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20–492 PDF 2016

HEARING TO REVIEW THE IMPACT OF G20 

CLEARING AND TRADE EXECUTION 

REQUIREMENTS

HEARING

BEFORE THE

SUBCOMMITTEE ON COMMODITY EXCHANGES, 

ENERGY, AND CREDIT

OF THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTEENTH CONGRESS

SECOND SESSION

JUNE 14, 2016

Serial No. 114–53

(

Printed for the use of the Committee on Agriculture 

agriculture.house.gov 

COMMITTEE ON AGRICULTURE 

K. MICHAEL CONAWAY, Texas, Chairman 

RANDY NEUGEBAUER, Texas, 

Vice Chairman 

BOB GOODLATTE, Virginia 

FRANK D. LUCAS, Oklahoma 

STEVE KING, Iowa 

MIKE ROGERS, Alabama 

GLENN THOMPSON, Pennsylvania 

BOB GIBBS, Ohio 

AUSTIN SCOTT, Georgia 

ERIC A. ‘‘RICK’’ CRAWFORD, Arkansas 

SCOTT DESJARLAIS, Tennessee 

CHRISTOPHER P. GIBSON, New York 

VICKY HARTZLER, Missouri 

DAN BENISHEK, Michigan 

JEFF DENHAM, California 

DOUG LAMALFA, California 

RODNEY DAVIS, Illinois 

TED S. YOHO, Florida 

JACKIE WALORSKI, Indiana 

RICK W. ALLEN, Georgia 

MIKE BOST, Illinois 

DAVID ROUZER, North Carolina 

RALPH LEE ABRAHAM, Louisiana 

JOHN R. MOOLENAAR, Michigan 

DAN NEWHOUSE, Washington 

TRENT KELLY, Mississippi 

COLLIN C. PETERSON, Minnesota, Ranking 

Minority Member 

DAVID SCOTT, Georgia 

JIM COSTA, California 

TIMOTHY J. WALZ, Minnesota 

MARCIA L. FUDGE, Ohio 

JAMES P. MCGOVERN, Massachusetts 

SUZAN K. DELBENE, Washington 

FILEMON VELA, Texas 

MICHELLE LUJAN GRISHAM, New Mexico 

ANN M. KUSTER, New Hampshire 

RICHARD M. NOLAN, Minnesota 

CHERI BUSTOS, Illinois 

SEAN PATRICK MALONEY, New York 

ANN KIRKPATRICK, Arizona 

PETE AGUILAR, California 

STACEY E. PLASKETT, Virgin Islands 

ALMA S. ADAMS, North Carolina 

GWEN GRAHAM, Florida 

BRAD ASHFORD, Nebraska 

SCOTT C. GRAVES, Staff Director 

ROBERT L. LAREW, Minority Staff Director 

SUBCOMMITTEE ON COMMODITY EXCHANGES, ENERGY, AND CREDIT

AUSTIN SCOTT, Georgia, Chairman

BOB GOODLATTE, Virginia 

FRANK D. LUCAS, Oklahoma 

RANDY NEUGEBAUER, Texas 

MIKE ROGERS, Alabama 

DOUG LAMALFA, California 

RODNEY DAVIS, Illinois 

TRENT KELLY, Mississippi 

DAVID SCOTT, Georgia, Ranking Minority 

Member 

FILEMON VELA, Texas 

SEAN PATRICK MALONEY, New York 

ANN KIRKPATRICK, Arizona 

PETE AGUILAR, California 

(II) 

(III)

C O N T E N T S 

Page 

Conaway, Hon. K. Michael, a Representative in Congress from Texas, opening 

statement .............................................................................................................. 73

Peterson, Hon. Collin C., a Representative in Congress from Minnesota, opening statement ........................................................................................................ 5

Scott, Hon. Austin, a Representative in Congress from Georgia, opening statement ...................................................................................................................... 1

Prepared statement .......................................................................................... 2

Scott, Hon. David, a Representative in Congress from Georgia, opening statement ...................................................................................................................... 3

WITNESSES

Duffy, Hon. Terrence A., Executive Chairman and President, CME Group 

Inc., Chicago, IL ................................................................................................... 5

Prepared statement .......................................................................................... 7

Submitted questions ......................................................................................... 79

Edmonds, Christopher S., Senior Vice President, Financial Markets, Intercontinental Exchange, Inc., Chicago, IL ............................................................. 9

Prepared statement .......................................................................................... 11

Submitted questions ......................................................................................... 80

Rosenberg, Marnie J., Global Head, Clearinghouse Risk and Strategy, 

JPMorgan Chase & Co., New York, NY ............................................................. 13

Prepared statement .......................................................................................... 15

Submitted questions ......................................................................................... 80

Merkel, J.D., Stephen M., Executive Vice President, General Counsel and 

Secretary, BGC Partners, Inc.; Director, Wholesale Markets Brokers’ Association, Americas, New York, NY ....................................................................... 25

Prepared statement .......................................................................................... 27

Submitted questions ......................................................................................... 82

Berger, Stephen John, Director, Government and Regulatory Policy, Citadel, 

LLC, New York, NY; on behalf of Managed Funds Association ....................... 45

Prepared statement .......................................................................................... 46

Submitted questions ......................................................................................... 84

Zubrod, Luke D., Director, Risk and Regulatory Advisory Services, Chatham 

Financial, Kenneth Square, PA .......................................................................... 57

Prepared statement .......................................................................................... 59

Submitted questions ......................................................................................... 87

(1)

HEARING TO REVIEW THE IMPACT OF G20 

CLEARING AND TRADE EXECUTION 

REQUIREMENTS 

TUESDAY, JUNE 14, 2016

HOUSE OF REPRESENTATIVES, 

SUBCOMMITTEE ON COMMODITY EXCHANGES, ENERGY, AND

CREDIT, 

COMMITTEE ON AGRICULTURE, 

Washington, D.C. 

The Subcommittee met, pursuant to call, at 10:00 a.m., in Room 

1300 of the Longworth House Office Building, Hon. Austin Scott of 

Georgia [Chairman of the Subcommittee] presiding. 

Members present: Representatives Austin Scott of Georgia, 

Lucas, Neugebauer, Rogers, LaMalfa, Davis, Kelly, Conaway (ex 

officio), David Scott of Georgia, Vela, Kirkpatrick, Aguilar, and 

Peterson (ex officio). 

Staff present: Caleb Crosswhite, Darryl Blakey, Kevin Webb, 

Paul Balzano, Stephanie Addison, Faisal Siddiqui, John Konya, Liz 

Friedlander, Matthew MacKenzie, Nicole Scott, and Carly 

Reedholm. 

STATEMENT OF HON. AUSTIN SCOTT, A REPRESENTATIVE IN 

CONGRESS FROM THE STATE OF GEORGIA 

The CHAIRMAN. Good morning. This hearing of the Committee on 

Agriculture, to review the impact of G20 clearing and trade execution requirements, will come to order. 

Good morning. Thank you for joining the Commodity Exchanges, 

Energy, and Credit Subcommittee for our last installment of our 

three-part hearing series examining the implementation of the derivatives market reforms envisioned by world leaders following the 

2008 global financial crisis. Today, we will wrap up the series with 

a focus on clearing and trade execution requirements. 

Throughout this series, we have reiterated many times that our 

goal is not an indictment of the reform objectives, but rather an 

analysis of its implementation by United States regulators and the 

interaction of the U.S. regulatory regime with that of other global 

jurisdictions. A vibrant and resilient derivatives marketplace is 

crucial for the market participants and end-users who rely on it to 

manage their diverse business risks. It is also critical for the consumers, Americans in the Eighth District of Georgia and across the 

nation, who rely on the price stability afforded by these risk management practices. 

2

Crucially, the global nature of this marketplace cannot be taken 

for granted. Regulations must not unnecessarily fragment the market, defining liquidity pools by borders instead of market needs. We 

have already had many conversations on cross-border equivalence 

and recognition in the clearing space. 

While we are encouraged by recent steps toward U.S.-EU regulatory harmonization of clearinghouses, applications to European 

Securities and Market Authority for U.S. clearinghouses to be recognized remain outstanding with a quickly approaching deadline. 

I am told this will be done soon, but this process has taken far too 

long. 

Equivalence recognition and substituted compliance decisions 

must be resolved more quickly. Regulators need to be working now 

to prevent similar protracted negotiations for trade execution facilities in the future. 

We are glad to have witnesses before us today who can expound 

on the changes to the clearing ecosystem. While transaction clearing has long played a role in the marketplace, Dodd-Frank swaps 

clearing mandate has significantly expanded the volume of cleared 

transactions. I am sure that the insights and perspectives offered 

today will be vital as we think through the related implications of 

resilience and recovery of clearinghouses in times of market stress. 

Many questions have been raised about the workability of the 

CFTC’s trade execution rules. Do they accurately reflect Congressional intent, and sufficiently take into account the intricacies of 

the marketplace they regulate, do they restrict market access for 

the end-users who need to meet specific and custom hedging needs, 

and perhaps most importantly, do they impose arbitrary barriers to 

trading that diminishes liquidity? We look forward to exploring 

these and other issues more deeply today. 

In developing their market reform framework, G20 leaders were 

clear about the need for global regulators to collaborate and coordinate on these rules. They saw consistent implementation of reforms 

as preventing regulatory arbitrage, protecting financial stability, 

and promoting competition and innovation. This too is the standard 

by which we measure our regulatory progress. 

With that, I want to welcome our panel of accomplished witnesses who bring their diverse viewpoints on clearing and trade 

execution. Thank you each for the time and effort you put into 

being here today. We look forward to leaving here with a deeper 

understanding of the issues at hand. 

[The prepared statement of Mr. Austin Scott follows:]

PREPARED STATEMENT OF HON. AUSTIN SCOTT, A REPRESENTATIVE IN CONGRESS

FROM GEORGIA

Good morning. Thank you for joining the Commodity Exchanges, Energy, and 

Credit Subcommittee for our last installment of our three-part hearing series examining the implementation of the derivatives market reforms envisioned by world 

leaders following the 2008 global financial crisis. Today, we will wrap up the series 

with a focus on clearing and trade execution requirements. 

Throughout this series, we’ve reiterated many times that our goal is not an indictment of the reform objectives, but rather an analysis of their implementation by 

United States regulators and the interaction of the U.S. regulatory regime with that 

of other global jurisdictions. 

A vibrant and resilient derivatives marketplace is crucial for the market participants and end-users who rely on it to manage their diverse business risks. It is also 

3

critical for the consumers, Americans in the Eighth District of Georgia and across 

the nation, who rely on the price stability afforded by these risk management practices. 

Crucially, the global nature of this marketplace cannot be taken for granted. Regulations must not unnecessarily fragment the market, defining liquidity pools by 

borders instead of market needs. We have already had many conversations on crossborder equivalence and recognition in the clearing space. 

While we are encouraged by recent steps toward U.S.-EU regulatory harmonization for clearinghouses, applications to the European Securities and Markets Authority for U.S. clearinghouses to be recognized remain outstanding with a quickly 

approaching deadline. I’m told this will be done soon, but this process has taken far 

too long. Equivalence, recognition, and substituted compliance decisions must be resolved more quickly. Regulators need to be working now to prevent similar protracted negotiations for trade execution facilities in the future. 

We are glad to have witnesses before us today who can expound on the changes 

to the clearing ecosystem. While transaction clearing has long played a role in the 

marketplace, Dodd-Frank’s swaps clearing mandate has significantly expanded the 

volume of cleared transactions. 

I’m sure that the insights and perspectives offered today will be vital as we think 

through the related implications for resilience and recovery of clearinghouses in 

times of market stress. 

Many questions have been raised about the workability of the CFTC’s trade execution rules.

• Do they accurately reflect Congressional intent and sufficiently take into account the intricacies of the marketplace they regulate?

• Do they restrict market access for the end-users who need to meet specific and 

custom hedging needs?

• And perhaps most importantly, do they impose arbitrary barriers to trading 

that diminishes liquidity? We look forward to exploring these and other issues 

more deeply today.

In developing their market reform framework, G20 leaders were clear about the 

need for global regulators to collaborate and coordinate on these rules. They saw 

consistent implementation of reforms as preventing regulatory arbitrage, protecting 

financial stability, and promoting competition and innovation. This, too, is the 

standard by which we measure our regulatory progress. 

With that, I want to welcome our panel of accomplished witnesses who bring their 

diverse viewpoints on clearing and trade execution. 

Thank you each for the time and effort you put into being here today. We look 

forward to leaving here with a deeper understanding of the issues at hand. 

I’ll recognize our Ranking Member, Mr. Scott, for any remarks he’d like to make.

The CHAIRMAN. And I will recognize our Ranking Member, Mr. 

Scott, for any remarks he would like to make. 

OPENING STATEMENT OF HON. DAVID SCOTT, A 

REPRESENTATIVE IN CONGRESS FROM GEORGIA 

Mr. DAVID SCOTT of Georgia. Thank you, Chairman Scott. It is 

a pleasure to be here. This is indeed an important and very timely 

hearing. 

As we know, the derivatives and swaps market that we are deal- ing with is an $600+ trillion piece of the world’s economy. It is very 

complex, complicated, and oftentimes all too confusing. So I 

thought we might give just a little background to sort of set the 

stage for how we got here. 

As you all remember, after the financial crisis the derivatives 

markets were dramatically transformed by Title VII in the DoddFrank Act. And Title VII falls directly under the purview of this 

Committee. It is a section relating to derivatives, the large swaths 

of CFTC and SEC mandates. These are our regulators in this area. 

And one of our major concerns is to make sure that our two regulatory agencies themselves can harmonize and make sure, and that 

4

is a very important mandate for our Committee to make sure of. 

This included rulemakings pertaining to clearing, trade executions, 

reporting, and transparency obligations. 

Then we come back a little earlier in 2009, the G20 proposed reforms to the derivatives markets with a particular emphasis on 

making sure a global standard is met so that harmonization in our 

rules could be met. The United States’ response to this G20 summit 

was Dodd-Frank, while other countries have implemented their 

own laws with varying timelines, which creates another problem. 

