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From Securities Regulation Daily, June 20, 2017

Commissioner Bowen announces her departure at CFTC’s Market Risk Advisory Committee meeting

By Brad Rosen, J.D.

At the conclusion of the CFTC’s Market Risk Advisory Committee (MRAC) meeting, Commissioner Sharon Bowen announced that she will be leaving the CFTC within the next few months or perhaps sooner if another nominee is confirmed. Bowen cited the prolonged absence of having a fully staffed and functioning Commission as being key factors in her decision to leave. "[S]ince the departure of former Chairman Massad, the work of this agency has been hampered by only having a two-person Commission when we should be a five-person Commission," she noted in her closing statement.

In announcing her departure, Bowen expressed her clear frustration, continuing: "Having just two Commissioners makes routine business difficult, but makes important policy decisions almost impossible. Without a full complement of commissioners to consider the far-reaching implications of our decisions, we are frozen in place while the markets we regulate are moving faster every day. This fact is intolerable to me."

Bowen began her term as a commissioner in June 2013 and has served as the Commission’s MRAC sponsor over the past two years since the group’s formation, which has tackled significant market risk and market structure issues, including cybersecurity, market liquidity, portfolio compression, and interregulatory cooperation and central counterparty resolution.

The MRAC June meeting featured panels on: (1) issues surrounding Brexit; (2) risk surveillance activities of CFTC’s Division of Clearing and Risk (DCR) with regard to central counterparties (CCPs); and (3) an economic perspective on the clearing regulatory framework.

The impact of Brexit. Brexit is foremost on the mind of market participants and regulators alike. While the general consensus of panelists was that the derivatives markets and swaps market have likely priced in the Brexit-related risks so far, issues relating to institutional planning challenges remain open. Banks will likely have to establish a new European entity or relocate certain activity to existing European entities in order to continue to transact with European clients, both from a house execution and client clearing perspective. These entities may require new exchange and clearing memberships in order to ensure continuity of activity.

Some firms are also concerned that significant resources will also be required internally to accommodate post Brexit-realities. Some dealers would have split trading and client coverage across two entities, leading to increased costs both from a margin and supplemental leverage ratio (SLR) capital perspective.

Acting Chairman Giancarlo, in his statement, also expressed Brexit-related concerns, noting the recent proposed amendment by the EC to regulate third country CCPs and to introduce a CCP location policy. Despite the EC’s objectives, the acting chairman observed, "[W]e are now upon the one year anniversary of the agreement between the CFTC and European Commission regarding CCP Equivalence. That agreement was only reached through difficult and protracted negotiations … [W]e have demonstrated our unwavering commitment to that agreement and view that agreement as an important signal to the markets and the international regulatory community of the ability of the United States and Europe to work together successfully on critical crossborder issues." Giancarlo concluded by clearly expressing U.S. expectations, declaring, "whatever the outcome of the Brexit negotiations and the EU’s internal discussions about how to supervise CCPs, we do not contemplate any change to the CFTC-EC Equivalence Agreement."

DCR’s risk surveillance activities. DCR leadership provided the committee with a comprehensive summary of the risk surveillance branch’s (RSB) risk surveillance methodology and activities. RSB conducts independent assessments of the risks posed by market participants, primarily through stress testing which is sometimes referred to as the fourth level of financial regulation. RSB currently has 28 employees, including personnel with experience as auditors, investigators and traders at exchanges. RSB’s activities are highly data driven. By the fourth quarter of this year, DCR expects to receive 60 million records daily.

Economic perspectives around clearing. The panel gave some consideration to the idea of "skin in the game" in the CCP context, and whether more capital is better than less. Some members of the panel thought the focus should be on resilience and the measure of resilience. While the skin in the game has be looked at, the panel members still await a research paper which lays out these things in a systematic manner. These issues will warrant further consideration as overhauling the supplemental leverage ratio (SLR) continues to be advocated by Acting Chairman Giancarlo and market players.

MainStory: TopStory CFTCNews ClearanceSettlement CommodityFutures Derivatives DoddFrankAct ExchangesMarketRegulation FinancialIntermediaries InternationalNews Swaps TrumpAdministrationNews FedTracker Securities

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