CFTC committee issues recommendation on bank capital requirements, derivatives

The Commodity Futures Trading Commission advanced two recommendations on the impacts of proposed U.S. bank capital requirements and liquidity management for derivatives.

The recommendations were made by the CRTC’s Global Markets Advisory Committee (GMAC) at its meeting on June 4.

The first one was on the impact of the us bank capital proposals on end-users that rely on cleared derivatives markets.

The current U.S. Basel III endgame bank capital proposals represent a rewrite of the regulatory capital standards for major U.S. banks. It brings major implications for the clients these banks serve – particularly for end users who rely on derivatives markets to hedge risk.

In its current form, the proposal would do several things, including:

• Reduce the capacity of U.S. banks to offer clients access to derivatives markets;
• Reduce liquidity in derivatives markets;
• Increase the costs of hedging for end-users and, as a result, increase costs for their customers;
• Disproportionately harm smaller end-users and non-public companies;
• Increase systemic risk; and
• Create an unlevel playing field for market participants, including across jurisdictions.

The report contains various recommendations on the impact of U.S. bank capital proposals on end users, central clearing, and derivatives markets.

The second recommendation relates to variation margin processes in non-centrally cleared markets.

With the global implementation of margin requirements for non-cleared derivatives, margin call and settlement volumes have grown exponentially. This, in turn, has raised the necessity for efficient collateral and liquidity management practices, especially during times of market volatility. The importance of streamlining variation margin (VM) practices is recognized by market participants through the increased use of standards and solutions.

In January, the Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) issued recommendations for streamlining VM processes. They recommend firms consider the following:

• The legal and operational challenges that could inhibit seamless exchange of margin and collateral calls;
• Granting greater flexibility in bilaterally agreed acceptable collateral;
• Advantages of standardization and automation of their non-centrally cleared margin processes; and
• The potential benefits of third-party services to help improve non-centrally cleared VM processes.

The GMAC recommends that the CFTC support and facilitate industry implementation of the BCBS-IOSCO recommendations for streamlining of variation margin practices.

“The GMAC continues to make great progress developing thoughtful recommendations and insightful work product to aid the CFTC, other policymakers, and participants in global markets,” CFTC Commissioner Caroline Pham said. “In less than a year, the GMAC has now adopted 13 recommendations on a broad array of issues to promote and bolster market integrity and resiliency. These recommendations continue to have a tangible impact, not only on rulemakings here at the CFTC, but also among our counterparts and international standard setters. As the GMAC’s sponsor, I’m honored to help provide a public venue for some of the preeminent industry experts to discuss and develop potential solutions to addressing the biggest challenges in global markets.”

At the June 4 meeting, the GMAC also received presentations on trading mandates and their impact on global market structure and liquidity on swap execution facilities, and trading activity in global commodity markets. Further, the CFTC’s Office of International Affairs also provided an update on the agency’s international engagement.

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