CFTC’s Massad: pricing benchmark integrity among swap issues to resolve.
Proposed European legislation on financial benchmarks could prohibit European-regulated companies from hedging thousands of products traded on US futures exchanges and swap execution facilities (SEFs). But never fear—US regulators are on it.
Commodity Futures Trading Commission Chairman Timothy G. Massad said that thousands of derivative contracts are priced over benchmarks, such as LIBOR and foreign-exchange benchmarks, which global banks have manipulated for their own gain. US regulators have upped their enforcement actions to firm up benchmark integrity, but the European Union has proposed regulation, a move Chairman Massad said would have “adverse” consequences.
The EU proposal would require it to determine whether a non-EU benchmark administrator is equivalently supervised in a non-EU country in order for EU-base companies to use derivatives priced over those benchmarks. Given the US doesn’t have such a government-sponsored supervisory regime for benchmarks, “the new proposed benchmark regulation could prohibit E.U. institutions from hedging using thousands of products traded on US futures exchanges and swap executive facilities,” Chairman Massad said.
Such an outcome would not only limit Wall Street’s derivative trading business but also the hedging efforts of European companies and the subsidiaries of US companies based in Europe. Chairman Massad said he has encouraged European officials to consider instead the work of the International Organization of Securities Commissions (IOSCO), which provides a framework for pricing reporting agencies and financial benchmark administrators to address factors to strengthen benchmarks without regulation.
In testimony he provided to the US House Committee on Agriculture, which along with the Senate agriculture committee oversees the regulatory agency, Chairman Massad said the benchmark issue was one of several the CFTC is current addressing. The testimony was intended to bring lawmakers up to speed on the CFTC’s progress dealing with an array of issues over the last year and those anticipated this year.
Chairman Massad emphasized that for derivative markets to contribute to the broader economy, they must work well for commercial end-users, including manufacturers and farmers seeking to hedge commercial risks. Since last summer, he said, the CFTC has made it a priority to address those market participants’ concerns, such as exempting end users from margin requirements for uncleared swaps, amending rules so local utilities can more effectively hedge, exempting end users from recordkeeping requirements, and ensuring companies’ treasury affiliates are exempted from clearing and trading requirements.
Chairman Massad said implementing the regulatory framework for swaps is ongoing. He noted that over-the-counter (OTC) swaps accelerated and intensified the financial crisis, and the interconnectedness they created meant that problems at one large financial institution could cascade through the global system. As a result, leader of the G-20 nations agreed to reform the OTC swaps market, including instituting more transparent and orderly central clearing for more standardized trades. Today, he said, 75 percent of swaps are cleared compared to 15 percent in December 2007.
However, there’s still much to do in three areas, he said. One is harmonizing swap data reporting rules across jurisdictions; another is making sure swap data repositories collect, maintain, and publicly disseminate data in ways to support effective market oversight and transparency; and the third is encouraging market participants to live up to their obligations.
A key goal in the year ahead, said Massad, is resolving cross border issues and building a global regulatory framework in a previously unregulated market that now extends across numerous jurisdictions, each with their own rulemaking processes and priorities. Areas where progress is anticipated in 2015 include recognizing swap clearinghouses across jurisdictions and harmonizing their regulation; developing largely consistent rules across jurisdictions for swap dealers and margin for uncleared swaps; and developing consistent swap reporting requirements.
Chairman Massad also pointed to developing mutually recognized swap trading rules and foreign boards of trade, or derivative exchanges, to enhance opportunities for trading especially future and option contracts globally. The CFTC has not generally sought to regulate the trading of US persons or institutions on foreign derivative exchanges, and has typically granted those exchanges relief from its registration requirements. More recently, however, it has allowed several exchanges, including those in Tokyo, Malaysia and Singapore, to register with the agency, recognizing the increasing interconnectedness of the global derivatives markets.
More generally, the approvals demonstrate “our commitment to a coordinated regulatory approach that relies on foreign supervisory authorities and ongoing cooperation,” Chairman Massad said, adding, “We look forward to granting additional approvals in the coming months.”