09.28.2016

Capital Requirements ‘Top Priority’ This Fall, CFTC Chief Says

(this article originally appeared in The Hill)

Re-proposing its capital requirements rule for swap dealers and major swap participants is the Community Futures Trading Commission’s (CFTC) top priority this fall, Chairman Timothy Massad said Tuesday.

The original capital requirements rule was proposed in 2011, but never adopted.

“Adequate capital is critical to the ability of swap dealers to absorb losses,” Massad stated in prepared remarks at the Securities Industry and Financial Markets Association Capital Markets Conference. “And that is in turn critical to preventing systemic risk and enhancing the resiliency of our system generally.”

The re-proposal will attempt to accommodate the various types of swap dealers and modernize the rule to meet the current landscape.

“We’ve got some swap dealers who are affiliates of bank entities and therefore I think it makes sense … to provide the option that they are subject to a very similar regime as the bank regulators’ capital rules,” Massad said in a question-and-answer session. “[Other firms] are either broker-dealers, [futures commission merchants], or non-financial companies.

“So, we need to have a different approach there,” he said.

De minimis. 

Capital requirement implementation is part of the reason Massad recently called for the commission to delay the date of the de minimis threshold by one year.

The de minimis threshold designates the minimum notional value of swap dealing activity for which an entity must register with the CFTC. Currently, the value is $8 billion, but is set to drop to $3 billion by December 2017.

Beyond capital requirements, more research needs to be done before the drop takes place, the Massad said.

Reg AT.

A supplemental proposal to “Regulation AT” is also expected this fall, Massad said.

“Regulation AT,” submitted in November 2015, aims to bring automated trading firms under the CFTC’s regulatory regime. Roughly 70 percent of futures market trading is automated, Massad said.

The commission has been weighing a host of issues raised by industry feedback, including, “issues of scope, issues of testing requirements, how they apply and where they apply,” he said. “I would hope that … certainly later this fall, we’ll come out with something.”

Euro margin rules.

Margin rules for uncleared swaps between the 20 largest swap dealers, those with $3 trillion in gross exposure, went into effect on Sept. 1 in the U.S., Japan and Canada. Europe delayed implementation, citing technical changes within the rule that needed to be addressed.

“I believe that this delay will be short, and I know that Europe is committed to minimizing it,” Massad said.

Currently, only swaps between two major European firms are uncovered by new margin requirement rules. Several non-major swap dealers will have to comply with the new margin rules by March 1, 2017.

“As we look ahead to March 1, I believe that date is going to stick and it’s going to stick around the world,” Massad said.

Clearinghouse considerations.

The CFTC has worked domestically and internationally in recent months to implement clearinghouse safeguards, Massad said. Domestically, the agency is implementing its own stress tests, working with systemically important clearinghouses to verify wind-down plans, and, alongside the Federal Deposit Insurance Corporation, developing resolution plans for clearinghouses.

Internationally, the CFTC is involved with working groups looking at clearinghouse resiliency, rule implementation, resolution planning, and interdependency.

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