CFTC takes questions on regulatory relief after recent crude oil market swings

Washington — US Commodity Futures Trading Commission officials Tuesday voiced overall confidence in the performance of derivatives markets thus far during recent oil and equity market volatility, even as the CFTC faced questions about regulatory relief offered over the last week.

The conversations occurred during a teleconference the CFTC's Energy and Environmental Markets Advisory Committee held Tuesday.

Energy sector and derivatives market representatives mostly praised the CFTC for flexibility and outreach during the unprecedented period of coronavirus precautions and global crude oil price wars, and commissioners highlighted their ability to set aside differences to act.

Over the prior week, the CFTC offered temporary waivers of recording and recordkeeping requirements for a range of market participants, mostly through June, to avoid disruptions as traders and other key employees shifted to remote work.

One action that drew questions during Tuesday's call was the CFTC's move Friday to relax through September a regulatory threshold for a large national bank that has loans and risks management business with small to midsize oil and gas producers.

RELIEF TIME FRAME

Public Citizen's Tyson Slocum, a member of the advisory panel, asked whether extending that relief for six months was prudent, if based on assumptions that the oil price plunge would be short term, or if the bank in question was already overleveraged.

Chairman Heath Tarbert responded that there had been a lot of discussion internally about the right time frame. With swaps involved, he said, the CFTC sought a time frame that would give some comfort but not extend too far into the future. The commission did not want to grant relief for only a couple of months if the swaps would likely stay on the books for longer or would be hard to exit, he said.

"We didn't want to create a situation where at least one financial institution didn't want to hedge its exposures in a prudent manner because it was worried about triggering a major swap participant" regulatory threshold, he said. Going forward, individual entities would need to ask to ask the CFTC for such relief on a case-by-case basis and the CFTC would be considering the proper time frame, he said.

Commissioner Dan Berkovitz, in an interview, said he did not object to the staff no-action letter on the bank relief and emphasized the letter went through comments internally to ensure safeguards such as requirements that the bank keep the CFTC apprised of its exposure quarterly and more frequently if the exposure exceeded the registration threshold.

Rather than permanent relief, he described the action as "temporary relief to essentially delay registration ... with adequate monitoring in my view given the circumstances."

Slocum also asked whether relief from certain record-keeping and reporting requirements to enable social distancing for a host of market participants signaled the need going forward for major trading entities to build out compliance redundancy to allow for remote operations.

Berkovitz replied that this was discussed internally, noting that existing requirements and plans for redundant capabilities did not take into account the current situation.

"When we get through this and as we look back on lessons learned, I think that's something that we're going to really have to carefully look at see what type of remote capabilities we have going forward," Berkovitz said.

MARKET OVERVIEW

In briefing the advisory committee, Mel Gunewardena, CFTC chief market intelligence officer, said that given the volumes and market volatility, all of the exchange traded contracts have performed well.

"I'm not suggesting that there won't be disruptions in the future, but at this point we're reasonably comfortable that the systems that have been put in place, the controls that have been put in place, and certainly the infrastructure that supports the financial clearing of these contracts is functioning fairly and reasonably given kind of where the markets are."

As an indication of volatility, he noted that traded activity reached around 55 million to 60 million contracts a day on the futures side. "On average, historically, the contract value was somewhere in the region of 30 million contracts a day," he said.

During a time in which markets, especially energy markets, are experiencing "unprecedented turbulence," Tarbert noted that margin calls are being met for all major firms and sellers are able to find buyers.

As for natural gas derivatives markets, CFTC market analyst Chris Goodenow noted that even though volatility doubled in the past few months, such swings were exceeded by previous weather events, potentially reflecting the still largely domestic nature of US gas markets, despite the increase in LNG exports.