This mismatch in timing has led to a slew of equivalency problems, 

none greater than what is happening in the European Union. For 

example, the EU will soon implement a rule that is not, and could 

not be as strong as the United States’ rule. And given the global 

nature of our world’s derivatives markets, equivalency problems 

have led to many market participants going from one place to another. 

And so on Tuesday, May 24, the CFTC issued a final rule that 

applies to the Commission’s margin requirements for uncleared 

swaps in the context of cross-border transactions. This rule would 

limit the ability of banks and other traders to move swaps businesses abroad to avoid U.S. trading requirements. And this is 

something we need to hear from you, how it impacts our industry. 

The rule requires that offshore units of U.S. banks adhere to CFTC 

margin rules, even in cases where the unit’s American parents 

aren’t explicitly off the hook for trades. 

Now, just to refresh your memory, swaps did get a bad name 

during the financial crisis because of a certain swap called the 

credit default swap. It is a key over-the-counter derivative. During 

that crisis, if you recall, AIG issued a huge amount of CDS contracts, paying out similar to an insurance contract, when 

collateralized debt obligations collapsed. This was hugely speculative, and has since been corrected because a version of it has been 

targeted by U.S. policymakers for greater oversight and transparency because they played a central role in the financial crisis. 

So we come to December 2015. Now, CFTC finalized rules to set 

collateral or margin requirements on trade between swap dealers 

and other firms that aren’t done through clearinghouses. This is 

what is referred to as uncleared swaps, and makes a multi-trillion 

dollar swaps market that isn’t backed by a central clearinghouse. 

However, this December 25 rule did not set guidelines for crossborder swaps. As written, the swaps were guaranteed by the foreign counterparty, the swaps were exempt from U.S. margin requirements, and because of this, U.S. banks have been restructuring their contracts to de-guarantee these swap transactions, and 

any liability for these swaps would then lie solely with the offshore 

operation. Now, most of this was moved to London. 

And so now, we are in a situation where we want to hear from 

you pertaining to this rule, and to share with this Committee concerns that you in the industry have. Regardless of what we do here, 

it is you, it is the clearinghouses, it is the market participants who 

have to make all of this work. 

So, Mr. Chairman, I look forward to a good hearing, an important and timely hearing, and thank you for the time. 

5

The CHAIRMAN. Thank you, Mr. Scott. And I understand Mr. 

Peterson, the Ranking Member of the full Committee, has a statement that he would like to be recognized to make. 

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A 

REPRESENTATIVE IN CONGRESS FROM MINNESOTA 

Mr. PETERSON. Thank you, Mr. Chairman. And I will be brief. 

And I want to thank the panel of witnesses for joining us today. 

When we wrote Title VII of Dodd-Frank, we incorporated goals 

set by the G20 in response to the market’s failure. We also took 

into account the risks posed by an opaque, top-heavy swaps market. We required standardized swaps to be cleared and to be traded 

in an environment, with multiple market participants making both 

bids and offers. That clearing requirement has now been met and 

we have brought stability to the market. 

I am looking forward to discussing the trade execution issue 

today because I don’t believe we have achieved the goal that we set 

in Dodd-Frank in terms of the way that swaps are traded. Not 

much has changed. In some ways, the marketplace is worse now 

than it was before the crisis. The four largest dealers control 90 

percent of all the swaps traded. The pre-crisis market structure, 

where they served clients in one market, and deal nearly exclusively with each other in the secondary market, still exists. So I 

hope today’s hearing can help us understand why this is the case, 

and I look forward to your testimony. I yield back my time. 

The CHAIRMAN. The chair would remind other Members to submit their opening statements for the record so the witnesses may 

begin their testimony, and to ensure that there is ample time for 

questions. 

I would like to welcome our witnesses to the table. First, we have 

the Honorable Terrence Duffy, Executive Chairman and President 

of the CME Group, from Chicago, Illinois. We have Mr. Christopher 

Edmonds, Senior Vice President, Financial Markets, Intercontinental Exchange, Chicago, Illinois; Ms. Marnie Rosenberg, Global 

Head, Clearinghouse Risk and Strategy, JPMorgan Chase and 

Company, New York, New York; Mr. Stephen Merkel, Executive 

Vice President, General Counsel and Secretary, BGC Partners, Incorporated, New York, New York, on behalf of the Wholesale Markets Brokers’ Association; Mr. Stephen John Berger, Director, Government and Regulatory Policy, Citadel, LLC, New York, New 

York, on behalf of the Managed Funds Association; Mr. Luke 

Zubrod, Director, Risk and Regulatory Advisory Services, Chatham 

Financial, Kenneth Square, Pennsylvania. 

Mr. Duffy, please begin when you are ready. 

STATEMENT OF HON. TERRENCE A. DUFFY, EXECUTIVE 

CHAIRMAN AND PRESIDENT, CME GROUP, INC., CHICAGO, IL 

Mr. DUFFY. Thank you, Mr. Chairman. Chairman Scott, and 

Ranking Member Scott, Members of the Subcommittee, I am Terry 

Duffy, the Executive Chairman and President of CME Group, and 

I thank you for the opportunity to testify today regarding the G20 

clearing and trading commitments. 

These commitments were meant to create a global regulatory 

framework; however, some G20 nations have not implemented core 

6

elements of the G20 reforms consistently. For example, regulatory 

requirements for clearinghouses have not been defined on a coordinated basis. This has the potential to create inconsistency, uncertainty, and disruption to the smooth functioning of global derivatives markets. 

Fortunately, negotiations between the U.S. and the EU on 

equivalence were successfully resolved in February. That is when 

the European Commission originally granted the CFTC equivalent 

status. The European Securities Market Authority is now implementing that agreement. It is ensuring that the CME clearing is 

recognized as equivalent in advance of the June 21 date for European clearing mandate. 

I want to applaud Chairman Massad and his European counterparts for working through their differences and reaching a positive 

outcome. However, the process took too long. This created considerable uncertainty for European participants wanting to clear products in the United States. We encourage global regulators to avoid 

this kind of potential market disruption in the future. They should 

implement long-term solutions. They should not force markets to go 

through a national equivalence and recognition process every few 

years. Otherwise, regulation will artificially influence liquidity, 

price discovery, and risk management. It will disadvantage individual markets in an increasingly competitive global marketplace. 

Beyond equivalence, the global clearing mandates have also led 

to increased focus on clearinghouses’ risk management. In 2012 

and 2013, enhanced risk management standards were adopted for 

clearinghouses. More recently, there has been a focus on recovery 

and resolution. Central clearing increases transparency, reduces 

systemic risk, and strengthens the financial system. Clearing members and market participants bring risk to the clearinghouse 

through their trading activities. In contrast, a clearinghouse’s core 

function is to manage that risk. We don’t create the risks. 

Clearinghouses are responsible for ensuring the overall safety 

and soundness of their markets. CME Clearing uses a number of 

tools to monitor and limit the risk it manages. These include its 

safeguards packages and waterfall structure. They provide a firewall against a potential systemic impact of a failing clearing member. These tools have proven themselves to be extremely effective 

in stressed markets and during the worse financial crisis in memory. 

We have long supported first loss contributions to each of our financial safeguard packages. This further aligns our interests with 

those of market participants. We are committed to ensuring that 

the capital contributions from clearing members, as well as CME, 

will be sufficient to avoid the mutualization of losses in a default 

situation. As a result, when addressing a clearing member failure, 

CME Clearing has never had to access the default fund contribution of a failing clearing member, the mutualized capital of its 

clearing members, or the capital that CME has in its default fund. 

Effective risk management must strike a balance between initial 

margins, clearinghouse contribution capital, and clearing member 

guarantee fund contributions. This ensures that all market participants have appropriate incentives to manage risk across the markets. 

7

Before closing, I want to mention the leverage ratio rule adopted 

by the Basel Committee and the Federal Reserve. It is an example 

of a regulation that is at odds with the G20 commitments to clearing. The leverage ratio will make clearing more expensive and less 

accessible. Why? Because it fails to recognize how customer collateral, appropriately segregated, reduces exposures. The Basel Committee recently proposed changes to the rule, but they stopped 

short of endorsing a segregated collateral offset for client-cleared 

derivatives. Customer collateral is legally required to be segregated, reduces exposures, and cannot be used to increase a clearing member’s leverage. Without such an offset, clearing costs will 

increase. Further, moving the clients of defaulted clearing members 

will be much more difficult. 

I thank you for your time and attention this morning, and I look 

forward to answering any questions you may have of me. 

[The prepared statement of Mr. Duffy follows:]

PREPARED STATEMENT OF HON. TERRENCE A. DUFFY, EXECUTIVE CHAIRMAN AND

PRESIDENT, CME GROUP, INC., CHICAGO, IL 

The G20 commitments were meant to create a global regulatory framework. However, some G20 nations have not implemented the core elements of the G20 regulatory reforms consistently. This lack of coordination has the potential to create inconsistency, uncertainty, and potential harm to the efficient functioning of U.S. and 

global derivatives markets. 

Equivalency and Recognition 

As one example of this inconsistency, regulatory requirements for clearinghouses 

have not been defined on a coordinated basis. Fortunately, the negotiations between 

the U.S. and EU on equivalence were successfully resolved in February, when the 

European Commission officially granted the CFTC ‘‘equivalent’’ status. The European Securities Markets Authority is now implementing that agreement by ensuring 

that CME Clearing is recognized as equivalent in advance of the June 21 start date 

for the European clearing mandate. 

However, the process for U.S. clearinghouses obtaining equivalence and recognition in Europe has taken far too long. While we applaud Chairman Massad and his 

European counterparts for working through their differences and reaching a positive 

outcome, we encourage policymakers on both sides of the Atlantic to ensure that 

market participants do not have to deal with the uncertainty created by such long 

delays in reaching a cross-border agreement. This requires agreement among global 

regulators to implement long-term solutions for increasingly global markets and not 

force markets to go through national equivalence and recognition processes every 

few years. 

If this is not the case, then regulation will artificially influence liquidity, price discovery and risk management, and competitively disadvantage individual markets in 

an increasingly competitive global marketplace. 

Risk Management through Central Clearing 

Congress has taken important steps toward strengthening the U.S. financial system post financial crisis. By way of example, a clearing mandate has been imposed 

for certain swaps—requiring that they be cleared through central clearinghouses 

like CME Clearing. These reforms increase transparency and reduce systemic risk 

by using the best practices of central clearing in the broader financial markets. 

A clearinghouse’s core function is risk management—not trading or other types 

of risk creation. Unlike clearing members and market participants, clearinghouses 

do not bring risk to the clearing system. Instead, clearinghouses are responsible for 

ensuring the overall safety and soundness of their markets. 

Clearinghouses, like CME Clearing, utilize a number of tools, such as the financial safeguards package and waterfall structure, to monitor and limit the risks 

brought by its clearing members and customers and to limit the systemic impact 

of a failing clearing member. These tools have been tested in stressed markets and 

have demonstrated their effectiveness against the worst financial crises in memory. 

CME Clearing has never had to access a defaulting clearing member’s default fund 

contribution, CME’s own contributed capital, or the mutualized capital of its clearVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00011 Fmt 6633 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
8

ing members to address a clearing member default. At its core, the clearing mandate and other related financial reforms were driven by a decision by the G20 that 

the robust performance by clearinghouses during the financial crisis suggested that 

their market structure and risk management should be a template for the financial 

markets, going forward. 

In response to the swaps clearing mandate, some have called for greater scrutiny 

of clearinghouse risk management, including the amount of capital that clearinghouses should be required to hold. We support best practices in risk management. 

It is critical, however, to recognize that the central clearing mandate was adopted 

due to clearinghouse resiliency during the financial crisis. Furthermore, the CFTC 

and other global regulators have significantly enhanced the risk management standards applied to clearinghouses beyond those which performed robustly during the 

financial crisis. The failure to recognize the increased resiliency of clearinghouses 

following these changes potentially risks distracting the regulatory focus away from 

less robust areas of the financial markets. 

Unlike the participants in our markets, risk management is the core function of 

CME Clearing and we have strong motivation to ensure clearing member contributions and our own capital contributions will be sufficient to avoid the mutualization 

of losses in a default situation. Effective risk management must strike the appropriate balance between initial margins, clearinghouse contributed capital, and clearing member guaranty fund contributions to ensure that all market participants have 

appropriate incentives to manage risk across the market. CME Clearing has long 

advocated for clearinghouses to make meaningful, first-loss contributions to their financial safeguards packages. CME Clearing makes a sizeable contribution to each 

of its financial safeguards packages, which works to align our interests with those 

of our market participants. 

In addition, CME Clearing regularly publishes public disclosures describing its 

risk management practices and measuring its available financial resources in compliance with local and international standards and best practices. This provides the 

market significant transparency into our risk management practices. 

Some have also called for the introduction of a framework for addressing any 

losses that exceed the clearinghouse’s financial resources. CME Group supports U.S. 

and international efforts to introduce robust recovery and resolution regimes for 

clearinghouses. However, we caution that no two clearinghouses are the same and 

the recovery and resolution framework should be tailored to the specific characteristics of each clearinghouse while ensuring that the tools prescribed are appropriately 

calibrated. 

Clearinghouses should retain flexibility in designing their recovery tools to take 

into account dynamic market conditions, and the specific products and markets they 

serve. Clearinghouses must also have the flexibility and discretion to implement 

their recovery tools and maintain the ability to use all possible tools available to 

them prior to resolution. 

Moreover, clearinghouses have the foremost expertise in managing the risks of the 

markets which they clear; therefore, we believe that a clearinghouse should only be 

put in resolution when the recovery process is exhausted. In addition to this expertise, the incentives of clearinghouses are aligned with overall market stability making them the appropriate pre-resolution decision-maker on the steps needed to recover their markets. 

In some jurisdictions it is suggested that initial margin collateral provided by 

market participants should be used other than for its sole, intended purpose as collateral for cleared positions, but as a means to allocate losses or as a temporary 

source of liquidity. This is commonly referred to as ‘‘haircutting’’ initial margin collateral. CME Group strongly opposes the haircutting of initial margin collateral 

whether during recovery or resolution, both as unlawful in regards to clients under 

the Commodity Exchange Act and Dodd-Frank Act and as a matter of policy, due 

to its destabilizing impact on markets and its negative capital impacts. 

