MFA Testifies on the Impact of International Developments on the U.S. Derivatives Market
June 27, 2019
On Wednesday, June 26, MFA member Stephen Berger, Managing Director and Global Head of Government & Regulatory Policy at Citadel LLC testified at the House Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit at the hearing entitled, “Brexit and Other International Developments Affecting U.S. Derivatives Markets.”
Click here to watch an archived video of today’s hearing.
Click here to read MFA’s written testimony.
The hearing focused on regulatory issues arising in the derivatives markets due to Brexit and other international matters. During the hearing, Subcommittee Chairman, David Scott (D-GA), emphasized his concern with the European Union’s (EU) regime for enhanced supervision of third country central counterparties (CCPs) related to the European Markets Infrastructure Regulation (EMIR 2.2). While most of the hearing focused on the impact of EMIR 2.2., the hearing covered a variety of other issues, including implementation of uncleared margin requirements, the risks Brexit poses to end-users, and CFTC reauthorization. The witness list included the following individuals:
- Mr. Stephen Berger, Managing Director and Global Head of Government & Regulatory Policy, Citadel LLC on behalf of Managed Funds Association
- Mr. Terrence A. Duffy, Chairman and CEO, Chicago Mercantile Exchange
- Mr. Christopher Edmonds, Senior Vice President of Financial Markets, Intercontinental Exchange
- Mr. Daniel Maguire, CEO, LCH Group
- Mr. Walt Lukken, President and CEO, Futures Industry Association
Key Takeaway’s from the June 26 Hearing:
EMIR 2.2. Clearinghouse Regulation
Throughout the hearing, Members of the Subcommittee expressed their concerns with the recently adopted changes in EMIR 2.2. Representative Neal Dunn (R-IN) stated his frustration with the EU regulation, which shows deference to EU member countries with less robust regulatory frameworks and oversight, but then seeks to impose another level of oversight and fees on CCPs well-regulated in the U.S. and UK. Representative Rick Crawford (R-AR) questioned the EU’s ability to even enforce EMIR 2.2 due to the number of entities outside the EU.
Ranking Member Austin Scott (R-GA) asked the panel about the risks associated with duplicative U.S.-EU regulation. Mr. Lukken responded that, during a crisis, when a CCP is trying to preserve the safety and soundness of the system, it is problematic to have two regulators giving the CCP conflicting instructions. Mr. Lukken added that, even if deference is given, the CCP and other market participants need to know who the primary regulator is to avoid significant market disruption.
Representative Sean Patrick Maloney (D-NY) asked Mr. Berger about the buy-side perspective on EMIR 2.2. Mr. Berger stated that MFA is a proponent of central clearing of derivatives because clearing mitigates risk, increases investor protections, improves transparency, and increases competition in the marketplace. Mr. Berger added that the derivatives market is a global market with deep liquidity and a diverse group of counterparties, and the buy-side needs that liquidity and diversity to ensure that they can appropriate manage risks and that the cost of clearing remains affordable. Mr. Berger stated that MFA members need access to CCPs whether they are headquartered in Chicago, Atlanta, London, or Frankfurt. And, furthermore, that it is essential to MFA members that “regulators work together to use the tools of substituted compliance, deference, and equivalence to make sure that there is that access.”
Implementation of Uncleared Margin Rules
Representative Abigail Spanberger (D-VA) asked Mr. Berger about the uncleared margin rules and how their implementation will mitigate risk. Mr. Berger stated the industry is in the process of phasing in uncleared margin rules that were a product of G-20 reforms to the OTC derivatives markets. The industry is facing challenges in the last implementation phase, which includes the largest number of counterparties. Providing some additional time to phase in the buy-side would be a welcomed development.