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Midyear 2020 Advocacy Report

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COVID-19 Clearing and Trading Cross Border Commodities Sustainability

Dear Member,

FIA is proud to be your voice and tireless advocate during these challenging times. This has been an extraordinary year like no other we have seen. The COVID-19 pandemic has brought an unprecedented health and economic crisis to our global community. Yet these uncertain times require us to rise to the occasion and meet these problems head-on with creative solutions and innovative ideas. FIA is energized to be your partner through these difficult days ahead.

I have been amazed by the performance of the listed and cleared derivatives markets during the volatility caused by the pandemic. Despite record volumes, commercial end users, hedgers and market makers were able to access markets globally to manage risk and discover prices. The clearing system brought enhanced transparency and confidence to the marketplace, bringing needed resilience during these unsettled times. It shows why the exchange-traded and cleared derivatives markets were the model for reform after the 2008 financial crisis.

That said, our markets performed well because our community—regulators, market participants and exchanges—all came together to keep markets open for business.  FIA worked with regulators and local officials to make sure that work-from-home policies didn’t hamper the marketplace. FIA helped its members to gain temporary relief in the US, Europe, and Asia so that important services to customers could continue unimpeded. Most importantly, FIA forcefully voiced its support for keeping markets open, and we strongly opposed measures, such as short selling bans, that would be counter-productive to market liquidity and integrity.

At the same time, our teams in Brussels, London, Singapore, and Washington continued their day-to-day advocacy—working on major legislative and regulatory reforms such as position limits, cross border regulations, MIFID II and Brexit. We also continued our collaboration with exchanges and clearinghouses to improve risk management standards and industry-wide operational efficiency.

FIA is proud to be your partner in finding solutions and advocating for positive change for our industry. As such, we are pleased to offer members an update on our advocacy efforts for the first half of 2020.

Walt Lukken
President & CEO

COVID-19

The sudden onset of the novel coronavirus (COVID-19) pandemic created serious challenges for the industry. Overnight, companies had to scramble to create a remote work environment, close trading floors, and allow for some essential workers to access the office safely. FIA recognized the need for regulatory flexibility to ensure key financial workers were able to continue working whether from home or offices. FIA organized multiple meetings with UK, Europe, US, and Asia-Pacific regulators to smooth the transition and provide updates on operational and compliance challenges. FIA also created a one-stop industry resource to give members and other market participants the latest information from regulators, exchanges, central counterparties (CCP’s) and others on developments relating to the pandemic. In response to industry requests, FIA also created and circulated a list of key contacts to help firms resolve trade reconciliation and cash adjustment issues. Here are some examples of our work so far this year in this area:

"In the first half of the 2020, the markets were more volatile than ever, with record setting volumes. Combine that with the entire industry working from home and it created the perfect storm for our members, who needed immediate regulatory relief and answers to questions in various areas. FIA responded to this challenge while continuing to engage policymakers and regulators globally on their work agendas and respond to ongoing consultations. Just as our members were working around the clock, so was the FIA staff. As the long list of advocacy items will show, FIA continued to move forward on our policy agenda to make the markets robust, safe and efficient."

Jacqueline Mesa
Chief Operating Officer & Senior Vice President of Global Policy

Temporary relief for companies – FIA coordinated temporary regulatory relief for futures commission merchants (FCMs) and introducing brokers in the US in the immediate aftermath of COVID-19. The relief allowed firms to transition to work from home and maintain normal business. 

More time for consultation responses - FIA co-signed trade association letters to the European Commission and European Securities and Markets Authority requesting extensions for various regulatory consultations.

Support for smaller companies - FIA joined the National Introducing Brokers Association to ask the CFTC to remove regulatory hurdles that would penalize smaller companies that applied for Paycheck Protection Plan loans under the CARES Act to keep employees working during the COVID-19 outbreak. Without the action by the CFTC, smaller FCMs or IBs registered with the CFTC would have had to take capital charges for participating in the program.