Collateral haircutting directly impacts participants in pension funds and other 

end-users by appropriating their assets which are not designed to address mutualized risk and such appropriation is prohibited under U.S. law. Effectively, the 

haircutting of client collateral amounts to a taxpayer bailout due to the fact that 

the assets of participants in pension plans, the very people we are trying to protect, 

are put up as client collateral and would be at risk of appropriation if the 

haircutting of client collateral were permitted. 

Haircutting of client collateral also creates a lack of incentive for market participants to actively participate in the default management process. CME Clearing is 

a strong supporter of sound risk management underpinned by the belief that market 

participants must be incentivized to manage the risks they create. 

9

We encourage Congress to avoid inappropriate shifts in costs to end-users and reduction in clearing member incentives to actively manage their risk. The appropriate balance must be struck between initial margins, clearinghouse contributed 

capital, and clearing member guaranty fund contributions to ensure that all market 

participants have appropriate incentives to manage risk across the market. 

Leverage Ratio 

Finally, highlighting a regulatory inconsistency with regard to the G20 commitments, the supplemental leverage ratio rule adopted by the Basel Committee and 

the Federal Reserve is directly at odds with the G20 commitment to clearing. 

Plainly speaking, the supplemental leverage ratio will make clearing more expensive and less accessible given its failure to recognize appropriately segregated client 

collateral in the centrally cleared derivatives markets. Customer collateral is required by law to be segregated, reduces exposures, and cannot be used to increase 

leverage. The Basel Committee has recently proposed changes to its leverage ratio 

framework; however it has stopped short of endorsing client collateral offsets for client cleared derivatives. Continued failure to do so will needlessly make more difficult a clearing firm’s ability to accept a portfolio of fully margined clients of a defaulted clearing member.

The CHAIRMAN. All right, Mr. Edmonds. 

STATEMENT OF CHRISTOPHER S. EDMONDS, SENIOR VICE 

PRESIDENT, FINANCIAL MARKETS, INTERCONTINENTAL

EXCHANGE, INC., CHICAGO, IL 

Mr. EDMONDS. Chairman Scott, Ranking Member Scott, I am 

Chris Edmonds, Senior Vice President, Financial Markets, for 

Intercontinental Exchange, or ICE. I appreciate the opportunity to 

appear before you today, and discuss the role of clearing and trade 

execution. 

Since launching an electronic over-the-counter energy marketplace in 2000 in Atlanta, Georgia, ICE has expanded both in the 

U.S. and internationally. Over the past 16 years, we have acquired 

or founded derivative exchanges and clearinghouses in the U.S., 

Europe, Singapore, and Canada. ICE has a successful and innovative history clearing exchange-traded derivatives, and OTC derivatives such as energy and credit default swaps, or CDS. In 2008, 

ICE launched the first new clearinghouse in the UK in over a century; ICE Clear Europe, which clears energy, credit, and interest 

rate derivatives. We launched our CDS clearinghouse; ICE Clear 

Credit, in 2009, and it has since converted to a derivatives clearing 

organization following the implementation of Dodd-Frank. 

Following the financial crisis in 2008, global financial ministers 

decided, to the extent possible, the OTC derivative market should 

be cleared. Global regulators recognized that a clearinghouse, by 

acting as a central counterparty to transactions, minimizes bilateral risk. As a result of increased clearing, market participants are 

realizing that moving uncleared positions and clearing creates both 

operational and capital efficiencies. For example, since 2009, ICE 

Clear Credit and ICE Clear Europe have cleared more than $78 

trillion in CDS notional, but through compression and netting, currently maintain a combined open interest of approximately $1.5 

trillion, significantly reducing the bilateral credit exposure among 

market participants, and reducing systemic risk. 

Ironically, despite mandate-driven and natural growth in the volume of cleared contracts, the number of futures commission merchants, or FCMs, available to provide clearing services for endusers has dropped from 190 to 76 in recent years. The bulk of derivatives clearing is now concentrated in a few bank-owned FCMs. 

10

These firms are constrained by the proposed requirement under 

Basel III that banks hold regulatory capital against clearing customer margin on their balance sheet, even though the customer 

margin is posted to a clearinghouse and held on a segregated basis. 

ICE has joined a group of concerned market participants to encourage the Basel Committee to reconsider and refine aspects of 

this rule. We appreciate the several Members of this Subcommittee 

who have helped us raise the issue with banking regulators. The 

Basel Committee recently indicated it may rethink its position, and 

has requested further comment on the proposal. ICE and the 

broader derivatives industry are hopeful the Basel Committee will 

recognize segregated and the risk-reducing nature of customer 

funds that are restricted on bank balance sheets. 

We are also pleased European and U.S. regulators reached an 

agreement on margin equivalence standards for CCPs in their respective jurisdictions. Further coordination between regulators is 

still required to ensure that these standards do not create opportunities for regulatory arbitrage or balkanize global markets. But this 

first step brings important regulatory certainty to clearing customers. 

We are also hopeful the global regulators will reach agreement 

on equivalence between trade execution platforms within a reasonable timeframe. Over the past decade, ICE has invested heavily in 

our clearinghouse technology and risk management practices. ICE 

has kept pace with, and often preceded regulatory reforms, new 

global rules, and international standards that have been established with respect to risk controls, levels of protection, and proper 

functioning of clearinghouses. We have worked closely with regulators, clearing members, and end-users to implement clearing 

models that meet or exceed modern regulatory reforms and international standards. The result is an even more robust clearing 

model that includes many ICE-led initiatives such as the introduction of skin-in-the-game, or the contribution by clearinghouses of 

designated amounts of their own capital for the default waterfall. 

ICE clearinghouses are subject to extensive regulatory oversight 

and strong corporate governance requirements, exercised largely 

through risk and advisory committees, and independent boards of 

directors. Risk committees include representatives from our clearing member firms, and in some cases, end clients. ICE clearinghouses regularly conduct margin back-testing, default fund stress 

testing, and liquidity stress testing, the results of which are reviewed by clearing members and regulators. The ICE clearinghouses also provide public disclosure of their margin back-testing, 

default fund stress testing, and liquidity stress testing as part of 

their compliance with the CPMI–IOSCO public quantitative disclosure standards. The rules, practices, and procedures of ICE’s clearinghouses are fully transparent and publicly disclosed in a consistent manner. Any material change to ICE’s clearing processes 

are subject to rigorous internal governance review, as well as applicable regulatory review and approval. 

Thank you for the opportunity to share our views with you, and 

I would be happy to answer any questions you and the Members 

of the Subcommittee may have. 

[The prepared statement of Mr. Edmonds follows:]

11

PREPARED STATEMENT OF CHRISTOPHER S. EDMONDS, SENIOR VICE PRESIDENT, 

FINANCIAL MARKETS, INTERCONTINENTAL EXCHANGE, INC., CHICAGO, IL 

Introduction 

Chairman Scott, Ranking Member Scott, I am Chris Edmonds, Senior Vice President, Financial Markets for Intercontinental Exchange, or ICE. I appreciate the opportunity to appear before you today to discuss the role of clearing and trade execution. 

Background 

Since launching an electronic over-the-counter (OTC) energy marketplace in 2000 

in Atlanta, Georgia, ICE has expanded both in the U.S. and internationally. Over 

the past sixteen years, we have acquired or founded derivatives exchanges and 

clearing houses in the U.S., Europe, Singapore and Canada. In 2013, ICE acquired 

the New York Stock Exchange, which added equity and equity options exchanges 

to our business. Through our global operations, ICE’s exchanges and clearing houses 

are directly regulated by the U.S. Commodity Futures Trading Commission (CFTC), 

the Securities and Exchange Commission (SEC), the Bank of England, the UK Financial Conduct Authority and the Monetary Authority of Singapore, among others. 

ICE has a successful and innovative history clearing exchange traded derivatives 

and OTC derivatives such as energy and credit default swaps (CDS). ICE Clear 

Credit (ICC) began operating as a trust company in 2009 under the supervision of 

the Federal Reserve Board and the New York State Banking Department and converted to a derivatives clearing organization (DCO) following implementation of the 

Dodd-Frank Wall Street Reform and Consumer Protection Act (DFA). In 2008, ICE 

launched ICE Clear Europe (ICEU), the first new clearing house in the UK in over 

a century. ICEU clears derivatives in several asset classes including energy, agriculture, interest rates and credit. In total, ICE owns and operates six clearing 

houses in North America, Europe and Asia. 

Current Clearing Environment 

Observers frequently point to a lack of cleared derivative contracts as a significant 

factor in the broad reach and complexity of the 2008 financial crisis. The disciplined 

and transparent risk management practices (including uniform collateral requirements and the daily marking-to-market of losses) associated with regulated cleared 

contracts serves to reduce systemic risk. Whereas, opaque bilateral OTC derivative 

transactions result in counterparty exposures that can become hard to unwind when 

the market experiences a period of widespread stress. A clearing house, by acting 

as a central counterparty (CCP) to transactions, minimizes bilateral risk by compressing derivative exposures. For example, since 2009, ICC and ICEU have cleared 

more than $78 trillion in CDS notional, but through compression currently maintain 

a combined open interest of $1.5 trillion, significantly reducing bilateral credit exposure among market participants and reducing systemic risk. 

ICE Global Cleared Activity—Gross Notional vs. Open Interest

In response to the financial crisis, the G20 finance ministers decided that, to the 

extent possible, the OTC derivative market should be cleared. Congress followed 

suit with the DFA, which created a clearing requirement for liquid standardized derivatives. Today, certain U.S. and European CDS indices and certain interest rate 

swaps are mandated for clearing by the CFTC. The European Market Infrastructure 

Regulation (EMIR) created a similar clearing mandate for Europe. As a result of increased clearing, market participants are realizing that moving uncleared positions 

into clearing results in risk, operational and capital efficiencies. 


11453001.eps
12

1 CDS Index instruments are subject to CFTC regulation, while CDS single name instruments 

are subject to SEC regulation, therefore a coordinated effort was required to provide for portfolio 

margining for CDS. 2 Committee on Payment and Settlement Systems, International Organization of Securities 

Commissioners (CPSS–IOSCO), Principles of Financial Market Infrastructures (April 2012). 

http://www.bis.org/publ/cpss101a.pdf. 

Basel-Fueled Headwinds 

Ironically, despite mandate-driven and natural growth in the volume of cleared 

contracts, the number of futures commission merchants (FCM) available to provide 

clearing services for end-users has dropped considerably in recent years. What had 

been an industry of 190 firms in 2004 was reduced to 76 firms by 2014, according 

to the Futures Industry Association. The bulk of derivatives clearing is now concentrated in a few bank owned global FCMs. These firms are constrained by the 

proposed Basel Committee on Banking Supervision’s leverage ratio framework 

(Basel III). Basel III requires a bank to hold regulatory capital against clearing customer margin on its balance sheet notwithstanding that the customer margin is 

posted to a clearing house and held at the clearing house on a segregated basis. This 

Basel III capital requirement makes it more expensive for banks to offer clearing 

services, at the very time clearing capacity is shrinking and customer demand is increasing. Further, Basel III makes the transfer (or porting) of client positions much 

more difficult as banks must perform an assessment of their capital costs before accepting a client position transfer. This will complicate default resolution as banks 

will be less likely to accept client positions from a defaulting clearing member. 

ICE has joined a group of concerned FCMs, end-users and other clearing house 

operators to encourage the Basel Committee to reconsider and refine aspects of the 

rule which is set to become final at the start of 2017. CFTC regulations already prohibit banks from using customer margin funds in any way other than to mitigate 

the risk reflected in customer positions. The Basel committee recently indicated it 

may rethink this position and has requested further comment on the proposal. ICE 

and the broader derivatives industry are hopeful the Basel Committee will recognize 

the segregated and risk reducing nature of customer funds that are restricted on 

bank balance sheets. 

Regulatory Coordination 

Earlier this year, European and U.S. regulators reached an important milestone 

on margin equivalence standards for CCPs in their respective jurisdictions. This determination encourages continued cross-border activity and will help prevent a fragmentation of liquidity for related contracts. Further coordination between the regulators is still required to ensure the standards do not create opportunities for regulatory arbitrage or balkanize global markets, but this first step brings important 

regulatory certainty to clearing customers. We are also hopeful that global regulators will reach agreement on equivalence between trade execution platforms within a reasonable timeframe. 

Since the enactment of the DFA, ICE has also worked with the CFTC and the 

SEC to provide CDS market participants the benefits of capital efficiency that can 

come with the portfolio margining of risk off-setting positions.1 The SEC developed 

a portfolio margining regime that requires each clearing member to create its own 

set of portfolio margining standards. Under these rules, there has been some 

progress in single name clearing but uncertainty remains. We look forward to working with the SEC to resolve the questions still limiting market participants’ ability 

to use these critical risk management tools. 

CCP Operation and Role in the Financial System 

The central counterparty clearing model is effective and has been relied upon in 

futures markets for more than 100 years. The recent introduction of mandatory 

clearing obligations for certain swaps has increased awareness around clearing and 

the significant benefits it brings to the capital markets. Over the past 100 years, 

clearing house risk management practices have been repeatedly tested and have 

performed as designed in resolving clearing member defaults. 

Over the past decade, ICE has invested heavily in our clearing house technology 

and risk management practices. ICE has kept pace with and often preceded regulatory reforms, new global rules, and international standards 2 that have been established with respect to risk controls, levels of protection and proper functioning of 

clearing houses. We have worked closely with regulators, clearing members and 

end-users to implement clearing models that meet or exceed modern regulatory reforms and international standards. The result is an even more robust clearing model 

that includes many ICE-led initiatives, such as the introduction of ‘‘skin-in-theVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00016 Fmt 6633 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
13

3For an overview of the risk governance at ICE clearing houses see: ICE Clear Europe—

www.theice.com/clear-europe/risk-management; ICE Clear U.S.—www.theice.com/clear-us/regulation; ICE Clear Credit:—www.theice.com/clear-credit/regulation. 4Supra, nt. 2. 5For an overview of ICE central clearing operations and governance see: https://

www.theice.com/publicdocs/Central_Clearing_Reducing_Systemic_Risk.pdf. 

game,’’ the clearing house’s contribution of a designated amount of its own capital 

to the default waterfall. 

