The US Commodity Futures Trading Commission's Energy and Environmental Markets Advisory Committee (EEMAC) held a meeting on 13 February at the Colorado School of Mines in Golden, Colorado, to discuss proposed increases in US bank capital requirements and the implications for and impact on derivatives markets.
The meeting also explored the role of rare earth minerals in transitional energy and electrification, including the potential development of derivatives products to offer price discovery and hedging opportunities in these markets.
This marks the fifth EEMAC meeting held under the sponsorship of CFTC Commissioner Summer Mersinger.
US bank capital proposals
The advisory committee featured a robust dialogue about the pending US bank capital proposals and the impact on derivatives markets, featuring input from bank intermediaries, exchanges, and end-user market participants.
Jackie Mesa, FIA’s chief operating officer & senior vice president of global policy, emphasized that the proposals will significantly increase the capital requirements for banks that offer client clearing services to customers, including energy, agriculture, and other end-user firms that seek to manage commercial risk.
In a comment letter recently submitted to the US banking regulators, FIA estimated that the two pending US bank capital proposals would result in an 80% increase in the capital required for client clearing services offered by the six US G-SIB banks subject to both proposals. FIA warned that the proposals would have the effect of driving up the cost of clearing and discourage end-users from using derivatives to hedge their risks.
John Murphy, global head of futures at Mizuho, highlighted the impact that prior bank capital rules have had on the cleared derivatives markets and cautioned about the impact the pending proposals will have on the cleared derivatives ecosystem.
Kara Dutta, assistant general counsel at ICE, highlighted that central clearing is a risk mitigating activity, yet the recent bank capital proposals may impact market participant’s ability to access cleared derivatives markets to hedge risks against price volatility. Dutta noted that the proposals put US banks at a competitive disadvantage with their European counterparts and that the proposals are more restrictive than capital frameworks being implemented or contemplated around the world.
Bill McCoy, managing director and counsel in the legal and compliance department of Morgan Stanley, highlighted how the proposals would negatively impact end-users that seek to hedge risk in derivatives markets.
Finally, Matthew Agen, chief regulatory counsel at the American Gas Association, highlighted why natural gas utilities hedge risk, how they utilize derivatives in their day-to-day, and why they have concerns about the pending bank capital proposals. Ultimately, Agen noted that increased costs and reduced access to hedging tools would result in increased costs for customers of natural gas utilities.
Additional documents and materials
Statement of Commissioner Summer K. Mersinger