Urging policymakers not to shut down markets - FIA joined trade associations and businesses to urge the Trump Administration and federal officials to keep US markets open during the COVID-19 outbreak. In response to this coordinated joint trade effort, Treasury Secretary Mnuchin spoke out to keep U.S. financial markets open.

Opposing short selling bans - FIA and its affiliated organizations, FIA PTG and FIA EPTA, issued a statement in response to calls for short selling bans by global policymakers. FIA also joined other trade associations in opposition to calls for short selling bans being considered by government authorities.

Essential worker access to offices in major cities - FIA engaged with US governors and mayors as lockdowns commenced in major cities to ensure that FIA member companies could continue operations for companies that need on-site personnel in letters to Governor Pritzker, of Illinois, Governor Wolf, of Pennsylvania, and Mayor Lightfoot, of Chicago.

FIA releases COVID-19 industry sentiment survey – FIA surveyed market participants on the impact of the COVID-19 pandemic on the cleared derivatives industry. The results showed that while the industry performed well during recent market volatility, there were several issues that need to be studied and addressed to strengthen the resilience of the system. These include unpredictable changes in margin, clearing operations and trade settlements during stressed market conditions. 

Clearing and Trading

Clearing is a core tenant of a safe and sound financial system. FIA staff are constantly monitoring new regulations affecting CCPs, clearing members and other market participants in the clearing ecosystem, and providing information on CCP rulebooks, operational practices, default procedures and financial resources. On trading, FIA engages with members to identify and address matters that affect trade execution across the global industry. Here is some of our work so far this year in this area:

"Over the coming months, FIA and its various committees will be working with members to focus on the lessons learned during these last several months to make sure our markets remain safe and efficient in the event of future disruptions. FIA continues to engage with EU and UK regulators and policy makers on important issues impacting the cleared derivatives industry with an immediate focus on the equivalence and recognition of UK CCPs, the outstanding areas of uncertainty as the UK transition period post Brexit comes to the end and the review of MiFID II."

Bruce Savage
Head of Europe

Balancing oversight with deference - FIA participated in the European Commission's consultation on the standards for determining when third country CCPs are "systemically important" to the EU financial system and urged EU regulators to avoid duplicative oversight by relying on home-country regulators. 

Clarifying bankruptcy rules - FIA commented on the CFTC’s recent update to Part 190 of the agency’s regulations dealing with the bankruptcy of FCMs and clearinghouses. FIA generally supports the commission’s recommendations, but cautions that parts of subpart C, which would establish a new regime to govern the bankruptcy of a clearinghouse, should be studied further before being approved. FIA’s members are concerned that certain of the new rules for clearinghouses will inadvertently increase legal uncertainty for FCMs, clearinghouses and other market participants. FIA urges the CFTC to hold a roundtable discussion with industry participation to be certain of the intended operation of the proposed clearinghouse rules. 

Strengthening CCP risk management standards - In June, the EU reached a deal on CCP Recovery and Resolution, which FIA has worked on for several years.  It includes the following points: a CCP second tranche of skin in the game, banning of initial margin haircutting and forced allocation of trades, and prefunded skin in the game based on the risk-based capital requirement of a CCP.  Additionally, cash calls will be capped at two times the default fund.

Capping clearinghouse liability – FIA worked with clearinghouses and regulators in Japan and Korea on measures to formally limit the liability of clearinghouse members in case of a default. In Japan, FIA attended multiple meetings with the JSCC and regulators, and participated in the JSCC organised Listed Products Management Committee to discuss the new proposals.   In Korea, FIA’s advocacy campaign focused on proposed amendments to the rules and multiple meetings with KRX. These multi-year efforts led to JSCC amending the default management framework for its Listed Derivatives segment and KRX amending its rules in relation to member withdrawal requirements in both the cash and futures markets. These rule changes bring JSCC and KRX closer to international best practices and reduce potential risks for global clearing firms.

Analyzing industry trends - FIA and Greenwich Associates released new research on trading and clearing trends in derivatives markets. The study assesses market sentiment towards several major market structure trends, including the impact of capital requirements, the adoption of central clearing, the transition away from Libor, and the implementation of margin requirements on uncleared derivatives. 