ICE clearing houses are subject to extensive regulatory oversight and strong corporate governance requirements, exercised largely through risk and advisory committees and independent boards of directors.3 Risk committees include representatives from clearing member firms and, in some cases, end clients. ICE clearing 

houses regularly conduct margin back-testing, default fund stress testing, and liquidity stress testing, the results of which are reviewed by clearing members and 

regulators. In addition, the clearing houses’ margin, guaranty fund and liquidity 

methodologies are independently validated on a routine basis. 

The rules, practices and procedures of ICE’s clearing houses are fully transparent 

and are publicly disclosed in a consistent manner, as set out within the CPMI–

IOSCO Principles for Financial Market Infrastructures (PFMIs) 4 and various regulatory requirements. Any material changes to ICE’s clearing processes are subject 

to rigorous internal governance as well as applicable regulatory review and approval.5

Conclusion 

ICE has always been and continues to be a strong proponent of open and competitive markets, and of appropriate regulatory oversight of those markets. As an operator of global futures and derivatives markets, ICE understands the importance of 

ensuring the utmost confidence in its markets. To that end, we have continuously 

worked with regulatory bodies in the U.S. and abroad to ensure they have access 

to all relevant information available to ICE regarding trade execution and clearing 

activity on our markets. ICE continues to work closely with governments and regulators at home and abroad to address the evolving regulatory challenges presented 

by derivatives markets and will continue to work cooperatively for solutions that 

promote the best and safest marketplaces. 

Mr. Chairman, thank you for the opportunity to share our views with you. I would 

be happy to answer any questions you and Members of the Subcommittee may have.

The CHAIRMAN. Thank you, Mr. Edmonds. 

Ms. Rosenberg. 

STATEMENT OF MARNIE J. ROSENBERG, GLOBAL HEAD, 

CLEARINGHOUSE RISK AND STRATEGY, JPMORGAN CHASE & 

CO., NEW YORK, NY 

Ms. ROSENBERG. Thank you for holding this hearing, and extending JPMorgan Chase the opportunity to present our views on implementation of the G20 derivative reforms. 

My name is Marnie Rosenberg, and I am the Global Head of 

Clearinghouse Risk within JPMorgan Chase’s Independent Risk 

Management Function. Our firm is a leading provider of access to 

clearing across the globe. 

The clearing mandate has benefitted the system overall by reducing risk and enhancing transparency. On the other hand, it has 

further concentrated risk in a small number of large global CCPs, 

and increased interconnectedness within the system. 

Today, one of the critical public policy issues for regulators and 

policymakers is ensuring that CCP risk management and governance frameworks are appropriately aligned and effective for the 

systemic role that CCPs have assumed. 

I lead a team that focuses on identifying, mitigating, and reducing our firm’s CCP membership risks, and it is from this perspective that I raise three key questions for policymakers today. First, 

are CCPs sufficiently resilient to withstand the default of one or 

14

more clearing members, or a major loss arising from an operational 

failure or a cybersecurity attack? Second, do CCPs have adequate 

plans and resources to recover from such a loss to carry on offering 

critical services? And finally, if they can’t recover, do they have 

credible resolution plans to continue to provide critical services, 

and ensure a CCP’s failure does not cause broader market instability or require taxpayer assistant. Regulators, including the 

CFTC, have made significant progress in addressing these questions, but there remains widespread agreement that there should 

be more done. 

The starting block for resilient CCPs is a strong, effective risk 

governance framework. Each CCP makes the decisions with respect 

to how they manage risk, including setting membership and eligible collateral requirements, establishing margin levels and overall 

financial safeguards, and determining the products that they offer 

for clearing. At the same time, clearing members bear the capital 

consequences of loss through the collective funds they provide to 

the CCP for loss mutualization. Therefore, risk governance rules 

should evolve to ensure that those that bear potential losses have 

a meaningful voice with how risk is managed. 

This can be achieved by mandatory and meaningful consultation 

and inclusion of clearing members in the decision-making process, 

enhanced and consistent risk committee standards, and appropriate levels of a CCP’s own resources at risk, often referred to as 

skin-in-the-game. 

Robust and transparent stress testing is critical to ensuring a 

CCP has sufficient resources should a clearing member default. 

CCP-designed stress test frameworks should be subject to more 

prescriptive global standards, and the testing methodology should 

be more transparent to clearing members. This is critical for clearing members to identify and manage the risk inherent in using a 

specific CCP. Specifically, regulatory-driven stress tests would provide oversight and inform supervisory requirements by evaluating 

the adequacy of the CCP’s financial safeguards. Results of these 

tests should be disclosed. We look forward to U.S. regulatory support on this front as global standards are developed over the next 

year. 

While resiliency is important, it is also crucial to ensure collectively that CCPs can recover from a threat to their viability in 

order for them to continue to provide core services to the market 

and avoid systemic contagion. But a CCP’s ability to allocate losses 

to clearing members through recovery tools, such as cash calls on 

members, must be very limited and subject to predetermined and 

predictable limits, otherwise, they can be pro-cyclical and have a 

destabilizing effect on the broader market. Moreover, bank regulators today expect and demand it. 

Last, well-defined plans and pre-established resources to resolve 

systemically important CCPs in the case of an event are still needed. If a CCP is no longer a viable entity, it must be resolved in a 

manner that is not disruptive to the marketplace, and without public support. An effective resolution plan does not result in winddown or liquidation, it means having tools and resources to replenish the default fund and regulatory capital, and reopen for business 

15

1http://www.g20.utoronto.ca/2009/2009communique0925.html. 

with a recapitalized CCP that can continue to provide these critical 

services to the market. 

Thank you, and I look forward to taking questions. 

[The prepared statement of Ms. Rosenberg follows:]

PREPARED STATEMENT OF MARNIE J. ROSENBERG, GLOBAL HEAD, CLEARINGHOUSE

RISK AND STRATEGY, JPMORGAN CHASE & CO., NEW YORK, NY 

Introduction 

Chairman Scott, Ranking Member Scott, and Members of the Subcommittee, 

thank you for holding this hearing and for extending JPMorgan Chase the opportunity to present our views. My name is Marnie Rosenberg, and I am the Global 

Head of Clearinghouse Risk and Strategy within JPMorgan Chase’s independent 

Risk Management Function. 

We appreciate the Committee’s leadership in holding this series of hearings to review implementation of the derivatives reforms agreed by the Group of Twenty 

(G20) in 2009.1 It is and will continue to be important to ensure the objectives of 

increased transparency and a reduction in systemic risk are being met, while also 

monitoring the impact on the derivatives markets and the ability for businesses to 

access those markets to manage risk. 

As this Committee knows well, American companies use futures and swaps to 

manage a wide variety of risks they encounter in their day-to-day business, such 

as interest rate risk when companies borrow money, currency risk when they sell 

their goods overseas or commodity risk posed by fluctuations in prices of raw materials used in production. 

JPMorgan works with companies from all industry sectors who seek to hedge 

their risks in the swaps markets, which allows them to do so in a flexible and customized manner that is not possible in the exchange-traded markets. We serve endusers by providing liquidity, financing and customized risk management solutions 

across markets, including energy, metals and agricultural markets. 

In addition, JPMorgan is a leading provider of access to clearing across the globe, 

with fifty-four memberships at forty-two clearing houses, or ‘‘CCPs’’ that offer futures and/or swaps clearing. In addition to its clearing memberships, JPMorgan provides services directly to CCPs globally, acting as a liquidity provider, cash manager, investment advisor, settlement bank and custodian. 

I lead a team that focuses on understanding current and proposed CCP structures 

and identifying, mitigating and reducing membership risk and exposures to enhance 

how JPMorgan measures and manages our exposure to CCPs. We apply this experience and expertise to develop policy recommendations on CCP risk issues and to 

proactively engage in policy discussions affecting CCPs to best ensure a safe and 

sound financial system. 

Today, I will focus on the importance of robust risk management frameworks at 

CCPs to the safety and soundness of the financial system. 

Overview of State of Reform 

Following the financial crisis, the leaders of the G20 nations agreed to a series 

of measures to increase the transparency of the over-the-counter (OTC) derivatives 

market and to reduce systemic risk. The reforms agreed to by the G20 included 

clearing of standardized OTC derivatives through CCPs, trading of standardized 

OTC derivatives on electronic platforms where appropriate, higher capital and minimum margin requirements on non-centrally cleared contracts, and requiring that 

all OTC derivatives transactions be reported to trade repositories. 

Global initiatives have been underway to implement these changes for some time 

and they are in various states of legislation, regulation, and implementation. Many 

of these reforms have brought significant progress in a number of key areas, including: mandatory registration and regulation of swap dealers; mandatory clearing of 

standardized contracts between financial firms; greater pre- and post-trade transparency through public reporting requirements; and execution of certain standardized contracts on swap execution facilities (SEFs). 

The Commodity Futures Trading Commission (CFTC) has written and adopted 

the bulk of regulations required to implement swaps market reforms under Title VII 

of the Dodd-Frank Act. These and other reforms, taken together, have reduced risk 

in the system and have facilitated greater transparency for regulators and market 

participants. They have also fundamentally altered the market structure of swaps: 

16

2http://www2.isda.org/functional-areas/research/research-notes/. 

how and where these instruments are traded, the economics of transactions, the nature of products available to American companies and the liquidity and efficiency 

of these markets. And as I will discuss later in my testimony, mandatory clearing, 

in particular, has intensified the importance among regulators and market participants for CCP risk management standards across all clearinghouses, not just those 

that clear derivatives. This development is a positive outcome for overall market 

stability but our work is not yet complete. CCPs have now become deeply interconnected and core to our derivatives markets but we have yet to fully evolve their 

risk management and governance models to reflect this increasingly critical role. 

This change in market structure is demonstrated by the fact that, for the interest 

rate swap markets as of the first quarter of 2016, 82.5% of the average daily notional value is now centrally cleared, and nearly 1⁄2 of the average daily trading activity is executed on a swap execution facility.2 In contrast, in 2013, only 57.7% of 

the average daily notional value of interest rate swaps market was centrally cleared. 

Now that the rules are largely in place and cleared volumes have increased, it 

is important for the CFTC and other policymakers to: (1) consider the implications 

of the changes to the derivatives markets, such as the growing importance of central 

counterparties to financial stability, and fragmentation in swaps markets; (2) review 

how emerging risks might best be managed and mitigated; and (3) determine 

whether adjustments to the rules or additional guidance may be appropriate to ensure the markets continue to meet the needs of all market participants. 

The following observations and recommendations should be considered as the 

Committee and the CFTC continue their ongoing work in this area:

• Mandatory clearing requirements can reduce risk in the derivatives markets. As 

the volume of centrally-cleared contracts has increased, however, so has the importance of CCPs as sources of systemic risk. Expectations are that CCPs will 

only continue to grow in size, importance and inter-connectedness.

• Inter-connectedness among systemically-important CCPs and clearing members 

has increased across jurisdictions. Global CCPs share a common set of large 

members, raising the likelihood that a default at one CCP will have a cascading 

effect across the globe. These connections must be mapped and well-understood, 

and broader industry preparedness is needed to ensure that member default can 

be contained.

• It is critical for policymakers, regulators and market participants to review the 

existing CCP risk management, governance and oversight models to ensure 

they are commensurate with the systemic risk they now pose. Stakeholders 

need to ensure that sufficient safeguards are in place to promote the resilience 

of CCPs, and that there are robust plans in place to manage extreme stresses 

to the financial strength of a CCP without the use of public money. Similarly, 

operational resiliency is of paramount importance, requiring strong operational 

risk and cybersecurity risk management. Specifically:

» CCPs should be subject to enhanced resiliency standards.

• Effective risk governance is the fundamental building block for resilient

CCPs. CCPs should be subject to global minimum governance standards

and ‘‘skin in the game’’ requirements to promote effective alignment of interests and proper risk management.

• CCPs should be transparent to market participants regarding their risk

methodologies used to size their aggregate financial safeguards. Higher

minimum standards are needed for CCP stress testing frameworks, and

standard regulatory-driven, disclosed stress test frameworks should be implemented to provide confidence in the adequacy of loss absorbing resources

held by CCPs.

• Regulators, CCPs and clearing members globally should work together to

implement and test default management protocols in a coordinated manner

across CCPs.

» Robust recovery tools should avoid pro-cyclicality and market destabilization.

• A CCP’s ability to make cash calls on its members as part of recovery must

be very limited and subject to a consistent global standard.

• Use of novel recovery tools, such as contract tear-up or gains haircutting,

have the potential to impose unpredictable losses on participants and

should be limited in CCP recovery and overseen by an impartial authority.

17

3http://www.sifma.org/issues/item.aspx?id=8589958563; http://www.commoditymkts.org/

wpcontent/uploads/2015/11/CMC-MFA-Leverage-Ratio-Letter-End-User-Impact-Final.pdf. 4https://www.esma.europa.eu/regulation/post-trading/otc-derivatives-and-clearing-obligation. 5https://www.jpmorganchase.com/corporate/About-JPMC/document/resolution-planccps.pdf. 

» Resolution plans should ensure continuity of clearing services while 

minimizing risks to financial stability and to taxpayers.

• At the same time, new capital requirements under the leverage ratio do not 

adequately reflect exposure from cleared derivatives and have made it difficult 

for many clearing member banks to offer clearing services. End-users are beginning to feel the impact of this constraint through reduced access to clearing and 

increased costs.3 This creates a distinct tension between the safety and soundness objectives of prudential regulators and those of market regulators, like the 

CFTC, responsible for implementing the G20’s clearing mandate to reduce risk 

in the derivatives markets. 

• The recent agreement between the CFTC and the European Commission with 

regard to recognition of U.S.-based CCPs by European authorities was a critical 

development in ensuring a global market for swaps. It also underscores the importance of cross-border coordination on an ongoing basis among regulators 

around the world, particularly as U.S. and EU authorities begin discussions related to trading venue equivalence.

