Statement of Commissioner Dawn D. Stump for CFTC Open Meeting, October 16, 2019

Extending Compliance Schedule for Phase 5 of the Margin Rule for Uncleared Swaps

Regarding the exchange of initial margin (IM) for non-centrally cleared derivatives, now is a good time to step back and reflect on the past implementation phases and to explore in more detail the issues faced by market participants who have, or will in a future phase, become subject to the requirement.  This exercise is important, in my view, in order to understand whether there are actions that we, as regulators, can take to mitigate the potential compliance bottleneck that will be caused by an unprecedented number of market participants coming into scope in the last implementation phase.

In a paper published last year, the Commission’s Office of the Chief Economist concluded, among other things, that whereas Phases 1 through 4 captured just over 40 entities, Phase 5 could bring 700 entities in scope, which together encompass only 11% of the average aggregate notional amount (AANA) of swaps across all phases.  The Chief Economist’s report also found that over 75% of entities coming into scope in Phase 5 have AANAs of less than $50 billion, or just about 3% of AANA across all phases of the margin rule.  Phase 5 compliance, the study revealed, could require implementing nearly 7,000 IM relationships.[1]

In recognition of the unique challenges presented by the last implementation phase, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) worked together to ensure that this phase could be staggered and extended, while also seeking to clarify documentation requirements.  Subsequently, Commission staff issued an advisory clarifying that documentation requirements for uncleared swaps would not apply until a firm exceeds the $50 million IM threshold with a particular swap dealer,[2] and today we are proposing to amend the Commission’s uncleared margin rule to extend the compliance schedule to September 1, 2021, for entities with smaller average aggregate notional amounts of swaps.

In supporting this proposal, I would note that deadlines have a knack for surprising folks sooner than expected and at some point, prolonging the finish is no longer an option for these margin requirements.  That said I am supportive of this extension both for the benefit of the market and the regulatory agencies tasked with addressing the unique challenges presented by the final phase of implementation.

During a recent meeting of the Global Markets Advisory Committee, we learned that in addition to the tremendous operational efforts required of market participants, regulatory parameters more suited to the counterparties involved in earlier implementation phases may need to be refined for application in this final phase.  The issues are so vast that the Committee determined to recommend the creation of a subcommittee that can advise the Commission on considerations to prudently address these challenges.  I am hopeful that such a subcommittee will be up and running soon to assist us in addressing additional questions we may expect to confront in the final phase of IM implementation.

Margin for the European Stability Mechanism

The CFTC Margin Rule applies to swap transactions between Covered Swap Entities (CSEs) and counterparties that are swap dealers (SDs), major swap participants (MSPs), or financial end users.  The Commission is today proposing to expressly carve out from the definition of “financial end user” the European Stability Mechanism (“ESM”) such that uncleared swaps between a CSE and the ESM are not subject to the CFTC Margin Rule.  In so doing, we note that Europe has already determined to exempt the ESM under their own European Market Infrastructure Regulation’s margin rules for OTC derivatives not cleared by a central counterparty.  I believe that today’s proposal is an expression of respect by the CFTC for our European colleagues.  If they do not believe it is necessary or appropriate to impose margin requirements on these transactions, we should, in the interest of international comity, consider adopting the same approach.  But, as the proposal notes, reciprocity is a valid consideration here.

Reciprocity can take on many forms, including mutual recognition of comparable regulations or the application of retributive jurisdictional assertions.  I prefer the former but will not rule out the latter should our own authority be disrespected.  That said I hold a great deal of hope for a structure of mutual respect, especially among jurisdictions that only 10 years ago, at the G20 Summit in Pittsburgh, agreed to work towards a common objective.  The proposal before us today is one example of the CFTC seeking to honor that commitment.  During the unfortunate events of the financial crisis, we learned that coordination among global regulators is critical and trust among us is essential.  Today, those lessons remain true, and we are reminded that disregarding this reality has the potential to weaken, rather than strengthen, the resilience of our global derivatives markets.