On 16 October, FIA’s General Counsel Allison Lurton participated in a public roundtable organized by the Commodity Futures Trading Commission’s Division of Clearing and Risk to discuss existing, new and emerging issues in clearing.
The roundtable included participants from derivatives clearing organizations, futures commission merchants, end-users, custodians, proprietary traders, public interest groups, state regulators and others.
The CFTC scheduled the roundtable as it considers new rules governing potential conflicts of interest that may arise between a registered entity and an affiliate of a registered entity. FIA has long expressed concern that these potential conflicts can be even more pronounced if the affiliate acts as an intermediary, such as an FCM or other market participant, with respect to transactions executed or cleared through the registered entity.
In addition to discussing conflicts of interest, roundtable participants shared their views on the custody and delivery of digital assets, digital assets and margin, full collateralization, 24/7 trading and non-intermediated clearing with margin.
CFTC Chair Rostin Behnam concluded the roundtable noting that “we have to talk about these issues because they aren’t going away” and “we have to think about how to handle them.”
Conflicts
The roundtable explored several permutations of jointly owned entities acting in different capacities in markets and the related conflicts. The conversation focused on the conflicts presented by designated clearing organizations also owning an FCM and on designated contract markets owning market makers trading on its trading venue.
Lurton called on the CFTC to propose a rulemaking to prohibit an entity that operates both a DCM and an FCM from also being a self-regulatory organization (SRO). Carol Wooding, General Counsel at the National Futures Association (NFA), agreed that a designated self-regulatory organization (DSRO) cannot oversee its own FCM.
FIA PTG representative Matt Haraburda expressed support, generally, for FCM-intermediated markets. Representatives from principal trading firms opposed exchanges having an affiliate relationship with a market-making entity trading on their market.
24/7 Trading
Roundtable participants generally reached consensus about the inevitability of 24/7 trading, driven primarily by interest from market participants. Lurton expressed FIA’s support for the operational efficiencies that market participants seek with 24/7 trading. She noted, however, that the existing regulatory framework leaves FCMs and clearinghouses holding risk over unplanned holidays and weekends due to an inability to move collateral, an issue that FIA has raised previously with the CFTC and other regulators.
FIA Board Chair Alicia Crighton, head of the clearing businesses and co-head of global futures business for Goldman Sachs, agreed. She pointed out the importance of considering these issues more broadly than just 24/7 trading, and to address current gaps like holiday processing collateral challenges.
Kevin McClear, president of ICE Clear US, also noted some challenges in moving to 24/7 trading. Notably, clearinghouses should not be forced to default FCMs due to liquidity reasons. McClear highlighted two necessary items in a transition to 24/7 trading. First, extending the operating hours of the Fedwire Securities Service to align with the expanded hours of the Fedwire Funds Service and National Settlement Service. Second, all clearinghouses not designated as Systemically Important Financial Market Utilities (SIFMUs) should have access to Federal Reserve Deposit Accounts. McClear said these steps would help ensure liquidity constraints do not force unnecessary defaults outside of current regular business hours.
Clark Hutchison, director of the Division of Clearing and Risk (DCR) at the CFTC, concluded the session by highlighting current practices and rules relating to letters of credit, residual interest, pre-funding, and holding foreign currencies as areas the CFTC should explore in connection with a potential transition to 24/7 markets.
Direct Clearing and Margin
Roundtable participants responded to a question about the tradeoffs (including from a risk and customer protection standpoint) if the CFTC were to consider allowing for market structure changes that would make it easier to operate without an FCM’s involvement.
Wooding questioned whether the Commodity Exchange Act (CEA) would permit a DCO to directly work with a customer. Wooding stated that a DCO would also need to register as an FCM - short of a legislative fix – to allow a DCO to face a customer directly. She further suggested any DCO with customer-facing activity should have an independent SRO to address concerns arising from conflicts of interest.
Crighton added that if a completely vertically integrated market structure were possible, conflicts would exist, requiring clarification.