• Finally, the use of SEFs is an important mechanism for enhancing transparency 

in the swaps markets. Minor adjustments to the CFTC’s rules setting out the 

process for determining swaps mandated to be traded on a SEF and the modes 

of execution permitted would help to mitigate unnecessary reductions in liquidity that have been widely observed since the SEF rules went into effect. 

The New Clearing Ecosystem 

I. CCP Resiliency, Recovery and Resolution 

One of the key components of the G20 agenda on derivatives reforms was mandating the use of CCPsfor the clearing of all standardized OTC derivatives contracts. A CCP interposes itself betweencounterparties to a derivatives transaction, 

whereby the CCP becomes the buyer to every seller and theseller to every buyer. 

The use of CCPs creates numerous benefits for market participants and thefinancial 

system by providing for centralized risk management and processing as well as risk 

reductionthrough collateralization of trades and multilateral netting. 

The increased use of CCPs has led to concentration of credit, liquidity, operational 

and legal risk arising from OTC derivatives in a small number of the large global 

CCPs. These risks are now centrally managed by CCPs themselves and market participants must rely upon CCPs to maintain appropriate membership criteria and 

risk management standards, and conduct ongoing, adequate member due diligence. 

This dependency upon CCPs to maintain strong risk management standards existed 

prior to the introduction of mandatory swaps clearing but has now become more 

pressing as mandatory clearing in multiple jurisdictions has led to further concentration of risk while, at the same time, market participants no longer have the 

option to execute and clear bilaterally if they become concerned with a CCP’s risk 

management protocols. While mandatory clearing has been in effect in the U.S. for 

nearly 3 years, market participants will need to begin complying with the European 

Union’s (EU) clearing requirement for OTC derivatives products later this month.4

Other jurisdictions have also moved forward with mandating the use of CCPs for 

certain standardized OTC derivatives. Further, as rules imposing margin requirements on swaps that are not cleared are implemented beginning in September 2016, 

an even greater use of CCPs is anticipated from market participants seeking to voluntarily clear additional products to benefit from margin efficiencies and multilateral netting that can be gained through clearing. 

Due to JPMorgan’s role as a significant clearer in global derivatives markets, it 

is imperative that we understand our own exposure and risks to CCPs, and evaluate 

how and whether the current regulatory and legal structures for CCPs are sufficiently suited to their growing importance to the financial system. This is why 

JPMorgan published a paper in 2014 called ‘‘What is the Resolution Plan’’ for CCPs.5

In the current derivatives clearing ‘‘ecosystem’’, policymakers and market participants need to address some key questions:

• Are CCPs sufficiently resilient that they can withstand a clearing member(s) 

default or major loss through sufficiently strong first line of defense measures: 

are membership criteria robust, is eligible collateral limited to the highest qualVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00021 Fmt 6633 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
18

6http://www.bis.org/cpmi/publ/d101a.pdf. 

ity liquid assets and are products that are cleared sufficiently liquid, standard, 

and suitable for clearing?

• Do CCPs have adequate plans to recover from such a loss and carry on offering 

critical services?

• If CCPs can’t recover, do they have adequate plans to continue to provide critical services and ensure the failure of a CCP does not cause wider market instability or require taxpayer assistance?

In response, we have come a long way, but more work is needed. 

Currently, CCPs are expected to meet higher regulatory and risk management 

standards, including internationally agreed to standards published by the Committee on Payments and Market Infrastructure (CPMI) and the International Organization of Securities Commissions (CPMI–IOSCO) in 2012, referred to as the Principles for Financial Market Infrastructures (PFMIs) 6 as implemented in the U.S. by 

CFTC rulemakings under authorities in Title VII and Title VIII of the Dodd-Frank 

Act. Nevertheless, regulators around the world have acknowledged that more work 

is needed, and CCPs have become a high priority on the agenda for global financial 

regulatory standard-setting bodies, including the Financial Stability Board and 

CPMI–IOSCO and we expect this focus to continue. These bodies are largely comprised of regulators, central bankers and in some cases, finance ministries from the 

U.S. and around the world. 

CCPs Should be Subject to Enhanced Resiliency Standards 

A resilient CCP should have the ability to withstand severe stress events such as 

clearing member defaults, and this can be achieved by having strong membership 

requirements to ensure the soundness of its clearing members while also ensuring 

fair and open access, robust risk management standards and adequate capital and 

liquidity resources. A resilient CCP must also be able to have sufficient controls and 

protections in place to withstand significant losses stemming from non-default 

events, such as fraud or a cybersecurity attack. 

There are four key recommendations on how to improve CCP resiliency and 

strengthen the clearing ecosystem:

(1) Effective risk governance is the cornerstone of resilient CCPs. CCPs 

should be subject to global minimum risk governance standards and 

‘‘skin in the game’’ requirements to promote effective alignment of interests and to incentivize strong risk management.

Many CCPs have migrated from being utilities owned by members to private forprofit institutions. This shift introduces an inherent tension and potential conflict 

of interest between a CCP’s role as a market utility that can mutualize potential 

losses among its members and its commercial objectives to increase revenues and 

earnings/dividends for its shareholders and market share. The fact that its members 

bear the losses also introduces an element of moral hazard. 

CCPs make key decisions impacting the risk profile of the CCP and its membership, with respect to the products that can be cleared, the members who participate 

in the CCP, the framework used to mitigate the risk brought in by participants, the 

type of collateral that can be posted and the aggregate amount of safeguards to 

maintain. However, it is clearing members of the CCPs that bear the capital consequences of any losses, through the collective funds (the ‘‘default fund’’) they provide to the CCP for loss mutualization. Therefore, CCP risk governance structures 

should evolve to ensure that those that bear potential losses and market risk as 

part of default management have a meaningful voice with regard to how risk is 

brought into the CCPs. Governance needs to be commensurate with the changed 

role of CCPs and the new responsibilities that CCPs have within the financial system. This can be achieved by mandatory, meaningful consultation and inclusion in 

the decision making process for clearing members, availability of appropriate, funded amounts of a CCP’s own resources (‘‘skin in the game’’) and increased capital 

available at the end of the waterfall. 

Governance. Members themselves must have more of a say in material risk decisions that are made by the CCP as it impacts their own capital contributions 

through the default fund. Current U.S. regulation does not require CCPs to incorporate and demonstrate input from clearing members or CCP risk committees early 

in the process with respect to key risk management decisions impacting clearing 

members’ liability. CCPs globally should therefore be required to obtain input from 

their clearing members and the CCP’s relevant risk committees on all material risk 

matters such as products that can be cleared, changes to loss mutualization rules, 

19

7https://www.theclearinghouse.org/issues/articles/2015/09/20150918-tch-comments-to-cpmiiosco-on-ccp-riskgovernance. 8http://www.bis.org/cpmi/publ/d101a.pdf. 9http://www.bis.org/cpmi/publ/d125.pdf.

and post-default risk management decisions. CCPs should be required to maintain 

records and report any conflicts between CCP decision, risk committee opinion and 

clearing member views. In addition, consistent global standards are needed with respect to a CCP’s risk committees. Risk committees should be required to have clearly-defined mandates, diverse memberships, and minimum member qualifications. 

The risk committee representatives should provide an independent, expert opinion 

on a CCP’s risk management strategy and the impact of a CCP’s actions on CCP 

and member stability, market integrity and clients.7 If the views of a CCP’s risk 

committee are not incorporated by the CCP in making key risk management decisions, the CCP should be required to document and disclose to regulators how the 

risk committee’s views have been addressed. 

‘‘Skin-in-the-game’’. CCPs should be subject to a meaningful risk-based minimum contribution to the guarantee fund ahead of non-defaulting members called 

‘‘skin in the game’’ (SITG). While many CCPs currently contribute such capital to 

their overall financial safeguards, the current level of CCP contributions, at generally less than 5% of the member default fund, are not sufficient. The CFTC currently does not require CCPs to have minimum SITG capital contributions. CPMI–

IOSCO is expected to issue a market consultation this year to set global standards, 

which is a welcome and positive development. Having a risk-based, minimum level 

of SITG would appropriately align incentives amongst the CCP and its members 

and ensure proper risk management and governance. Aligning and scaling CCP contributions with those of the largest clearing members will also help to ensure that 

membership requirements remain strong and will limit the possibility that any single member becomes too large as a proportion of total risk. 

CCP Capital. The current minimum CFTC and global capital requirements for 

CCPs should be reviewed. Currently, CCPs are required to cover at least 6 months 

of operating expenses under CPMI–IOSCO standards and twelve months under 

CFTC requirements. This is primarily meant to cover business and operating risk 

and any losses that arise by a non-member default event such as cyber risk, technology failure, or fraud. However, CCP capital should be available for both default 

and non-default losses. Members should not be responsible for non-default losses. 

This should be the responsibility of the CCP’s shareholders. The size and impact of 

such events are untested and the current capital levels may be insufficient to cover 

losses. Sufficient standards are needed to address operational risk, and in particular, cyber-risk through investments in expertise and ensuring infrastructures to 

handle these risks are adequate. This is front and center on the international regulatory agenda and the work done by CPMI–IOSCO and the CFTC to address these 

risks through consultations on cybersecurity and operational controls is another welcome and positive development.

(2) CCPs should be more transparent to market participants regarding 

risk methodologies used to size their aggregate financial resources to 

cover the largest single (or two) member defaults.8

Clearing members and their clients must have access to and transparency around 

the methodologies used by CCPs to develop financial safeguards in order to identify 

and manage the risks inherent in using a specific CCP. For example, transparency 

regarding stress scenarios used by a CCP to determine the size of financial safeguards is necessary to provide clarity to participants on whether the CCP has sufficient resources to absorb default losses. 

While the industry has made significant progress on CCP transparency over the 

last 3 years, more must be done. Regulators around the world continue to voice support for market participants’ calls for transparency and now require public disclosures through the CPMI–IOSCO quantitative disclosures standard that was published in February 2015.9 Current, standard disclosures are useful to participants 

on many levels but these disclosures alone are not sufficient as they do not permit 

CCP users to replicate margin models and do not provide details of the stress scenarios that a CCP has determined it will be able to withstand. The more market 

participants can adequately measure and manage their credit risks to CCPs, the 

more confidence the system will have that CCPs have sufficient resources to withstand a crisis. 

(3) More prescriptive, minimum global standards are needed to govern 

CCP stress testing along with the establishment of standard reguVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
20

10 In July of 2015, ISDA sent a letter to CPMI–IOSCO setting out the industry’s principles 

for CCP stress testing: www.isda.org.

latory-driven, disclosed stress test frameworks to provide confidence 

in the adequacy of aggregate financial safeguards held by CCPs.

Adequate stress testing of CCP members and their client portfolios is key to evaluating whether a CCP has sufficient resources should a clearing member(s) default. 

To ensure this, a CCP’s financial safeguards should be sized based on CCP-designed 

stress test frameworks that are subject to minimum and more prescriptive standards that are transparent to clearing members and other market participants. In 

addition, there should be regulatory-driven stress tests that then provide oversight 

and inform supervisory requirements by evaluating the adequacy of the CCP’s financial safeguards with appropriate consequences should a CCP fail the test. 

There has been significant progress towards enhanced standards for stress testing,10 and CPMI–IOSCO is expected to issue a consultation with additional guidance for CCPs in the third quarter of 2016. In addition, European regulators recently conducted stress tests of CCPs in Europe, and it is important that such a 

framework is extended to CCPs globally. 

(4) Regulators, CCPs and clearing members globally should work together to develop, implement and test standard default management 

protocols in a coordinated manner across CCPs.

It is important for policymakers to consider that a large clearing member default 

could occur simultaneously at multiple CCPs and that CCPs are highly dependent 

upon non-defaulting members to help manage the default, participate in the default 

management process and absorb the defaulter’s portfolio with its associated market 

risks. A CCP’s dependency upon the resources and expertise of its broader membership to achieve a successful default management outcome cannot be underestimated, 

and market and prudential regulators, CCPs and all of their participants have a 

vested interest in making sure this happens. Currently, while each CCP tests its 

default management protocols with its members through default management fire 

drills, these drills are done in isolation and not in collaboration with other CCPs. 

An extreme market stress event that occurs across CCPs in multiple jurisdictions 

could severely constrain the ability of non defaulting members to respond effectively. 

In order to ensure market preparedness for such an event, a coordinated approach 

to drills under the joint oversight of relevant regulators, and a push for more standardized default management protocols among global CCPs is necessary. As an example, a recent joint default management exercise run by UK and German authorities 

coordinated across two CCPs, LCH and Eurex, was an important step in the right 

direction. However, more is needed, including involvement of U.S. CCPs and authorities in future work. This will be a topic at an upcoming Market Risk Advisory 

Committee meeting at the CFTC, for example, which is a very welcome development. 

Robust Recovery Tools Should Avoid Pro-Cyclicality and Market Destabilization 

Focusing on CCP resilience is a necessary first step, but it is not sufficient on its 

own. To the extent that resiliency measures are not sufficient, CCPs are required 

to have robust recovery plans that ensure continuity. ‘‘Recovery’’ refers to the ability 

of a CCP to recover from a threat to its viability so that it can continue providing 

its critical services without entering into resolution or insolvency. While efforts are 

appropriately focused on reducing the likelihood of any CCP entering recovery, it 

is important that CCPs are prepared through comprehensive and effective recovery 

plans that are also transparent, measurable and acceptable to members who bear 

the majority of the risk. 

In 2013, the CFTC adopted rules requiring systemically important CCPs to comply with international standards for CCPs, including a requirement to maintain viable recovery plans. Since that time, U.S. CCPs have been revising their end of waterfall rules to put in place robust processes, agreements and defined tools to support recovery. 

Clearly defined, transparent, and robust ex ante CCP recovery plans that do not 

lead to destabilizing and pro-cyclical effects are essential. Specifically:

(1) A CCP’s ability to make cash calls on its members as part of recovery 

must be very limited and be subject to a consistent global standard.

