Senate Agriculture Committee Holds Hearing on the Derivatives Market and CFTC Reauthorization
On Tuesday, June 25, the Senate Agriculture Committee held a hearing entitled, “The State of the Derivatives Market and Perspectives for CFTC Reauthorization.” MFA President and CEO, Richard H. Baker, submitted a Written Statement addressing CFTC reauthorization, data protection, and several other issues. Witnesses testifying include:
- Mr. Thomas Sexton, President and CEO, National Futures Association
- Mr. Walter Lukken, President and CEO, Futures Industry Association
- Mr. Joe Barker, Director of Brokerage Services, CHS Hedging
- Mr. Dennis M. Kelleher, President and CEO, Better Markets
The hearing focused on a variety of topics including EMIR 2.2 and the importance of recognizing previously established equivalence agreements between the U.S. and EU, position limits and the definition of bona fide hedging, recognizing initial margin in capital requirements, impacts of automated trading on markets and the prospects for Reg AT, cybersecurity, commodity prices, data collection, and CFTC funding.
The following are some key takeaway’s from today’s hearing:
EMIR 2.2 and EU Oversight of U.S. Clearinghouses
Many Senators noted their strong bipartisan concern with the recently updated EMIR 2.2 regulation that would allow ESMA oversight on non-EU clearinghouses and be required to fund ESMA through surcharges. Committee Chairman Pat Roberts (R-KS) asked what progress had been made between the CFTC and ESMA regarding this proposal and noted it is likely in direct conflict with previously agreed upon equivalence standards. Mr. Lukken stated that FIA supports the EU coming out with full deference to U.S. regulators, which they have the ability to do under EMIR. He added that CFTC regulations are clearly equivalent.
Ranking Member Debbie Stabenow (D-MI) stated she will submit questions for the record on the issue, but she is deeply concerned the EMIR 2.2 clearinghouse provisions may go through before Dr. Heath Tarbert gets to the CFTC.
Senator Dick Durbin (D-IL) also raised concerns about the future of already established U.S. and EU equivalence rules regarding central clearing. He also asked who will be hurt by the new EMIR regime. Mr. Lukken stated equivalency has been part of the international regulatory regime for a very long time, and it is largely accepted as an international standard. He stated both the U.S. and EU entered into an equivalence agreement two years ago on central clearing. He stated the issue is that Brexit is causing the EU to recraft their rules which also fall the U.S. Mr. Lukken stated at this time it is unknown if the EU will defer to previous equivalence agreements with the U.S. He added changing already existing equivalence agreements stands to hurt the EU because market participants will not have access to EU markets.
Initial Margin and Capital Requirements
Senator John Boozman (R-AR) stated the number of firms providing clearing services has dropped dramatically. He asked what was causing this and what can we do in CFTC reauthorization to combat it. Mr. Lukken stated several factors are to blame including technology demands, higher costs, and that clearing is considered by many to be a low-margin business. Mr. Lukken also stated clearing issues, which include that banks are being forced to hold capital against initial margin are deterrents. He applauded the Basel Committee’s release last week that recommended an offset for initial margin against capital. He said they are hopeful the prudential regulators will implement that.
Senator Boozman asked Mr. Sexton about the NFA’s collection of data. He noted their testimony mentioned not holding as much information would be a better protective measure, and Senator Boozman agreed. Mr. Sexton stated the best risk mitigation is not collecting data that you simply don’t need. He stated that the NFA commends Commissioner Dawn Stump’s approach at the CFTC, and stated if we don’t need the data we shouldn’t collect it.
Senator Chuck Grassley (R-IA) asked about the impact of automated trading on commodity markets. He is concerned that algorithmic trading is hurting markets over normal person-to-person trading. Mr. Sexton stated that the NFA has the tools in place to monitor this issue. He noted Dr. Tarbert, the incoming Chairman of the CFTC, stated he may have CFTC staff take another look at Reg AT. Mr. Sexton stated that NFA stands ready to work with Dr. Tarbert on Reg AT. Mr. Lukken, as well as Mr. Barker and Mr. Kelleher, stated that automated trading injects a lot of liquidity into the markets which is good. Mr. Lukken added there is a concern that it can affect end of day pricing, but he argued the CFTC has adequate authority to deal with this issue.
CFTC Funding/User Fees
Several Senators including Chairman Roberts, Ranking Member Stabenow, Senator Tina Smith (D-MN), and Senator John Hoeven (R-ND) asked about CFTC funding levels. Many witnesses agreed the CFTC should be “well-funded,” including Mr. Lukken. Mr. Barker stated he encourages the CFTC to have additional funds available, but does not agree with user fees which would hurt end users. Mr. Kelleher argued the CFTC does not have the proper resources and funding is not even keeping up with inflation.