The Commodity Futures Trading Commission plans to streamline rules governing the $846trn OTC derivatives market, said CFTC chairman Michael Selig in his keynote address at the International Securities and Derivatives Association’s (ISDA) 40th annual general meeting,
Selig, who took over the helm last December, said, “My priority as CFTC chairman is simple: keep these derivatives markets efficient, resilient and innovative – and keep them in the United States.”
He advocated for “light-touch regulation” and pledged to “future-proof” derivatives oversight to better accommodate market digitization.
Reporting requirements for derivatives trades, which were a central plank of the post-2008 financial crisis reforms, were designed to help regulators identify risks in the financial system. The deregulatory stance will be welcomed by many in the financial industry and could have important implications for the wider market.
The CFTC oversees, both directly and through cross border frameworks, around 35% of global derivatives activity, making the agency the “world’s largest derivatives regulator,” according to Selig.
The CFTC’s aim is to “reduce burdens and provide clarity to market participants,” he added, noting that “several unworkable rules are ripe for an overhaul.”
Selig said that one of the most notable areas where the CFTC has “fallen short”, was elements of the 2013 swap reporting requirements that created compliance issues. He said problems have been addressed “through a patchwork of no-action letters that are continually extended.”
He believed that the CFTC should evaluate whether legacy reporting regimes remain necessary in their current form. “It is reasonable to consider whether certain requirements should finally be sunset,” he added. “This recognizes that every reporting obligation carries real costs. Market participants must build, maintain, and continuously update complex systems to comply with our rules. “
Selig said the agency also plans to revise regulations to clarify which entities have which reporting obligations when a swap is submitted for clearing to a derivatives clearing organization (DCO) that is exempt from registration with the Commission.
Selig also highlighted outstanding issues in connection with swaps trading. For example, he said more than a decade of experience shows that there is little appetite for using a swap execution facility (SEF’s) Order Book to execute permitted transactions.
“Why, then, do CFTC regulations continue to require that SEFs offer this functionality for those transactions,?” he added. “A no-action letter issued last year effectively relieves SEFs of that obligation and we will look to codify that relief via notice and comment rulemaking.”
Selig also discussed the CFTC’s preparation for the implementation of the Treasury clearing mandate. At the end of the year and 2027. Earlier this month, the Commission issued an exemptive order providing relief necessary for the Fixed Income Clearing Corporation (FICC) and the Chicago Mercantile Exchange (CME) to extend their cross-margining arrangement to customers.
This cross-margining arrangement recognizes that the risks of positions held at each of the two clearinghouses can offset each other and, therefore, warrant lower margin requirements. The CFTC exemptive order, combined with corresponding action by the Securities and Exchange Commission, provides a framework for appropriately offsetting correlated Treasury positions. “This will result in more efficient collateral and capital allocation, while also retaining the key elements of customer