Currently, CPMI–IOSCO and the CFTC do not prescribe rules with respect to the 

number of cash calls that a CCP can impose upon its members. This has led to 

CCPs implementing varied rules which make it difficult for members to measure 

21

11The Clearing House and the International Swaps and Derivatives Association recommended 

in a recent industry paper that authorities should consider the ‘‘implementation by CCPs of arrangements to maintain replenishment resources that could be used to backstop the timely replenishment of the default fund on an interim basis (or any failure of a clearing member to perform its replenishment obligation).’’

and manage their own exposures. The interconnectedness among CCPs suggests 

that there could be multiple, simultaneous cash calls on the same clearing members. 

In the absence of limits, the cash calls may not be reliable, particularly in a stressed 

market, and could lead to liquidity and funding issues that would be vectors for further financial instability.

(2) Use of novel recovery tools, such as contract tear-up or gains 

haircutting, have the potential to impose unpredictable losses on participants and should be limited in CCP recovery and overseen by an 

impartial authority.

Gains haircutting is a tool for allocating losses in recovery that is being implemented by CCPs to satisfy their regulatory requirement to ensure comprehensive 

loss allocation. This tool allows CCPs to reduce any payments it owes to participants. Most importantly, it could lead to disproportionate distribution of losses to 

certain market participants, which could in turn incentivize such participants to 

take actions with respect to their positions that are destabilizing or otherwise inhibit the CCP’s recovery. 

Similarly, CCPs have proposed partial tear-up as a way to restore the CCP to a 

matched book should default management protocols fail to successfully liquidate the 

defaulter’s portfolio. The CCP would tear-up positions of the defaulter and those 

non-defaulting participants that hold equal and offsetting positions at a price determined by the CCP. Because this tool would be used during a period of illiquidity, 

establishing a fair market price would be quite challenging and subjective on the 

part of the CCP. 

A CCP’s decision to use recovery tools like gains haircutting and partial tear-up 

should be overseen by an impartial authority, and require compensation to be paid 

by the CCP to participants who suffer losses. While the CPMI–IOSCO recovery report already contemplates compensation in particular, U.S. regulators should consider issuing guidance in this regard.

Resolution plans should ensure continuity of clearing services while 

minimizing risks to financial stability and to taxpayers.

If a CCP is no longer a viable entity for the performance of its critical functions, 

it should be resolved in a manner that is not disruptive to the marketplace, is not 

reliant on taxpayer assistance and allows for operational continuity of a newly capitalized entity under new ownership that can continue its critical functions. 

The trigger point for resolution should be the point at which the exercise of recovery tools becomes too destabilizing for the market, threatens the sustainability of 

the CCP or when the CCP is otherwise near or in default. As opposed to recovery, 

a resolution would be managed by resolution authorities, such as the Federal Deposit Insurance Corporation (FDIC) in the U.S., and could lead to a change in ownership, a write-down of the CCP’s equity and the replacement of the CCP’s management. 

Resolution authorities should develop public sector playbooks or action plans that 

facilitate continuity, are made available to participants on a confidential basis, address default and non-default losses and provide resolution authorities with appropriate flexibility to determine the entity to be put in resolution. In addition, CCP 

resolution plans should not interfere with the resolution plans of clearing members, 

or lead to contagion in other services or segments cleared by the CCP, and should 

minimize risks to market participants and the broader financial system. CCP resolution plans should also specify ex-ante resources for the recapitalization of the CCP 

with respect to both regulatory capital as well as default fund replenishment so that 

it can re-open for business and provide its critical services without taxpayer assistance.11

The resolution regime in the U.S. currently provides for CCPs to be resolved 

under Title II of Dodd-Frank, but it does not provide any further framework regarding the tools or resources that can be used to resolve CCPs. Further work needs to 

be done to confirm how a Title II resolution would be effectuated for the different 

ownership and capital structures of systemically-important CCPs. 

Recognizing the need for greater prescription, the Financial Stability Board (FSB) 

is expected to consult later this year on further guidance on strategies and tools for 

CCP resolution, such as the resources that can be used, the structure to be adopted, 

22

12http://www.sifma.org/issues/item.aspx?id=8589958563; http://www.commoditymkts.org/

wpcontent/uploads/2015/11/CMC-MFA-Leverage-Ratio-Letter-End-User-Impact-Final.pdf 13http://www.cftc.gov/PressRoom/PressReleases/cftc_euapproach021016. 

the legal framework to be applied, the authority responsible for resolution, and 

cross-border coordination issues in the context of a CCP resolution. U.S. regulators 

should issue new guidance in line with the FSB’s recommendations, which would 

also support future equivalence discussions with various jurisdictions. 

II. Capital Constraints are Reducing Access to Clearing for Market Participants 

This Committee and the CFTC should be complimented for their leadership in examining the impact of the leverage ratio on the cost of clearing for end-users and 

other market participants. Clearing members are fully responsible to the CCP for 

the performance of the transactions they clear for their clients, and clearing members collect margin from those clients to offset their exposure to them. The margin 

collected by clearing members is segregated from our own funds as required by the 

Commodity Exchange Act and firms cannot leverage it. 

The Basel Committee’s leverage ratio proposal, however, does not recognize the 

exposure reducing effect of the margin collected, and does not allow firms to offset 

off-balance exposure arising from client transactions against the value of the margin 

maintained in segregation. 

This approach creates a disincentive for many clearing member banks to offer 

clearing services due to the higher capital requirements, a result at odds with the 

G20 mandate to move more derivatives into central clearing. End-users are already 

seeing the effects of this approach, as there are fewer banks offering clearing services and end-users are already seeing the price of clearing increase.12

In its recent consultation regarding revisions to the leverage ratio, the Basel Committee did seek input from stakeholders regarding the impact of the failure to recognize initial margin as an offset, on the cost of clearing. An industry-wide response 

is being prepared to demonstrate the reduction in access to clearing for end-users, 

and we appreciate and look forward to the continued support of this Committee. 

III. Mutual Recognition of CCPs is Key to a Global Derivatives Market 

The G20 leaders’ 2009 agreement on derivative reform included a commitment to 

undertake reform without causing market fragmentation. This is an important goal 

given the global nature of the derivatives market. In practice, despite common objectives, technical and legal differences in national rule implementation have led to 

concerns around regulatory conflicts, inconsistencies, arbitrage, gaps and duplicative 

requirements which could undermine this goal. Subsequent G20 communique ́s have 

emphasized the need for regulators to address these issues. 

The lengthy negotiation between U.S. and EU authorities on EU recognition of 

U.S.-based CCPs regulated by the CFTC illustrates the challenges faced. Policymakers had struggled to reach agreement due in part to differences in the applicable initial margin regimes in each jurisdiction. Following negotiations lasting over 

2 years, in February 2016, the CFTC and European Commission announced a ‘‘Common Approach’’ regarding requirements for CCPs.13 This was a welcome development, alleviating prolonged uncertainty which had been detrimental for market participants in the U.S. and EU, as well as in other jurisdictions seeking recognition 

in these markets. 

The agreement between EU and U.S. authorities is critical to mitigating unnecessary reductions in cross-border trading and market liquidity by ensuring market 

participants across both continents have continued access to CCPs in each other’s 

markets, and to prevent European banks from facing punitive capital requirements 

for exposures to U.S.-based CCPs. 

The process will help to instruct and streamline future equivalence and substituted compliance determinations between U.S., EU and other authorities, particularly with respect to equivalence for trading venues and substituted compliance for 

clearing, trade execution and margin requirements, to ensure that derivative markets remain global, liquid and resilient. It is important that regulators focus on thematic and outcomes-based determinations, rather than pursuing a granular element-by-element approach. It is also important to recognize that markets are global 

and that the global economy benefits most if capital is able to freely flow across 

those markets. 

Trade Execution and the Implementation of the SEF Mandate 

I. Evolution in Swaps Execution 

Title VII of the Dodd-Frank Act established a comprehensive regulatory framework for swap trading platforms with the intent of furthering two policy objectives: 

23

14https://www2.isda.org/functional-areas/research/research-notes/. 15 A request-for-quote system is a type of electronic bidding solicitation in which a requester 

(i.e., a client) seeks bids from several dealers to provide a price quote for the execution of a particular swap. 16https://www2.isda.org/functional-areas/research/research-notes/. 

(1) increasing pre-trade transparency to market participants before the point of execution; and (2) promoting trading on regulated exchanges. To achieve these objectives, Title VII created new types of trading facilities for swap execution known as 

swap execution facilities (‘‘SEFs’’), established core principles for the orderly and efficient operation of SEFs and introduced a requirement that certain swaps subject 

to the trade execution requirement in Section 2(h)(8) of the Commodity Exchange 

Act (‘‘CEA’’) be traded on or pursuant to the rules of a SEF or traditional exchanges 

(designated contract market (‘‘DCM’’)). 

In June 2013, the CFTC adopted final rules that, among other things, defined 

which trading facilities and platforms must register as SEFs, established prescriptive requirements for SEFs to operate in accordance with SEF core principles and, 

although not expressly required by Dodd-Frank, created a process for determining 

which swaps are subject to the CFTC’s trading mandate (‘‘Mandated Swaps’’). That 

process is commonly known as the ‘‘made available to trade’’ or ‘‘MAT’’ process. The 

CFTC’s final rules’ further required that all multiple-to-multiple trading platforms 

that list swaps to register as SEFs, even if those platforms do not offer Mandated 

Swaps for trading. 

Since the CFTC’s final trade execution rules came into force in October 2013 and 

the introduction of SEFs the CFTC’s reforms have brought greater transparency, 

better price information and significant enhancements to market integrity. Notwithstanding these achievements, research shows that global derivatives markets have 

fragmented along geographic lines.14

These rules require all electronic trading platforms that provide access to U.S. investors for swap execution to register with the CFTC as SEFs. Under the CFTC’s 

final rules, Mandated Swaps must be executed on a SEF or DCM through an electronic order book or a request-for-quote system that operates in conjunction with an 

order book.15 This trading requirement has fundamentally changed the trading protocols and widely-accepted trading practices that were in place for market participants before the adoption of the CFTC’s final rules. 

In February 2014, the first series of swaps became subject to the CFTC’s trading 

mandate. As of that date, all U.S. persons (and non-U.S. persons trading with U.S. 

persons) had to trade Mandated Swaps on registered SEFs or DCMs and all SEFs 

and DCMs that listed Mandated Swaps were required to do so in accordance with 

the CFTC’s final rules. 

II. Market Impact of the CFTC’s Final Rules 

In effect, since the CFTC’s trade execution requirements are restrictive and burdensome, non-U.S. market participants are choosing not to trade on SEFs. In addition, since the CFTC has not establish a process of recognizing non-U.S. trading 

venues that are subject to comparable regulatory oversight, U.S. participants have 

limited access to these non-U.S. based platforms and arguably non-U.S. liquidity 

pools. 

These unintended consequences are most evident in the global interest rate swap 

markets which have inhibited market participants from getting better pricing on derivatives resulting from varying levels of market fragmentation. This pattern is 

most persistent in euro-denominated interest rate swaps (IRS), where the vast majority of trading activity occurs between European dealers. ISDA research finds that 

91.2% of cleared euro IRS activity in the European interdealer market was transacted between European counterparties in December 2015. In September 2013, immediately prior to the introduction of the SEF rules, this figure stood at 70.7%.16

Although concerns over best pricing have been discussed for almost 3 years, there 

are no signs currently that this trend is reversing. CFTC Chairman Massad’s recent 

statements that suggest the CFTC is planning to make some adjustments to their 

final trade execution rules are welcome and important for promoting market efficiency. In this regard, market participants have put forth recommendations to improve pricing and restore liquidity in the derivatives markets, while still achieving 

the objectives of the reforms. 

III. Market Participants Want Additional Choice in Execution and Greater Flexibility 

in SEF Rules 

As noted above, the CFTC’s final rules require SEFs to provide execution methods 

that may include either an order book (similar to an exchange) or a request for 

24

17 7 U.S.C. 1a(50) (2015). 

quote to a minimum of three participants. Many of our U.S. clients want flexible 

trading requirements and protocols that will provide competitive and efficient execution based on the unique characteristics of a particular product. 

The Dodd-Frank Act does not require that SEFs only execute transactions by 

means of an order book or a request-for-quote system to three. Such a restrictive 

interpretation contradicts Congressional intent to allow swaps to be traded by ‘‘any 

means of interstate commerce,’’ discourages trading of swaps on SEFs and hurts 

pre-trade price transparency.17 The CFTC’s restrictive interpretation makes it difficult to achieve the broad goal of global swaps trading envisioned by the G20 member countries. In Europe, policymakers and regulators intend to allow derivative 

contracts that are subject to the trading obligation to be traded on a number of centralized venues, which offer more flexible methods of execution than provided for 

under the CFTC’s SEF rules. 

There are achievable ways in which to reduce the undesirable regulatory outcomes that threaten the efficient functioning of the swaps markets, reduce barriers 

to market access for U.S. market participants looking to trade abroad and for nonU.S. market participants wishing to trade efficiently in the United States, and minimize roadblocks to an effective cross-border regulatory regime, while preserving increased transparency and market integrity. 

The CFTC should consider amending its rules to allow the CFTC, under certain 

circumstances, to approve additional methods of execution for Mandated Swaps. In 

addition, adjusting SEFs’ execution models could facilitate a path toward achieving 

a substituted compliance regime for derivatives trading. 

IV. The MAT Process Should Give the CFTC Decision-Making Authority With Regard to Products Mandated To Be SEF Traded, and Market Participants Should 

Have the Opportunity To Provide Input 

Under the current MAT process, a SEF or DCM files with the CFTC, identifying 

the swap or swaps that will be subject to the CFTC’s trading mandate. The only 

requirements or regulatory standards that the SEF’s or DCM’s analysis must meet 

are that: (1) the swaps in the submission must already be subject to mandatory 

clearing; and (2) the submission must consider one of six factors, broadly defined. 

Depending on the type of submission, in either 10 or 30 days following the official 

filing date, the SEF’s MAT determination becomes law and applies to all SEFs, 

DCMs and market participants. SEFs are for-profit entities and this framework 

does not appropriately balance their commercial interests with the needs of market 

participants nor does it provide the CFTC with an adequate voice in the approval 

process. Specifically:

• The MAT process should require SEFs to provide a more granular explanation 

as to why a particular swap contains the requisite trading liquidity for mandatory trading. For example, SEFs should present additional quantitative and 

qualitative data as part of their MAT determination assessment.

