February 19, 2019
Washington, DC — Commissioners of the U.S. Commodity Futures Trading Commission (CFTC) submitted a comment on the notice of proposed rulemaking issued by the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation to implement a new approach for calculating the exposure amount of derivatives contracts under the agencies’ regulatory capital rules. Commissioners Brian Quintenz, Rostin Behnam, and Dan Berkovitz signed the comment, and were joined by Chairman J. Christopher Giancarlo.
“I would like to thank Commissioner Brian Quintenz for his leadership on this letter, and commend the Commissioners for their collaboration,” said Chairman Giancarlo. “It expresses the continuing concern of the Commissioners beginning with the prior Chairman that the supplementary leverage ratio has a negative impact on the clearing mandate.”
In their letter, the Commissioners explained that the calculation of the supplementary leverage ratio (SLR) in the prudential regulators’ proposed rulemaking fails to acknowledge the risk-reducing impact of client initial margin that the clearing member client banking organizations hold on behalf of clients. “The adoption of SA-CCR without offset will maintain or increase the clearing members’ SLRs by more than 30 basis points on average will continue to disincentivize clearing members from providing clearing services, and thereby limit access to clearing in contravention of G20 mandates and Dodd-Frank,” they said in the letter.
“Capital standards and clearing of standardized derivatives are two fundamental components of financial regulatory reform under the Dodd-Frank Act. When implemented appropriately, bank capital standards for uncleared and cleared swaps should not discourage central clearing,” the letter continues. “However, market data, academic research, and feedback from a diverse landscape of financial and end user firms indicate that one of the implemented capital standards – namely, the SLRs – is working counterproductively, limiting access to derivatives risk management strategies and discouraging the central clearing of standardized swap products.
“Under the CFTC’s regulations, when margin is segregated, it remains the property of the client. The clearing member may only use client funds to meet that client’s obligations. In the event of a client default, the clearing member may use the client’s margin to cover losses resulting from the client’s positions. The clearing member cannot use segregated client margin to leverage itself under any circumstance.
“Segregated margin is, by definition, risk-reducing,” the Commissioners write. “Failing to reduce a clearing member’s exposure by the segregated client margin it holds results in an inflated measure of the clearing member’s exposure for a cleared trade.”
Commissioner Dawn Stump recused herself from commenting on the proposed rulemaking.