CFTC’s Massad: Swaps margin will not apply to end-users
July 24, 2015 |06:44 PM
The Commodity Futures Trading Commission’s proposed rule on margin for uncleared swaps does not apply to commercial end-user counterparties, Commodity Futures Trading Commission Chairman Timothy Massad said Thursday. He was making a speech reflecting on the fifth anniversary of the Dodd-Frank Financial Services Reform Act.
“I want to highlight that, as with our clearing and trading mandates, our proposed rule on margin for uncleared swaps does not apply to commercial end-user counterparties. We know commercial end-users do not pose the same risk as large financial institutions,” Massad said in a speech to the D.C. Bar in the law offices of Covington & Burling.
Farmers, co-ops and other end-users of the financial instruments that come under the CFTC’s regulatory authority have told the House and Senate Agriculture committees, which have jurisdiction over the CFTC, that they fear it will be harder and more expensive for them to do business.
Massad said, “One of our key priorities has been, as we continue to implement Dodd-Frank, to make sure the markets continue to work well for commercial end-users. The new rules are not meant to burden them.
“We have taken a number of actions to address end-user concerns – rule adjustments and clarifications addressing trade options and contracts with embedded volumetric optionality; the ability of publicly owned utilities to use the swap market efficiently; the requirements pertaining to posting of collateral with clearing members; adjusting real-time reporting requirements for certain less liquid, long-dated swaps; and making sure end-users can use the clearing and swap trading exemptions Congress provided when they transact through treasury-affiliates,” he added. “I expect we will continue fine-tuning the framework in the months ahead.”
In general, however, Massad used the occasion to defend the need for the Dodd-Frank bill.
Most people, Massad noted, didn’t know much about the derivatives market and the role it plays in the economy until 2008, when they learned that “excessive risk in one part of the derivatives markets –over-the-counter swaps – contributed to the intensity of the worst financial crisis since the Great Depression.”
The country has made a lot of progress in restoring its “economic health,” Massad said, “but we must not forget the costs of that crisis. Eight million Americans lost their jobs. Millions lost their homes and life savings. Countless retirements and college educations had to be deferred, and businesses shuttered.”
The risk in over-the-counter swaps was “opaque,” Massad said, because that market was unregulated.
“Today, it still staggers the imagination to consider that the U.S. government had to commit more than $180 billion to prevent the collapse of just one company, AIG, because its failure due to excessive swap risk, at that time and in those circumstances, would have led to catastrophic consequences,” he said.
Massad said he understands that the commitments of the G-20 countries and the Dodd-Frank Act brought such “fundamental change” to the derivatives market that “active discussion and debate are healthy and useful.”
But he added, “Insofar as some raise questions about the fundamental need for reform, I respectfully – but firmly – disagree. We saw first-hand the consequences that the absence of sensible regulation created. And the basic principles reflected in the G-20 commitments and Title VII of Dodd-Frank – central clearing, oversight of dealers, transparent trading, and reporting – are sensible: They help reduce the risks in our financial system and enhance its resiliency, and they contribute to the transparency and integrity of our markets.”
Massad did not bring up the CFTC reauthorization or the issues of funding for the commission that are before Congress.
“I want to highlight that, as with our clearing and trading mandates, our proposed rule on margin for uncleared swaps does not apply to commercial end-user counterparties. We know commercial end-users do not pose the same risk as large financial institutions,” Massad said in a speech to the D.C. Bar in the law offices of Covington & Burling.
Farmers, co-ops and other end-users of the financial instruments that come under the CFTC’s regulatory authority have told the House and Senate Agriculture committees, which have jurisdiction over the CFTC, that they fear it will be harder and more expensive for them to do business.
Massad said, “One of our key priorities has been, as we continue to implement Dodd-Frank, to make sure the markets continue to work well for commercial end-users. The new rules are not meant to burden them.
“We have taken a number of actions to address end-user concerns – rule adjustments and clarifications addressing trade options and contracts with embedded volumetric optionality; the ability of publicly owned utilities to use the swap market efficiently; the requirements pertaining to posting of collateral with clearing members; adjusting real-time reporting requirements for certain less liquid, long-dated swaps; and making sure end-users can use the clearing and swap trading exemptions Congress provided when they transact through treasury-affiliates,” he added. “I expect we will continue fine-tuning the framework in the months ahead.”
In general, however, Massad used the occasion to defend the need for the Dodd-Frank bill.
Most people, Massad noted, didn’t know much about the derivatives market and the role it plays in the economy until 2008, when they learned that “excessive risk in one part of the derivatives markets –over-the-counter swaps – contributed to the intensity of the worst financial crisis since the Great Depression.”
The country has made a lot of progress in restoring its “economic health,” Massad said, “but we must not forget the costs of that crisis. Eight million Americans lost their jobs. Millions lost their homes and life savings. Countless retirements and college educations had to be deferred, and businesses shuttered.”
The risk in over-the-counter swaps was “opaque,” Massad said, because that market was unregulated.
“Today, it still staggers the imagination to consider that the U.S. government had to commit more than $180 billion to prevent the collapse of just one company, AIG, because its failure due to excessive swap risk, at that time and in those circumstances, would have led to catastrophic consequences,” he said.
Massad said he understands that the commitments of the G-20 countries and the Dodd-Frank Act brought such “fundamental change” to the derivatives market that “active discussion and debate are healthy and useful.”
But he added, “Insofar as some raise questions about the fundamental need for reform, I respectfully – but firmly – disagree. We saw first-hand the consequences that the absence of sensible regulation created. And the basic principles reflected in the G-20 commitments and Title VII of Dodd-Frank – central clearing, oversight of dealers, transparent trading, and reporting – are sensible: They help reduce the risks in our financial system and enhance its resiliency, and they contribute to the transparency and integrity of our markets.”
Massad did not bring up the CFTC reauthorization or the issues of funding for the commission that are before Congress.
