Introduction

Good morning and thank you all for attending this Market Risk Advisory Committee (MRAC) meeting via teleconference.  I would especially like to thank Commissioner Behnam and his staff for convening this meeting.  I am also grateful to Alicia Lewis, the Designated Federal Officer for the MRAC, for organizing the meeting.  And of course, I must thank Nadia Zakir for serving as the MRAC Chair, and all the MRAC members for taking the time to share your valuable perspectives.

A number of important issues will be discussed this morning, including climate-related market risk, CCP risk and governance, market structure, and interest rate benchmark reform.  These are all important issues, and I look forward to the discussion. 

The meeting will also discuss the performance of the market during the early months of the COVID-19 pandemic in the United States.  This morning I want to say just a few words about market volatility during this time and the LIBOR transition.

Market Volatility During the Early Months of the Pandemic

We witnessed significant volatility in the derivative markets in the wake of the coronavirus pandemic, particularly during the early months.  For example, we saw a historic drop in the May futures contract for West Texas Intermediate Crude, which briefly traded at negative prices for the first time ever. 

Clearly, there were unique macroeconomic factors at play: a historically high supply of oil, a fight between Saudi Arabia and Russia for market share, and a simultaneous drop in demand that was unprecedented in both speed and severity due to the coronavirus.  The markets were digesting a lot of information and it happened to coincide with the expiration of a futures contract.  

The possibility of negative futures prices was not a surprise for the CFTC.  For weeks, we had been in regular contact with exchanges in anticipation of just such an event.  To help markets prepare, we issued a joint Staff Advisory to remind DCMs, FCMs, and DCOs of their responsibility to prepare for the prospect that certain contracts may continue to experience extreme market volatility, low liquidity, and possibly negative pricing. 

We have completed a detailed forensic study of the West Texas Intermediate crude oil price aberration on April 20th that led to negative oil prices and plan to make that report public this fall. The analysis points to a confluence of fundamental and technical reasons including a few market structure considerations that have not been previously highlighted that we will address to ensure that the price formation, price discovery, reliability and soundness of this important derivative market that serves our U.S. energy industry is further strengthened.

One of the most interesting things about the recent market volatility is how well the derivatives markets have performed.  Far from amplifying risk throughout the financial system, the derivatives markets have so far acted as shock absorbers.  Unlike during the 2008 financial crisis, derivatives have internalized the impact of market swings.   And while no one can predict the future, derivatives markets have been resilient in part because the CFTC has deployed tools to help prevent financial contagion. 

Over the past few months, the CFTC has been focused on responding to the tremendous impact of the COVID 19 pandemic on the markets we regulate.

First, the agency has continued to monitor closely and prioritize agricultural and energy markets.  As a just mentioned, we issued a joint Staff advisory on market volatility.

Second, we have issued additional targeted, temporary relief to market participants.  This includes relief to registrants listing new principals and to applicants for registration as associated persons from the requirement to submit a fingerprint card for those individuals.  I am proud of how the CFTC has risen to this occasion, acting on a bipartisan basis to approve more than a dozen temporary relief measures since this crisis began.

Third, we have also continued to bolster the CFTC’s customer education efforts.  Times such as these unfortunately create new opportunities for fraud, and we have increased our efforts to arm the public with information so they can detect and avoid these illegal schemes.

Finally, the CFTC’s advisory committees, including this one, have been hard at work and enabling our Commission to gain valuable insight from external stakeholders.

LIBOR Transition

Turning to the LIBOR transition, I am looking forward to the report by ARRC chairman Tom Wipf on the table top exercise conducted in June for the transition to SOFR.  Thank you to Tom, Commissioner Behnam, and Alicia for their leadership in this exercise.  The MRAC Interest Rate Benchmark Reform Subcommittee’s work has helped set the path for what I anticipate will be a smooth transition away from LIBOR and other impaired interest rates. 

I would also stress that the CFTC is in active dialogue with the ARRC on various issues affecting the transition.  We are working to provide reasonable relief to market participants to both encourage the transition away from LIBOR and to make that transition as smooth as possible.

Conclusion

In closing, let me just emphasize how important these advisory meetings are to the Commission, as we consider the most pressing issues facing our markets today. I look forward to today’s discussion.