The Commodity Futures Trading Commission’s Global Markets Advisory Committee (GMAC) advanced two recommendations to examine the impacts of proposed US bank capital requirements and to improve collateral and liquidity management for non-centrally cleared derivatives.
Commissioner Caroline Pham said in a statement: “In less than a year, the GMAC has now adopted 13 recommendations on a broad array of issues to promote and bolster market integrity and resiliency. These recommendations continue to have a tangible impact, not only on rulemakings here at the CFTC, but also among our counterparts and international standard setters.”
- Report on the Impact of the US Bank Capital Proposals on End-Users that Rely on Cleared Derivatives Markets: The current US Basel III endgame bank capital proposals represent a comprehensive rewrite of the regulatory capital standards for major US banks. The proposal brings major implications for the clients these banks serve – particularly for end users who rely on derivatives markets to hedge risk.
- In its current form, the proposal would: reduce the capacity of US banks to offer clients access to derivatives markets; reduce liquidity in derivatives markets; increase the costs of hedging for end-users and, as a result, increase costs for their customers; disproportionately harm smaller end-users and non-public companies; increase systemic risk; and create an unlevel playing field for market participants, including across jurisdictions. The report includes various recommendations to further examine the impact of US bank capital proposals on end users, central clearing, and derivatives markets.
- Variation Margin Processes in Non-Centrally Cleared Markets: Following the global implementation of margin requirements for non-cleared derivatives, margin call and settlement volumes have grown exponentially, raising the necessity for efficient collateral and liquidity management practices, especially during times of market volatility. The importance of streamlining variation margin (VM) practices is recognized by market participants through the increased use of standards and solutions and by the global regulatory community which has recommended areas for improvement of VM processes.
- Prompted by periods of market volatility including and following the global pandemic, the Basel Committee on Banking Supervision (BCBS), the BIS Committee on Payments and Market Infrastructures (CPMI), and the International Organization of Securities Commissions (IOSCO) engaged to review margining practices and foster market participants’ preparedness for high margin call and settlement volume during market volatility events. In January, BCBS and IOSCO issued recommendations for streamlining VM processes. They recommend firms consider the following: the legal and operational challenges that could inhibit seamless exchange of margin and collateral calls; granting greater flexibility in bilaterally agreed acceptable collateral; advantages of standardization and automation of their non-centrally cleared margin processes; and the potential benefits of third-party services to help improve non-centrally cleared VM processes.
- The GMAC recommends that the CFTC support and facilitate industry implementation of the BCBS-IOSCO recommendations for streamlining of variation margin practices.