The US Commodity Futures Trading Commission's Market Risk Advisory Committee (MRAC) held a public meeting on 10 December that featured a presentation by Josh Frost, Assistant Secretary for Financial Markets, US Treasury Department, who provided an update about the state of Treasury markets. Frost focused his remarks on the critical roles and evolution of the Treasury market, and reviewed the significant efforts made to strengthen the Treasury market as well as what remains to be done looking to the future related to implementation of the clearing mandates.
CFTC Commissioner Kristin Johnson, sponsor of the MRAC, opened the meeting by stating that the “MRAC will introduce three formal recommendations, reports, and presentations with insightful guidance informed by diverse stakeholders to improve the integrity and stability of our markets.”
The first report and set of recommendations focused on effective risk management practices related to the Treasury cash-futures basis trades. The second report set of recommendations focused on derivatives clearing organization system safeguards standards for third-party service providers. The third report and set of recommendations focused on legal entity identifiers (LEIs).
The meeting concluded with a presentation from Todd Conklin, Chief Artificial Intelligence Officer & Deputy Assistant Secretary of Cyber, US Treasury Department. Conklin noted that the financial services sector has been using traditional AI for many years, and that cybersecurity and risk management and fraud prevention are critical areas of focus for the sector moving forward.
Finally, the Climate-Related Market Risk Subcommittee provided a brief update to the advisory committee about carbon market opportunities and challenges, among other topics.
The Market Risk Advisory Committee is one of five advisory committees that serve as a resource for the CFTC commissioners and staff. Although these committees have no formal rulemaking powers, their meetings provide a platform for market participants and policy experts to spotlight issues and provide feedback for the agency.
Recommendations on the Treasury Cash-Futures Basis Trade
In prepared remarks, Johnson noted that the MRAC Market Structure Subcommittee “developed recommended practices to serve as a guide to effective management of market, liquidity and counterparty credit risks associated with the Treasury cash-futures basis trade – risks that could have a broad, systemic impact on markets and market participant associated with the trade.”
The recommendations, endorsed by the full MRAC with no opposition, include:
- Market participants, including basis traders, futures markets participants, intermediaries, and others engaged in or providing intermediation for trades associated with the cash-futures basis—including the basis, long futures positions, and financing positions—should continuously assess and manage the risks associated with these trades including market, liquidity, counterparty credit, and other risks. These risks should be modeled, and a mark-to-market attribution analysis should be conducted.
- Market participants should manage market risks that could affect the performance of their portfolios.
- Market participants should evaluate and manage their liquidity risks, including the risk that margin costs increase rapidly and significantly, and that financing is reduced or becomes unavailable.
- Market participants should appropriately monitor and manage counterparty credit risks associated with the basis trade or its intermediation, including through effective due diligence, onboarding, credit risk mitigants, and continuous monitoring processes.
Johnson went on to note in prepared remarks “while these recommendations will help to ensure stability to this market and in turn, the financial system, the report acknowledges that these risk management practices should continue to be evaluated in light of changes in market structure, including Treasury central clearing rules, and changes in cross margining or available data, among others.”
Recommendations on Cyber Resilience and Preparedness for Third-Party Service Providers
Don Byron, Head of Global Industry Operations and Execution, FIA, helped lead an industry panel discussion about cyber resilience and preparedness. Byron focused on FIA’s leadership and response to a ransomware attack on a single third-party service provider, and the formation of a Cyber Risk Taskforce, which led to the establishment of a formal Industry Resilience Committee (IRC), which now serves as a trusted forum for key stakeholders to discuss cyber incident management, resilience planning and recommend best practices for the industry. Looking ahead, Byron highlighted that the IRC is working to produce a questionnaire for exchanges and central counterparties with the aim of assisting their members in recovering clearing, settlement, reference and risk data during an incident.
Following the panel discussion, the Central Counterparty (CCP) Risk and Governance Subcommittee adopted a series of recommendations, without any opposition from members of the full committee, that seek to address the cybersecurity risk to financial markets that is posed by CCPs' use of third-party service providers. Johnson noted in her prepared remarks that “in particular, the subcommittee’s report addresses DCO system safeguard standards for third party service providers and advances recommendations to build upon and incorporate the language, concepts and principles already set out” in the CFTC System Safeguards Rule found in Part 39.18 of the CFTC’s regulations (DCO Rule 18 -- System Safeguards) with respect to DCOs. The recommendations also include the amendments to CFTC Rule 39.18(d)(2) on retention of responsibility, to retain responsibility over critical third-party arrangements.
Recommendations on Legal Entity Identities
The CCP Risk and Governance Subcommittee presented a report and recommendations on legal entity identifiers, which was ultimately endorsed, with amendments, by the full MRAC. Johnson highlighted that the recommendations call on the CFTC to amend their rules to “bring the US regulatory structure in line with global standards by mandating the use of Legal Entity Identifiers, or equivalent identifiers, by the beneficial account owner level (obtained and maintained by the beneficial account owner) for daily reporting by DCOs [and] … to the extent not already required, DCOs and futures commission merchants should also require that a beneficial account owner always provide an LEI with respect to any activity subject to such registered entity’s reporting obligation to the CFTC.”
FIA's board chair, Alicia Crighton of Goldman Sachs, serving as the chair of the MRAC, provided a formal statement on behalf of FIA. Crighton noted that FIA is supportive of entities trading in the futures and options markets obtaining an LEI and that given the LEI-implementation experience in OTC markets, FIA welcomes further dialogue. Moreover, Crighton noted on behalf of FIA that although requiring a LEI seems logical, FIA strongly believes that many firms will be slow to adopt and some will not move forward to do so, particularly absent an express legal obligation on the account owner and/or controller. Crighton concluded that FIA welcomes continuing the dialogue on this issue with the Commission and other partners in the industry.