• The public should be given the opportunity to provide comments to a SEF’s 

MAT determination submission through a public consultation process.

• The CFTC and not SEFs should make the final decision as to when a swap 

should be considered to be a Mandated Swap.

• The CFTC should view a swap’s availability for mandatory trading as a fluid 

determination. The SEF rules do not provide sufficient flexibility to both SEFs 

and SEF users to remove a certain swap from a MAT determination if the trading characteristics of the swap change such that it is no longer suited for trading through a SEF’s order book or through a request for quote to three participants.

Market participants understand the CFTC is actively evaluating reforms to the 

MAT process and such refinements would be welcome. 

IV. Trading Venue Equivalence Will Reduce the Risk of Further Market Fragmentation and Promote Trading Liquidity Between U.S. and Non-U.S. Markets 

Other jurisdictions are at various stages of developing their own trade execution 

regulatory regimes. For example, the EU is in the process of developing its trading 

proposals, and its trading obligation is not expected to be implemented until 2018. 

Notwithstanding that foreign regulatory regimes are in their formative stages, it is 

encouraging that the CFTC has begun coordinating with foreign regulators to facilitate mutual recognition of trading platforms and trading requirements. 

25

To reduce the risk of market fragmentation and to enhance trading liquidity between U.S. and non-U.S. markets, the CFTC should apply the principles outlined 

in the Final Report issued by IOSCO Task Force on Cross-Border Regulation and 

recognize and highlight the broad commonalities between the U.S. and foreign regulatory regimes, rather than focus on the more technical, line-by-line differences between the underlying rules. 

The CFTC should compare its final trading rules with foreign regulations designed to achieve corresponding regulatory outcomes. Where these requirements are 

satisfied, the CFTC should provide that the foreign trading venues are exempt from 

SEF registration and compliance with the SEF rules, and that where a swap is subject to the CFTC’s trading mandate, the parties to such a swap may satisfy the obligation to comply with the CFTC’s trading mandate by executing such a swap on a 

foreign trading venue in accordance with applicable rules, regardless of their status 

as a U.S. person or otherwise. 

Congress directed the CFTC to exempt a trading venue from CFTC registration 

if the CFTC finds that the facility is ‘‘subject to comparable, comprehensive supervision and regulation on a consolidated basis by . . . the appropriate governmental 

authorities in the home country of the facility.’’ This creates concerns about the competitive harm to American companies resulting from differences in final regulations, 

the gap in implementation dates in Europe and other jurisdictions as well as confusion over the extraterritorial application of these provisions. Congress provided the 

CFTC with broad authority to exempt platforms to adopt such a restrictive approach 

to mutual recognition. To that end, market participants see this authority as a helpful mechanism by which Congress intended the CFTC to pursue a more flexible approach based on global regulatory collaboration. 

The work the CFTC and EU regulators have undertaken to date discussing these 

issues is important. In February 2016, both regulators announced the U.S./EU Common Approach, which market participants hope will result in greater harmonization 

of global trade execution standards. 

Conclusion 

We thank the Committee for the opportunity to share this perspective and we 

offer our assistance to policymakers in addressing issues that promote the viability 

of markets critical to end-users and economic growth. 

With the implementation of mandatory central clearing, CCPs have become an increasingly important component in the overall safety and soundness of the financial 

system. It is therefore critical that policymakers and market participants ensure the 

risk management frameworks in place at CCPs are sufficiently robust to reflect this 

enhanced role, particularly as central clearing is no longer optional for many market 

participants seeking to manage risk. 

Similarly, it is important for regulators to review the various new requirements, 

with regard to both market reforms and new prudential standards, to understand 

any interconnections and ensure objectives are aligned. The leverage ratio’s failure 

to recognize the exposure reducing effect of initial margin for client clearing is an 

example where regulatory objectives are at odds and it is already manifesting in reduced access to clearing services for some market participants. 

Last, minor adjustments to the CFTC’s SEF rules would support market efficiency, while maintaining the core objectives of enhanced transparency and market 

integrity.

The CHAIRMAN. All right, thank you, Ms. Rosenberg. 

Mr. Merkel. 

STATEMENT OF STEPHEN M. MERKEL, J.D., EXECUTIVE VICE 

PRESIDENT, GENERAL COUNSEL AND SECRETARY, BGC 

PARTNERS, INC.; DIRECTOR, WHOLESALE MARKETS

BROKERS’ ASSOCIATION, AMERICAS, NEW YORK, NY 

Mr. MERKEL. Thank you, Chairman Scott, Ranking Member 

Scott, and Members of the Subcommittee. 

My name is Stephen Merkel. My company, BGC Partners, is a 

leading global intermediary to the wholesale financial markets. I 

am testifying today as a Director and former Chairman of the 

Wholesale Markets Brokers’ Association, Americas, an independent 

industry body, representing the largest interdealer brokers. Each of 

26

our members has a CFTC-registered swap execution facility, or 

SEF. 

Mr. Chairman, it has been a long, strange trip, from the early 

versions of what would ultimately result in the Dodd-Frank Act, to 

the current state of affairs. Generally speaking, nothing has gone 

as planned. 

The SEF rules demonstrate an interpretation inconsistent with 

the new Commodity Exchange Act statutory authority. The subsequent SEF registration process highlighted numerous defects in the 

rules. As a result of these detours, we found, and find, ourselves 

in an environment of regulatory uncertainty, fragmented liquidity, 

and a need for course corrections by the CFTC. 

Looking forward, and putting it simply, we all need to support 

the CFTC to fine-tune its rules and enjoy harmonious relationships 

around the world. 

I credit highly the dedicated CFTC staff who completed an enormous amount of work, designing and implementing the architecture for a regulatory regime. CFTC staff has helped us through the 

registration process to become a SEF, accommodated us through 

the issuance of no-action letters, staff guidance, and interpretative 

statements. Unfortunately, this reactive and ad hoc process cannot 

easily cover every problem or need, and fails to provide the same 

regulatory certainty as APA compliant rules. 

My written testimony references a series of outstanding substantive issues that need to be resolved. We are encouraged by 

Chairman Massad’s recent statement that CFTC will seek to codify 

the existing no-action letters under the formal rulemaking process, 

and we urge them to address a wider set of issues in that release. 

There have also been pronounced market implications. Liquidity 

has fragment by jurisdiction as non-U.S. participants seek to avoid 

Dodd-Frank. 

My written testimony cites the recent ISDA research and the 

Bank of England staff study on this point. The research warns that 

there is no sign of this trend reversing. 

This arrangement is not sustainable, nor is it consistent with the 

visions set forth in Pittsburgh in 2009. Because this is a new regulatory framework, the CFTC should regularly analyze market data 

to study the impact of its rules. If ISDA and the Bank of England 

can do this, the CFTC should too. The research should be published, conclusions publicly commented on, and the resulting product should inform future policy initiatives. 

The path forward for any future mutual recognition process will 

need to resolve the awkward regulatory relationship among jurisdictions. Current comparison of Dodd-Frank in MiFID II raises 

questions about whether the two can coexist, including the CFTC’s 

past failed attempt to institute a qualified multilateral trading facility regime. 

There are also divergent approaches to the permitted methods of 

execution with, for example, MiFID explicitly identifying auction 

protocols. Furthermore, the CFTC’s reliance on no-action relief is 

a procedural tool that is not recognized in Europe. 

Mr. Chairman, I hope this Subcommittee will encourage the 

CFTC to make mutual recognition and equivalency a high priority. 

I would be pleased to answer your questions. Thank you. 

27

1The WMBAA is an independent industry body representing the largest inter-dealer brokers. 

The founding members of the group—BGC Partners, GFI Group, Tradition, and Tullett 

Prebon—operate globally, including in the North American wholesale markets, in a broad range 

of financial products, and have received permanent registration as swap execution facilities. The 

WMBAA membership collectively employs approximately 4,000 people in the United States; not 

only in New York City, but in Stamford and Norwalk, Connecticut; Chicago, Illinois; Jersey City 

and Piscataway, New Jersey; Raleigh, North Carolina; Juno Beach, Florida; Burlington, Massachusetts; and Dallas, Houston, and Sugar Land, Texas. For more information, please see 

www.wmbaa.com. 2See Leaders’ Statement, the Pittsburgh Summit, September 24–25, 2009, available at

https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_sum

mit_leaders_statement_250909.pdf. 3 Id.

[The prepared statement of Mr. Merkel follows:]

PREPARED STATEMENT OF STEPHEN M. MERKEL, J.D., EXECUTIVE VICE PRESIDENT, 

GENERAL COUNSEL AND SECRETARY, BGC PARTNERS, INC.; DIRECTOR, WHOLESALE

MARKETS BROKERS’ ASSOCIATION, AMERICAS, NEW YORK, NY 

Introduction 

Chairman Scott, Ranking Member Scott, and Members of the Subcommittee, 

thank you for providing this opportunity to participate in today’s hearing. 

My name is Stephen Merkel. I am the Executive Vice President, General Counsel 

and Secretary of BGC Partners, Inc. (‘‘BGC Partners’’), a leading global intermediary to the wholesale financial markets, specializing in the brokering of a broad 

range of financial products, including fixed income, interest rate derivative, foreign 

exchange, equity, equity derivative, credit derivative, listed futures, commodity, and 

structured product markets. BGC Partners was created in August 2004, when Cantor Fitzgerald separated its voice and electronic interdealer brokerage business from 

its dealer activities. 

I am testifying today in my capacity as a Director and former Chairman of the 

Wholesale Markets Brokers’ Association, Americas (the ‘‘WMBAA’’), which represents BGC Partners, GFI Group, Tradition, and Tullett Prebon.1 Each of the 

WMBAA member firms has registered a swap execution facility (‘‘SEF’’) with the 

Commodity Futures Trading Commission (‘‘CFTC’’). For each of the last 7 years, we 

have collectively hosted a 1 day conference in Washington or New York appropriately entitled ‘‘SEFCON’’ that explores the top issues facing our industry and 

over-the-counter (‘‘OTC’’) markets from both a domestic and global perspective. The 

WMBAA extends thanks to the Chairman and other Members of the Agriculture 

Committee who have attended and shared their thoughts at this marquee event. 

Thank you for inviting me to speak with you about the ongoing implementation 

of the September 2009 Pittsburgh G20 commitments to improve OTC derivatives 

markets.2 The WMBAA remains supportive of coordinated global efforts to promote 

trading on regulated venues, central counterparty clearing, and public reporting of 

standardized OTC derivative contracts in order to ‘‘improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.’’ 3

I welcome the chance to update you from the WMBAA’s perspective as it relates 

to implementation of trade execution regulations and the impact on global market 

conditions. 

In my written testimony, I will focus on the following points:

• First, the primary driver of the G20 commitments was to address systemic risk 

to our financial system. Trade execution in and of itself was not and has never 

been singled out as contributing to the financial crisis.

• Second, while not without challenges or material shifts in pre-existing market 

structure, markets are gradually adjusting to the new regulatory landscape and 

the new SEF trading environment. There remain significant efforts to ensure 

a globally coordinated approach is ultimately put in place. The CFTC should 

continue to review its rules, analyze their impact on market conditions, with 

quantifiable metrics, and adjust the regulations as appropriate.

• Third, important lessons should be learned from the prolonged clearinghouse 

mutual recognition negotiations so that trade execution venues do not have to 

endure the same experience. With liquidity provision services offered by SEFs 

in the United States (‘‘U.S.’’), multilateral trading facilities (‘‘MTFs’’), soon to be 

recognized organized trading facilities (‘‘OTFs’’) in Europe, introducing brokers, 

traditional broker-dealers, and others, global regulators should more carefully 

coordinate regulatory efforts so as to not fragment markets, reduce liquidity, 

28

4See ISDA SwapsInfo First Quarter 2016 Review, June 2016 (stating ‘‘[m]ore than half of average daily IRD trading activity was executed on a [SEF] during the first quarter: 52.6% by 

trade count and 56.0% by notional volume’’), available at http://www2.isda.org/attachment/

ODQxNg==/SwapsInfo%20First%20Quarter%202016%20Review%20.pdf. 5See id.

6See Letter from Timothy W. Cameron and Lindsey Weber Keljo, Asset Management Group, 

Securities Industry and Financial Markets Association to the CFTC, May 11, 2015, available 

at http://www.sifma.org/commentletters/2015/sifma-amg-submits-comments-to-the-cftc-in-response-to-commissioner-giancarlo-s-white-paper-and-in-regards-to-the-sef-regulatory-framework/. 

and increase costs to users by rupturing the existing methods by which U.S. 

and non-U.S. swap dealers, international banks, global asset managers, and 

end-users access competitive, transparent OTC markets in the U.S. or in other 

jurisdictions. We have already witnessed liquidity move across borders. Global 

regulatory gaps have not only promoted bifurcation of trading patterns but can 

be exploited to the detriment of investors.

• Finally, while some key implementation issues remain with the CFTC’s SEF 

rules, and I will highlight several today, the WMBAA remains hopeful that 

many of these outstanding issues can be resolved by the regulatory agencies. 

I will explain how the CFTC interpreted clear Congressional intent to fashion 

a flexible swap trading regime into a prescriptive, artificially restrictive rule set 

and, to date, has not fully evaluated the impact of its rules on market quality. 

Although continued oversight and vigilance, such as this hearing, remain needed on an ongoing basis, it is also our hope that that Congress will not have to 

be called upon to reiterate through new legislation its previously stated desire 

for a flexible, technology-neutral trade execution framework that encourages innovation and fosters liquidity formation. 

I. The Transition to OTC Trading on Regulated Platforms Is Proceeding, 

But Not Without Challenges 

While the CFTC’s SEF rules were implemented in 2013, the first ‘‘made available 

to trade’’ or ‘‘MAT’’ determination did not become effective until February 2014. 

That determination, which can only be initiated by a SEF petition, is the first step 

towards requiring that a certain swap be traded on a SEF. Currently, the mandatory trade execution requirement only applies to certain interest rate and credit default swaps. Accordingly, in those markets, we have seen increased market reliance 

on SEFs to facilitate trading in these products. 

