On 26 September, FIA COO Jackie Mesa moderated a discussion with Commodity Futures Trading Commission Chair Rostin Behnam at the 2024 Treasury Market Conference, an annual event co-hosted by the US Treasury Department, the Federal Reserve Board of Governors, the Federal Reserve Bank of New York, the Securities and Exchange Commission and the CFTC.
The important role central clearing plays in risk management and market transparency echoed throughout this conversation and others during the day.
Behnam shared his view on the US Treasury futures markets generally, the clearing mandate for interest rate swaps and the US Treasury market, risk management and the relatively low number of firms willing to clear swaps. He also addressed FMX’s entrance into the US interest rate futures and the role of LCH as the clearinghouse for FMX.
Transition to swaps clearing to inform US Treasury and repo clearing
FIA’s Mesa noted the Dodd-Frank reforms of 2010 mandated central clearing for interest rate swaps. That market has since moved from 24% cleared in 2009 to 62% cleared in 2017 and has hovered at 80% ever since.
When she inquired how Behnam thought that experience would inform the transition to clearing in the US Treasury securities market, he noted that current Securities and Exchange Commission Chair Gary Gensler chaired the CFTC after the Dodd-Frank reforms became law and would draw on that experience as a guide as the Treasury clearing mandate approaches.
Behnam noted, “There's what feels to be an organic migration to clearing when the mandate is set … despite the rule not being in place quite yet. The market has organically shifted to clearing at an incremental pace and we'll probably continue to see that.”
And while the CFTC does not have a direct role in the coming mandate, Behnam offered the Commission’s “first-hand, very timely experience from just 10 to 15 years ago” that might serve as a model for the current transition.
The benefits of clearing
He also expressed optimism about the current interest rate swap markets and the important role clearinghouses play in eliminating counterparty credit risk. That supports a “migration into all-to-all trading and equal access, which was and continues to be a … key component to healthy, transparent and vibrant markets.”
At the onset of clearing swaps, some in the industry expressed concerns that forcing products into clearing simply transferred the risk to one large systemically important infrastructure, the central counterparty.
Behnam responded that he continues to hear those concerns, some borne out of the natural friction between the clearing member banks and the CCPs. “Yes, you're concentrating risk in a single location. But you're making it more transparent,” he added. Ultimately, it comes down to ensuring transparency in the relationship between the clearing member banks and the CCPs.
He also shared how the CFTC performs its oversight more effectively with all the data in a single source, as opposed to hundreds of locations in a bilateral market.
Related to margin calls, Behnam referenced the largely flat markets from 2008 until the COVID-19 pandemic in 2020. However, from 2020 through today, markets shocks have occurred more frequently (the pandemic, Russia’s invasion of Ukraine, etc.), leading to spikes in margin calls. While those have impacted commodity markets significantly, other markets have experienced that volatility, too.
Concentration in the swaps markets
As the conversation turned to the concentration of clearing members in the swaps market, Mesa noted that only 12 firms are willing to clear swaps for clients versus the 49 firms willing to clear futures and asked Behnam if he thought capacity existed for agency clearing in the cash Treasury market.
While Behnam deferred from making a direct answer without having the data, he noted the importance of recognizing the size of the market and the capacity of the dealer community to absorb that market. He also referenced market concentration and how roughly a half dozen futures commission merchants clear 60% to 80% of the market, depending on the product.
In particular, he drew attention to the effect of market concentration impacting small commercial operations first and more significantly than others, as they rely on the markets to manage their business risk.
FMX enters US interest rate futures market
Mesa wrapped up the conversation with questions related to FMX entering the US interest rate futures market. FMX, which was founded by BGC Group and has financial backing from several banks and trading firms, has begun trading futures on short-term interest rates and plans to introduce futures on US Treasurys in the first quarter of next year.
FMX relies on LCH, a clearinghouse based in London, to clear its trades. That has caught the attention of US Senator Dick Durbin (D-IL). On 21 August, he wrote to Behnam, inquiring about any risks involved in using a non-US clearinghouse for the clearing of futures on US sovereign debt.
Behnam noted LCH is fully registered with the CFTC and added that the CFTC is working with the US Treasury Department to respond to the specifics of the letter.
Mesa pointed out that LCH currently has a leading role in the clearing of interest rate swaps, with 98% of dollar-denominated IRS market going through LCH and asked how that differed from the situation with US Treasury futures.
Behnam commented that the CFTC has a close relationship and memorandum of understanding with the Bank of England that gives the agency the sufficient information and oversight it needs for interest rate swaps, but he noted that Treasury futures have a physical delivery component, which differs from the cash settlement aspect of interest rate swaps.
