The US Commodity Futures Trading Commission's Global Markets Advisory Committee held a meeting on 4 June in New York to discuss a range of market developments and regulatory issues. One of the top themes was the potential impact of the proposed US bank capital rules, with several speakers focusing on concerns raised by end-users, intermediaries and market infrastructures.
Another key topic was the state of global commodity markets. Derek Sammann, the global head of commodities, options and international markets at CME Group, gave a detailed presentation on the increases in trading volumes across the exchange's metals, agriculture, and energy contracts. Sammann noted that the exchange is seeing increasing participation across all types of market participants, including retail.
The Global Markets Advisory Committee is one of five advisory committees that serve as sounding board for the CFTC. 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.
CFTC Commissioner Caroline Pham, the sponsor of the Global Markts Advisory Committee, also has used the expertise of the committee to draft regulatory recommendations. At the beginning of the meeting, Pham noted that GMAC has adopted 13 recommendations in less than a year on a broad array of issues. "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,” she said.
GMAC endorses report and recommendations related to the US Bank Capital proposals
Kyle Glenn, vice president of US government relations at FIA, presented a report and a set of recommendations developed by the advisory committee's global market structure subcommittee highlighting the harmful impact of the pending US bank capital proposals on the CFTC regulated derivatives markets. Specifically, the report focuses on how the proposed US bank capital rules will:
- reduce the capacity of US 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 proposed increases in capital requirements will be especially impactful on a handful of large banks that provide the majority of client clearing services in the US derivatives markets. FIA has estimated that for the six US banks that are categorized as "global systemically important banks", the proposed requirements will increase the amount of capital required for client clearing by 80%.
The report, which was endorsed unanimously by the full GMAC, highlights excerpts from the comment letters filed with the banking regulators by the users of derivatives markets including agriculture, energy, insurance, pension funds and the investment management industry, manufacturers, exchanges, clearinghouses and others.
The report emphasizes concerns that the pending bank capital proposals will increase the cost client clearing and hedging for market participants, which would disincentivize prudent risk management and increase risk in our markets.
The report concludes with GMAC calling on the CFTC:
- to continue engaging with the relevant US bank regulators about the pending proposals and the impact they will have on the markets that fall under the CFTC jurisdiction;
- to conduct an independent study of the proposals to better understand the impact of the proposals, should they be adopted in their current form, on the users of derivatives markets; and
- organize a roundtable with US bank regulators focused on derivatives markets.
Thane Twiggs, chief compliance officer at Cargill Risk Management, presented the broad concerns of end-users like Cargill that rely on access to risk management tools like futures. Twiggs emphasized that if the costs of accessing these tools increase too much, it will force firms to either pay more, or hedge less, and ultimately the repercussions of those decisions would be felt across the economy.
Additional Documents and Materials
Agenda | Statement of Commissioner Kristin N. Johnson | Meeting Slides | Video
Global Market Structure Subcommittee – Report on the Impact of the US Bank Capital Proposals on End-Users that Rely on Cleared Derivatives Markets