Improving Trade Reporting - FIA submitted a response to ESMA’s Consultation on draft Regulatory and Implementing Technical Standards covering reporting to Trade Repositories (TRs), procedures to reconcile and validate reported data, data access by the relevant authorities and registration of the TRs. FIA will continue to monitor developments as ESMA is set to publish their final report and submit the draft technical standards to the European Commission for endorsement in Q4 2020.  

Supporting legislative reforms - FIA and ISDA signed a joint response to the European Commission’s consultation on possible reforms to the MiFID/MiFIR regulatory framework. The response provided members feedback on the overall functioning of the regulatory framework, consolidated tape, availability and price of market data, post-trade transparency regime for non-equities, derivatives trading obligation, and non-discriminatory access. 

Supporting clearinghouse accounts - FIA and ISDA wrote to U.S. Rep. Emmanuel Cleaver (D-Mo.) in support of legislative efforts to grant derivatives clearinghouses access to deposit accounts offered by the U.S. Federal Reserve. The letter notes that during times of stress and increased market volatility, access to deposit accounts for all central counterparty clearinghouses will improve liquidity across the cleared derivatives ecosystem and reduce the interconnectedness of the CCPs and banks. This access would also protect customers and end-users who use the derivatives markets to hedge risk. 

 Reassessing market transparency requirements - FIA and ISDA filed a joint response to ESMA consultation on the review of the MiFID II/MiFIR transparency regime for non-equity instruments and the derivatives trading obligation. The response focuses on member views with respect to data harmonization, to the assessment of liquidity of sub-asset classes and the calibration of SSTI (Size Specific to the Instruments) and Large in Scale (LiS) transparency waivers and a review of the methodology used to determine the liquidity thresholds applied to commodity derivatives under ESMA RTS 2.The response support a refit-style approach to MiFID that would clarify remaining uncertainties and ensure a meaningful level of pre- and post-trade transparency. 

Advancing best practices - FIA joined ISDA, the European Fund and Asset Management Association (EFAMA), the European Venues and Intermediaries Association (EVIA), and the Global Foreign Exchange Division (GFXD) of the Global Financial Markets Association (GFMA) to publish jointly a set of best practices for derivatives trade reporting under the European Market Infrastructure Regulation (EMIR). The EMIR Reporting Best Practices covers 87 data points across 61 reporting fields, including both over-the-counter and exchange-traded derivatives, and were developed to improve the accuracy and efficiency of trade reporting and to reduce compliance costs. The best practices are available to all market participants to access and implement.

Cross Border

Over the past 30 years, market regulators have successfully developed an oversight framework that allows cross border business to occur while avoiding duplicative or conflicting rules. Some call this approach mutual recognition, others equivalence and still others substituted compliance, but they all result in the same thing: foreign jurisdictions deferring to home country regulators if the home nation’s laws are deemed comparable. FIA will continue to work with our members and regulators around the world to ensure these markets remain regulated at the highest global standards but in a way that avoids duplicative and conflicting rules and regulations, which is especially important during times of market stress. Here are some significant actions this year:

"The first half of 2020 has been both challenging and unprecedented. FIA staff in Asia has been working with our members to ensure that the ongoing initiatives, such as the Japan and Korea capped liability commitments, remained on track while at the same time worked with our members, various regulatory bodies and various other market participants to ensure the safety and security of the exchange traded derivatives infrastructure was never compromised. In the coming months we will ensure smooth transition in the commitments from Japan and Korea and we will also remain vigilant to the dynamic situation in the other North Asian jurisdictions. "

Bill Herder
Head of Asia-Pacific

Avoiding Brexit-related disruption - FIA and its members held numerous meetings this year with EU regulators and policy makers to highlight the financial stability implications and serious financial, commercial and operational consequences to derivatives clearing if Brexit leads to the loss of UK equivalence and de-recognition of UK CCPs.  FIA hosted a webinar on cross border clearing and market access with senior industry and regulatory representatives in July to discuss the equivalence approach and the potential implications for clearing firms. FIA welcomed the statement from the European Commission in July that it is “considering the adoption of a time-limited equivalence for UK derivatives CCPs” and continues to engage with the European Commission, European Parliament, Member States and ESMA on the finalization of EMIR 2.2 and the recognition process for CCPs.

