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From Securities Regulation Daily, April 25, 2017

Diverse views and perspectives aired at CFTC’s Market Risk Advisory Committee meeting

By Brad Rosen, J.D.

The CFTC’s Market Risk Advisory Committee (MRAC), considered a host of issues and shared diverse opinions on numerous topics ranging from central counterparty defaults, to increased cybersecurity risks, to the uncertainties associated with Brexit and global regulatory reforms at its meeting convened at the Commission’s Washington D.C. headquarters.

The MRAC is charged with advising the CFTC with regard to systemic issues that impact the stability of the derivatives markets and other related financial markets, ensuring market integrity, and the impact and implications of evolving market structures. It’s members consist of leaders and representatives from world’s leading financial institutions, clearinghouses, exchanges, market end users, and public interest organizations.

At its meeting, the MRAC considered three broad topics and featured panels on: (1) central counterparty (CCP) risk management issues and recommendations for dealing with significant CCP defaults; (2) cybersecurity threats and trends; and (3) the state of the markets in light of current issues.

Recommendations for CCP default management. MRAC recommendations regarding CCP potential default centered around the establishment of detailed communication, coordination and harmonization procedures and processes. These were generally lauded by the members CFTC’s Division of Clearing and Risk staff. Another key aspect of these procedures include ongoing fire drills and simulations in connection with default scenarios, one of which was recently conducted that reflected positive results. Market participants still voice concerns around issues relating to porting and moving positions of solvent customers off the books of books of a non-solvent clearing member to a solvent one. The importance of auctioning off a defaulting members portfolio was also underscored.

Cybersecurity and threats. The discussion concerning cybersecurity and the increasing role of organized crime and state actors in connection cyber-related threats was particularly compelling. Steve Chabinksy, a partner at White and Case pointed to the increased severity of cyberattacks. He noted that a denial of service (DNS) attack on the financial services industry four years ago widely attributed to Iran involved 65 billion bits per second flooding computers. A recently DNS attack was reported to be at 1.2 trillion bits a second reflecting increased capability and sophistication by the bad guys.

According to Chabinksy, there are "increasing situations where we are becoming more of a target. We've always been one because of naturally, the criminal element, the banks are where the money is, that's where theft occurs". However, Chabinksy asserted that companies on their own may not be in the position to counter these cyber assaults and the there is "the need for [the] U.S. government as well as other world governments to really look at this and say how do you protect those critical assets that really underlie the entire global economy and our ability to operate in safety…"

State of the Markets. The day’s final panel included a number of controversial issues that continue to challenge regulators and market participants alike. The topics and some related thoughts addressed were:

  • Brexit and volatility events—some see Britain’s exit from the EU resulting in a 6 -7.5 percent eventual drop in GDP;
  • liquidity and SEFs—lack of market liquidity contains to plague certain markets;
  • interest rate environment—participants express confidence the markets will be able to successfully accommodate the possibility of a rising interest environment;
  • leverage ratios—these requirements compel clearing firms to get rid of business and raise the cost of doing business for intermediaries and market users alike;
  • repo markets—lack of liquidity creating ongoing challenges; and
  • uncleared margin—cash market end users continue to be frustrated by requirements.

In closing remarks, Acting Chairman noted, "I listened to the remarks all of which I found very helpful across the board, well based, well argued. At the end of the day, the concern that I have, is that our markets continue to serve risk transfer which is essential to economic growth [and] supportive of the strength, vitality and durability of the markets… because without risk transfer, you can't have healthy investment and healthy investment is necessary for economic growth." He added, "I think the emphasis of the new administration is toward generating healthy, strong, sustainable and broad based economic growth. Those are things I'll bear in mind as we reflect to some things we heard today."

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