The US Commodity Futures Trading Commission's Global Markets Advisory Committee (GMAC) held a meeting on 7 March in Washington DC that featured a robust agenda including a panel discussion about the proposed US bank capital rules and the negative implications on derivatives markets and market participants.
The meeting also featured a keynote presentation from John Schindler, Secretary General, Financial Stability Board, who provided an overview of the FSB's priorities and workstreams for 2024. Schindler noted that the FSB has an ongoing workstream related to CCP resolution, with a focus on finalizing a toolbox for CCP resolution authorities on financial resources and tools. Additional, FSB is seeking to address vulnerabilities associated with leverage in the nonbank financial institution space, to develop a roadmap on climate-related financial risks, and a more comprehensive digital asset policy approach.
Additionally, the meeting featured presentations from the GMAC’s Subcommittees on Global Market Structure, Technical Issues, and Digital Asset Markets regarding various workstreams. The advisory committee also advanced three recommendations 1) to promote US Treasury markets resiliency and efficiency, 2) to provide resources on the upcoming transition to T+1 securities settlement, and 3) publish a first-ever digital asset taxonomy to support US regulatory clarity and international alignment.
US bank capital proposals
FIA was represented on the panel focused on US bank capital proposals by Joseph Hwang, managing director, Goldman Sachs. Hwang highlighted the significant increase in capital requirements expected for the largest US banks due to the pending bank capital proposals and the impact this will have for derivatives markets broadly. Hwang also noted that rather than harmonize capital standards internationally, the proposals would create further divergences from the EU and the UK. Hwang concluded that if the proposals are finalized without change, the result will be:
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higher transaction costs,
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reduced market capacity for cleared derivatives, and
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more activity moving abroad.
Reggie Griffith, global chief compliance officer, Louis Dreyfus Co., and Dan Gallagher, director, commodity sales and trading, Basin Electric Power Cooperative (on behalf of the National Association of Rural Electric Cooperatives), highlighted the views of end-users of derivatives markets. Griffith and Gallagher raised significant concerns about the potential unintended consequences of the bank capital proposals on the futures markets and end-users that rely on them. These include concerns related to the ability to access futures and derivatives markets through bank FCMs as well as the increased costs for hedging and, ultimately, increased costs for consumers of agricultural and energy.
Elisabeth Kirby, head of market structure, Tradeweb, raised concerns that the pending bank capital rules could have harmful effects on important financial markets, US market participants, and the US economy. Kirby said meaningfully higher capital requirements could reduce or eliminate the ability for certain banks to act as liquidity providers which would have the unintended consequence of reducing liquidity of the markets overall.
A question was raised for the panel about whether the solution to these bank capital proposals may be a move to direct clearing model, eliminating the FCM role as an intermediary. Griffith said the problem with this model is that not many commercial entities have the capacity to engage in a direct clearing model. Griffith also noted that removing one of the levels – an FCM, exchange, or clearinghouse – would inject more risk into the system.
Additional Documents and Materials
Statement of Commissioner Christy Goldsmith Romero
CFTC’s Global Markets Advisory Committee Advances 3 Recommendations