Protecting intragroup transactions - FIA, EBF and ISDA sought temporary relief for obligations under the clearing regulatory technical standards for intragroup transactions. The request sought  1) the necessary equivalence decisions be adopted as a matter of urgency in relation to all jurisdictions that have implemented clearing rules in line with the G20 commitments and 2) that the Clearing RTS should be amended to extend the current temporary derogation from clearing requirements for intragroup transactions with non-EU affiliates for a further 3 years for all other jurisdictions. 

Supporting equivalence - FIA and ISDA sent a letter in support of the European Commission's draft equivalence decisions to declare the regulatory and supervisory of the framework of Japan, in accordance with the ‘Financial Instrument and Exchange Act as “equivalent” under Article 30 of the European Benchmarks Regulation. 

Clarifying registration rules - FIA submitted a comment letter to the CFTC in response to its proposed rule regarding the cross-border application of the registration thresholds and certain requirements applicable to swap dealers and major swap participants.  The letter focused on the scope of the proposed definition of a US Person. 

Commodities

Through 2020, FIA’s work on commodities has continued, even with the COVID-19 pandemic. Since commodity markets underpin and drive our entire global economy—whether it’s the food that feeds our families, the energy that fuels our cars or the steel that frames our cities. FIA staff and the US Commodities Committee have worked to advocate on behalf of members. Here are some significant actions this year:

Finalizing position limits in the US - FIA praised the CFTC for proposing a workable and flexible rule on speculative position limits for derivatives, which provides a pragmatic framework for the agency and market participants.  FIA also suggested technical changes to certain parts of the draft rule that would help to further clarify the rule text, enhance the rule’s accommodation of commercial hedging and other risk management activities, and promote a smooth implementation process. 

Updating position limits in the EU - FIA and ISDA responded jointly to various consultations by ESMA, the European Commission and the German Ministry of Finance, advocating for changes to the position limits regime, especially the removal of limits for new and illiquid contracts and an expansion of the hedging exemption. The European Commission has recently published legislative proposals as part of a “MiFID quick fix”, reflecting our advocacy positions.

Sustainability

FIA has a continued focus on issues related to ESG objectives and the growing policy developments regarding sustainability and climate change. FIA has been proactive in our engagement with members, policymakers, and regulators as we have seen an increased focus on these important issues globally. Here are some significant actions this year:

Analyzing climate risk  -  FIA is helping to facilitate the CFTC Market Risk Advisory Committee’s effort to identify the risks that climate change creates for the financial system. In comments to the CFTC, FIA noted the importance of continued dialogue around climate-related issues for derivative markets and its belief that market forces are now, and can continue to be, part of the solution to the complex problem of climate change. 

Engaged in the development of sustainable finance - FIA supported the European Commission's increased focus on sustainable finance and has made several recommendations for the development of its strategy. FIA advocated that these financial initiatives complement each other and amplify the European climate actions and goals. FIA believes that market participants will need clear direction from policymakers as to which assets and technologies will be phased out and when, with a long transition period to improve predictability, avoid market disruption and to allow for budget considerations and a timely assessment of stranded assets. FIA also believes that increased global coordination will be key to the success of any sustainable finance policy. This will not only ensure a positive global impact on climate but avoid arbitrage opportunities if more stringent requirements only apply locally, which would reduce the effectiveness of EU measures. 

Establishing ESG Benchmarks - FIA joined with several other leading financial and commodity trade associations in calling for consistent pan-European standards for the development of benchmarks that track carbon emissions and ESG disclosures. In particular, the associations urged ESMA to finalize the Level 2 technical standards for the Low Carbon Benchmark Regulation before national authorities begin requiring benchmark administrators to comply with that regulation.

More regulatory responses, letters and other engagement: