The Commodity Futures Trading Commission's Market Risk Advisory Committee, a group consisting of representatives from exchanges, intermediaries, end-users and advocacy groups, held an open meeting on 9 April to discuss a wide range of current policy issues and market trends.
The committee approved a list of recommendations on how to improve the recovery and resilience of central counterparties, and discussed a "work plan" on how to address issues raised by the use of artificial intelligence in financial markets. The committee also discussed the reduction in the number of futures commission merchants that provide clearing services for customers, and heard a presentation on the risks of the basis trade in the US Treasury market.
The advisory committee does not have any rulemaking powers, but it serves as a platform for discussion with CFTC officials and staff. CFTC Commissioner Kristen Johnson, the committee's sponsor, said the committee's work has provided the agency with "pragmatic solutions" that support the resilience, integrity and stability of derivatives markets.
CCP Resilience and Recovery
During the meeting, the committee approved a set of recommendations developed by a working group that included representatives from derivatives clearing organizations, clearing firms, end-users and academics.
Alessandro Cocco, a vice president in the financial markets group at the Federal Reserve Bank of Chicago who is currently on detail at the US Treasury Department, gave a summary of the recommendations. He explained that the recommendations are intended to support the CFTC staff as they work to finalize a rule guiding CCP plans for resilience, recovery, and resolution.
The recommendations include:
- Adopt and implement supervisory stress testing of credit and liquidity risks for all derivatives clearing organizations, including reverse stress testing, and make the results available to the public;
- Require derivatives clearing organizations to conduct recovery scenarios and analyses that include "extreme but plausible scenarios" that could trigger recovery or wind-down, including an assessment of the financial resources and tools available;
- Support inclusion of non-default losses in recovery and resolution planning for all derivatives clearing organizations; and
- Set up an inter-agency working group with the US Treasury Department to address challenges to the porting of customer positions and collateral in case of a clearing member default and a clearing organization resolution.
Cocco noted that the working group did not reach consensus on certain issues. For example, members representing end-users, FCMs and academia recommended that the CFTC should form an inter-agency task force to discuss the sharing of information for resolution planning with the Federal Deposit Insurance Corporation, the US government agency with the authority to oversee a CCP resolution process. Members representing derivatives clearing organizations took the view that such a task force is not necessary and that existing channels for coordination are sufficient.
Artificial Intelligence
The committee heard a presentation from Gary Kalbaugh, deputy general counsel at ING Financial Holdings, on the work of a subcommittee on the "future of finance." Kalbaugh discussed the subcommittee's plans to develop recommendations for how the CFTC should oversee the use of AI in derivatives markets. Kalbaugh noted that market participants have been using AI for many years, but new forms of AI – notably generative AI and unsupervised machine learning – are "qualitatively different" and therefore need consideration.
Johnson, in her opening remarks, outlined several areas where the subcommittee could develop recommendations for the CFTC. Those include: conducting a survey on the uses of AI by market participants and developing guidelines, advisories or formal rules on the risk, testing and oversight of AI models.
During the discussion, several members of the advisory committee cautioned the CFTC against taking an overly prescriptive approach to AI, and urged the agency to develop an understanding of the technology before setting rules on its uses.
FCM Concentration and Capacity
Ashwini Panse, chief risk officer for the North American clearinghouses operated by Intercontinental Exchange and the head of risk oversight for its Dutch clearinghouse, led this part of the discussion. She described an analysis conducted by an MRAC subcommittee on the current state of the market for futures commission merchants. Panse said the analysis, which was based on 10 years of publicly available financial information, highlighted the "significant consolidation" in the number of FCMs and the increased concentration in the provision of clearing services for customers.
One factor in this trend has been the increase in capital requirements, and she noted that FCMs are setting "thresholds" in how much clearing capacity they can offer. As a result, some commercial participants have migrated to uncleared OTC markets or reduced their level of hedging. She also noted that the impact of capital requirements will make it more challenging for customers to port their positions out of one FCM and into another FCM.
During the discussion, two end-users echoed the concerns about FCM consolidation. Juan Blackwell, head of credit and counterparty risk management at Ontario Teachers' Pension Plan, said the contraction in the number of FCMs is "the biggest concern" for end-users, and Annette Hunter, director of business operations for the Federal Home Loan Bank of Atlanta, said she was very concerned about the effect on her institution's ability to port its positions to a different FCM.
Treasury Basis Trade
This part of the discussion was led by Nathaniel Wuerffel, head of market structure at Bank of New York Mellon. Wuerffel, who was the head of the domestic markets trading desk at the Federal Reserve Bank of New York until he joined BNY Mellon last year, described the mechanics of the basis trade, which consists of a short position in Treasury futures and a long position in Treasury securities. The volume of trading in this strategy – recently estimated at $317 billion – has attracted the attention of regulators, and Wuerffel outlined the risks that it can present to the markets as well as the steps that market participants can take to manage those risks.
MRAC links
