rulemaking represents a first step of many more in that international harmonization effort and I will continue to support the work of Commissioner Stump through the GMAC to further align and rationalize uncleared margin frameworks globally.

Dissenting Statement by Commissioner Quintenz to the Proposed Exclusion for the European Stability Mechanism from the Commission’s Margin Requirements for Uncleared Swaps

In March 2018, I articulated my approach to our current regulatory relationship with our European counterparts in light of their refusal to stand by or re-affirm their 2016 commitments in the CFTC’s and European Commission’s common approach to the regulation of cross-border central counterparties (CCPs) (CFTC-EC CCP Agreement).[2]  Specifically, the absence of the agreement’s re-affirmation directly implied the agreement’s abrogation by the European Market Infrastructure Regulation 2.2 (EMIR 2.2).[3]  I therefore vowed that I would either object to or vote against any relief provided to or requested by European Union authorities until the agreement’s clarity was restored.  While the possibility still exists for a successful outcome to EMIR 2.2 that fully respects the CFTC’s ultimate authority over US CCPs, still no assurance has been given to remove that doubt.

I therefore dissent from today’s proposed rule to exempt the European Stability Mechanism from the Commission’s margin requirements for uncleared swaps.

The ESM plays an important role within Europe - an intergovernmental organization of the EU’s Eurozone member states that provides financial assistance to those countries.  The rule the CFTC is proposing to issue today would codify CFTC staff no-action relief permitting the ESM, unlike other financial entities, to enter into uncleared swaps with Commission-registered swap dealers without complying with the CFTC’s margin regulations.[4]  In proposing this rule, the CFTC has directed precious staff resources to provide legal certainty to an EU agency so that it may access CFTC-supervised swap dealers with significantly greater flexibility than numerous US firms.  Yet, we are taking this step while, and as I stated at last month’s Global Markets Advisory Committee meeting, the proposed implementation of EMIR 2.2 has actually increased the likelihood of the CCP Agreement’s nullification.[5]  It is entirely unclear if any of the five US CCPs currently authorized to access the EU[6] will ultimately be treated as domestic EU firms and forced to follow EU rules.

Subjecting a US CCP to the same level of EU regulation as an EU CCP would unilaterally render null and void an agreement originally based on regulatory deference and mutual respect between two authorities.  Even subjecting them to a re-application process under new or different criteria could nullify the 2016 agreement. And yet that re-application process is precisely the current expectation.

The CFTC-EC CCP Agreement promoted cross-border markets and regulatory efficiency because the CFTC and the European Commission agreed on where and how to defer to each other’s regulatory regimes.  A rule like the one proposed today, or the relief provided by CFTC staff to Eurex Clearing last December (to which I similarly objected)[7] provides special accommodations to an EU institution by relying on the CFTC’s trust in our EU counterparts.  Such trust continues to be misplaced until the EU can provide assurance that the CFTC-EC CCP Agreement will be upheld.