CFTC chairman open to further stretch of margin compliance timeframe

Washington — US Commodity Futures Trading Commission Chairman Heath Tarbert voiced support Tuesday for stretching out compliance timelines for final phases of margin requirements for uncleared swaps, in sync with international regulators, in light of the coronavirus pandemic.

At issue are a fifth and sixth phase of the CFTC's initial margin requirements for uncleared swaps that are expected to bring a large group of smaller swaps end users into the regulation's scope. While many energy companies have exemptions for uncleared swaps used to hedge commercial risk, the regulations can affect those that act as swap dealers and can indirectly affect costs, liquidity or capital set aside requirements, some energy companies have argued.

Tarbert made the comments during a meeting of the CFTC's Global Markets Advisory Committee, during which recommendations for improving the scoping and implementation of the requirements were presented by a stakeholders subcommittee.

Harmonization

"As a threshold matter, I agree with the report's recommendation to extend the compliance deadline for phases five and six of the margin requirements by a year in response to COVID-19," he said. He noted that the Basel Committee on Banking Supervision and the International Organization of Securities Commissions have also backed an extension. "They did so because it also allows firms to dedicate the necessary operational resources through their COVID-19 response and business continuity efforts," he said.

Tarbert called margin rules a key systemic risk mitigant, but said the market participants receiving the extension are only those with the smallest uncleared swaps portfolio.

An extension is on the CFTC's near-term agenda and could receive a vote in short order, he said.

"We're essentially balancing the critical need to marshal scarce operational resources for COVID-19 against the relatively small risk of a compliance delay," he said.

Republican Commissioner Brian Quintenz also noted that the remaining phases comprise only 11% of the average aggregate notional amount of swaps, but would reach out to cover about 95% of entities brought under the uncleared margin regime.

"Given the large number of firms brought into scope during phases five and six, and the estimated 7,000 initial margin relationships that need to be negotiated, as well as the small overall percentage of swap activity covered by these firms or that these firms represent, I believe it is important to implement these final phases in the most responsible, least burdensome way."

Remaining hurdles

To that end, the subcommittee report contended there are still significant challenges for market participants to complete documentation and operational setups, aside from the COVID-19 challenges.

Presenting the findings at the virtual meeting Wednesday, the advisory subcommittee chair, Wendy Yun (also co-chair of the derivatives committee of the Securities Industry and Financial Markets Association Asset Management Group) said, "We believe there are still significant scoping and implementation challenges bringing in such a large, diverse group of market participants into compliance with the CFTC's complex initial margin requirements for noncleared swaps." Among other things, the panel sought a six-month grace period for those seeking to document compliance.

Speaking during the meeting, Christine Stevenson of BP Energy noted that smaller swap dealers may be disadvantaged by being restricted from certain transactions if required to use a quantitative method for calculating initial margin. Commercially, an inability to agree on the model to be used for calculations could impact the number of counterparty pairings and liquidity, and potentially consolidate trades to larger swap dealers, she said.

Commissioner Dan Berkovitz noted that he has supported prior compliance extensions but also said he was interested in the extent to which there is now increased counterparty credit risk, given the stresses to many sectors of the economy, including the retail sector, the energy sector and transportation sector.

Commissioner Rostin Behnam called margin requirements a huge dimension of global reforms after the financial crisis but said it was also important to reduce operational risks, and that the timing was well- designed, so that market participants and end users could use markets in an efficient way.