Indeed, a recent International Swaps and Derivatives Association (‘‘ISDA’’) study 

found that more than 1⁄2 of average daily interest rate derivatives trading activity 

was executed on a SEF during the first quarter.4 For the credit default swap index 

market, SEF trading accounted for 78.8% of average daily trade counts and 78.1% 

of average daily notional volume.5

These statistics, coupled with statements of support for regulated, transparent 

intermediation of OTC derivatives by the buy-side institutions such as mutual 

funds, pension funds, insurance firms,6 and other market participants suggest a 

broad adjustment to rules implemented in support of the G20 mandate to promote 

regulated swap trade execution as a replacement for purely bilateral trade activity. 

However, while the ISDA research indicates that market participants have migrated towards regulated intermediation in selected marketplaces, there are serious 

global market structure issues across the derivative markets generally that remain 

unresolved. 

In the U.S., for example, there are now 21-fully registered SEFs, one temporarilyregistered SEF, and two SEFs with applications still pending. This means, just in 

the U.S. alone, domestic market participants must choose among 24 different venues 

to access liquidity. For each SEF, market participants have to review and compare 

individual rule books, analyze different cost structures, and complete the legal and 

technical components of onboarding before executing the first trade. 

While the ISDA statistics and large number of recently-registered SEFs may suggest a smooth transition to the SEF regime, I will share with the Subcommittee 

some of the troublesome compliance and interpretative issues related to swap trading that still remain. Some of these issues will likely be dealt with through CFTC 

staff interpretation of existing regulations and others will require changes to the 

rules. Regardless, the complexities of connecting market participants—with varying 

technological sophistication and available resources—with SEFs, clearinghouses, 

credit hubs, swap data repositories, and other critical market infrastructure, require 

agreement among these entities about how to best comply with the ruleset adopted 

by the CFTC, as well as those forthcoming rules from the Securities and Exchange 

Commission (‘‘SEC’’) for security-based swaps and corresponding regulation in EuVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
29

7See ISDA Research Note: Cross-Border Fragmentation of Global Interest Rate Derivatives: 

Second Half 2015 Update, May 2016, available at http://www2.isda.org/attachment/

ODM4NQ==/Fragmentation%20FINAL1.pdf. 8 Id.

9 Id.

10 Benos, Evangelos, Richard Payne and Michalis Vasios, Bank of England Staff Working 

Paper No. 580, Centralized trading, transparency and interest rate swap market liquidity: evidence from the implementation of the Dodd-Frank Act, available at http://

www.bankofengland.co.uk/research/Documents/workingpapers/2016/swp580.pdf, page 2. 11 Id. 12See Testimony of Terrance A. Duffy before the House Committee on Agriculture Subcommittee on Commodity Exchanges, Energy, and Credit, Hearing on CFTC Reauthorization,

March 25, 2015, available at http://agriculture.house.gov/uploadedfiles/duffy_testimony.pdf; see 

also Testimony of Chairman Timothy G. Massad before the U.S. House Committee on Agriculture, February 10, 2016, available at http://agriculture.house.gov/uploadedfiles/

massad_testimony.pdf. 

rope and Asia. With more clarity from regulators and consensus among market participants, the smoother the ongoing transition to the new rules will be. 

II. The Global Swap Trading Landscape Requires Global Coordination; Any 

Other Approach Will Harm Financial Markets 

A. SEF Rules Have Fragmented Global Market Liquidity 

As intermediaries of financial products and operators of regulated exchange 

venues around the world, WMBAA members have observed firsthand the pronounced fragmentation caused by the CFTC’s SEF rules. Anecdotally, we have seen 

market participants refrain from transacting with counterparties in certain jurisdictions to avoid the CFTC’s regulatory burdens. 

For example, rather than submit to U.S. regulation, a wide spectrum of non-U.S. 

entities either withdrew from U.S. trading venues or refused to trade with U.S. person counterparties to reduce activity that would be attributed towards the ‘‘swap 

dealer’’ or ‘‘major swap participant’’ thresholds which carry significant and costly obligations. As a result, liquidity has been formed by jurisdiction. Trading has become 

more regionalized with, for example, Euro and British Pound interest rate swaps 

traded almost exclusively among non-U.S. counterparties and away from SEFs, 

while U.S. Dollar interest rate swaps are now almost exclusively traded in the U.S.7

Last month, ISDA also published its ‘‘Second Half 2015 Update’’ analyzing the 

cross-border fragmentation of global interest rate derivatives. ISDA concludes that 

‘‘[t]he fracturing of the global interest rate swaps market that emerged in the aftermath of U.S. [SEF] rules coming into force in October 2013 shows no signs of reversing’’ and that ‘‘some liquidity pools continue to be split on U.S. and non-U.S. lines.’’ 8

Specifically, ISDA found that ‘‘91.2% of cleared euro interest rate swap (‘IRS’) activity in the European interdealer market was transacted between European 

counterparties in December 2015,’’ compared with 70.7% just before the CFTC’s SEF 

rules went into effect in September 2013.9

Other analysis of market data reaches the same conclusion. For instance, a recent 

Bank of England staff working paper found that:

the introduction of the SEF trading mandate reduced the proportion of trading taking place between U.S. and non-U.S. persons, particularly for EUR denominated swaps. This suggests that some non-U.S. persons became less willing 

to trade with U.S. persons as this would require them to trade on a SEF. Thus, 

an effect of the new regulation was increased geographical fragmentation of the 

global swap market.10

The Bank of England staff did not just identify fragmented markets. The paper 

also concludes that SEF trading brings benefits to investors. Namely, ‘‘as a result 

of SEF trading, activity increases and liquidity improves across the swap market, 

with the improvement being largest for [U.S. Dollar] mandated contracts which are 

most affected by the mandate. The associated reduction in execution costs is economically significant.’’ 11

B. Policymakers Must Improve the Mutual Recognition Process 

While the CFTC SEF registration process may be complete (with the SEC’s corresponding security-based SEF regime still outstanding), the impeding MiFID II 

January 2018 target compliance date makes it vital that any trade execution regulatory gaps among the principal jurisdictions be resolved in the coming months. 

This Subcommittee and my fellow witnesses are all familiar with the issue of 

clearinghouse equivalence, having explored the topic in many prior hearings.12 We 

30

13The United States Commodity Futures Trading Commission and the European Commission: 

Common approach for transatlantic CCPs, February 10, 2016, available at http://www.cftc.gov/

idc/groups/public/@newsroom/documents/speechandtestimony/eu_cftcstatement.pdf. 14See Six Month Progress Report on CFTC Swaps Trading Rules: Incomplete Action and Fragmented Markets, August 4, 2015, available at http://www.cftc.gov/PressRoom/

SpeechesTestimony/giancarlostatement080415. 15 CFTC No-Action Letter No. 14–46, April 9, 2014, available at http://www.cftc.gov/ucm/

groups/public/@lrlettergeneral/documents/letter/14-46.pdf. 16Public Law 111–203, 124 Stat. 1376 (2010). 

were pleased to see the announcement of a common approach for central clearing 

counterparties in February 2016.13 However, as CFTC Commissioner J. Christopher 

Giancarlo has noted, the equivalence debate for U.S.-registered SEFs/security-based 

SEFs versus MTFs, OTFs, and other versions of registered trading venues outside 

the U.S. could lead to another ‘‘equivalency standoff.’’ 14

Furthermore, the CFTC’s past efforts to provide a ‘‘qualified’’ MTF regime for execution platforms operating within the EU where U.S. person entities would be allowed to execute off-SEF15 failed because, among other reasons, the proposed terms 

allowed the CFTC to unilaterally remove the relief at any time. The proposal also 

did not attract participants because, under the terms of the relief, an MTF would 

be required to comply with the CFTC’s SEF regime not just for trades involving U.S. 

counterparties or U.S.-regulated products, but even for trades executed between European counterparties on a European-regulated product through a European trading 

venue. That expansive overreach went too far for already-regulated market participants to agree to a second layer of regulatory burdens. 

Therefore, while multiple EU-based execution venues, including all WMBAA 

member firms, were prepared to meet the necessary qualifications for both the 

CFTC and the UK’s Financial Conduct Authority, this proposal did not result in any 

European intermediaries agreeing to submit it and its participants to comprehensive CFTC oversight. The global derivative markets can ill afford a repeat of this 

scenario in the equivalence negotiations leading up to MiFID II implementation, especially because the European regulatory regime does not offer the flexibility of noaction relief and, therefore, an avoidable polarization of liquidity pools may become 

permanent if an agreement is not reached prior to January 2018. We urge the Subcommittee to prioritize execution equivalence as the primary tool to counter the increasingly well-entrenched trend for liquidity to be split along regional lines. 

As we have seen, the paralyzing impact this delay in coordination and overall uncertainty can bring to clearinghouses with the accompanying segregation of trading, 

the same (if not worse) could happen if the current opportunity to shape execution 

equivalence between the U.S. and the EU is squandered. Of course, the costs will 

be borne by liquidity providers, asset managers, and end-users who rely on intermediaries to provide this vital function, as they will receive fragmented, less competitive bids and offers due to barriers erected by uncoordinated cross-border rules. 

All of these artificial blockages to natural liquidity formation result in higher costs 

to investors who are meant to be the ultimate beneficiary of the reforms instituted 

by the Dodd-Frank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank 

Act’’).16

Subsequent to the G20 summit in Pittsburgh and well before the adoption of the 

Dodd-Frank Act, WMBAA members and other trading firms were preparing for 

what would ultimately result in the current SEF regime. There has been nearly a 

decade of time, energy, and resources devoted to post-financial crisis regulatory reform that has been replicated in other G20 jurisdictions. These parallel work 

streams should have resulted in a comprehensive, consistent, and coordinated global 

oversight framework that promotes market liquidity and function while meeting 

public policy objectives. 

Yet, to date, that has not occurred. Some global financial services companies have 

created and registered separate entities in various jurisdictions purely to avoid 

being subject to SEF terms and conditions. Some intermediaries have submitted 

their European platforms for U.S. oversight in a splintered fashion. And, most recently, the CFTC received an application for a jointly-registered SEF and MTF. 

While market participants remain tentative and unsure as to how the G20 global 

trade execution implementation permutations will play out, this also suggests uncertainty among the trading venues themselves. 

III. Examples of Necessary Regulatory Improvements to the CFTC SEF Regime 

The WMBAA has long publicly supported a flexible, principles-based approach to 

the implementation of the Dodd-Frank Act trade execution framework. In that light, 

we continue to harbor reservations about some of the technical points related to the 

31

17Statement of Chairman Timothy Massad before the CFTC’s Market Risk Advisory Committee, April 26, 2016, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/

massadstatement042616. 18 Remarks of Chairman Timothy Massad before the ISDA 30th Annual General Meeting, 

April 23, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-17. 19See CEA § 1a(50) (‘‘a trading system or platform in which multiple participants have the 

ability to execute or trade swaps by accepting bids and offers made by multiple participants in 

the facility or system, through any means of interstate commerce, including any trading facility, 

that—(A) facilitates the execution of swaps between persons; and (B) is not a designated contract market.’’). 20The traditional RFQ trading protocol, where a single market participant solicits a bid or 

offer from at least three other market participants, seems to fall short of the ‘‘multiple to multiple’’ component of the SEF definition. 

CFTC’s interpretation of certain provisions of the Dodd-Frank Act and the staff’s 

reading of the implementing regulations in terms of satisfactory policies and procedures. Furthermore, while other global regulatory bodies and industry associations, 

like the Bank of England and ISDA, have engaged in an empirically-based evaluation of the swap trading rules on market conditions, the CFTC has not yet published 

any data-driven analysis of their own rules. We strongly believe that should be completed, published for market feedback, and result in appropriate changes to the 

rules. 

As I said at the outset, we remain hopeful that many of these can be resolved 

at the agency level. But we very much appreciate this Subcommittee’s interest in 

these very important issues and its continued oversight of the CFTC’s work. 

The current mix of statute, rules, no-action letters, staff guidance, and interpretive statements does not provide sufficiently predictable regulatory certainty for 

SEFs to plan, invest, and grow domestically or to be able to incorporate SEF activity 

within global operations. As long-standing businesses placed under a novel regulatory scheme, it is vital to know objectively not just the practical implications of 

rules but how they may be interpreted on a permanent basis similar to rules adopted under the Administrative Procedure Act. Staff or Division letters and guidance 

are informative, but can be revoked or amended at any time without any due process protections. The Subcommittee should remain aware of the Commission’s reliance on these measures and protect against their overuse. 

Chairman Massad has said, even recently, that the CFTC has ‘‘fine-tuned’’ some 

of its rules through no-action letter relief and will ‘‘consider a codification of those 

adjustments, and potentially other changes to enhance SEF trading and participation.’’ 17 The WMBAA welcomes this approach as an initial step as the formalization 

in rule text provides additional reliability. However, the WMBAA also believes that 

more substantive, comprehensive changes are likely necessary on a wider range of 

issues than simply codifying a few existing no-action letters. We agree with Chairman Massad that the CFTC should work to create ‘‘the foundation for the market 

to thrive’’ and ‘‘permit innovation, freedom and competition.’’ 18

To assist the Commission in its review of changes to enhance SEF trading and 

participation, in March of this year, the WMBAA submitted a comprehensive list 

of issues to Chairman Massad. That letter is attached to my testimony today. We 

look forward to participating in a productive dialogue with Chairman Massad, his 

fellow Commissioners, and the hard-working CFTC staff. 

Briefly, I would like to highlight a few issues set forth in the WMBAA’s March 

2016 letter. 

Explicit regulatory certainty with respect to flexible modes of execution. The SEF 

definition, as set forth in the Dodd-Frank Act,19 is intentionally broad, flexible, and 

contemplates a wide array of execution methods. The implementing CFTC regulation artificially restricts permitted methods of liquidity formation and execution to 

an order book or request for quote (‘‘RFQ’’).20 First, this is problematic because it 

is inconsistent with the clear language of the statute. Second, this approach may 

prevent or discourage certain technologies from facilitating trading through a registered SEF. Finally, and importantly given the ongoing work to achieve global harmonization, the restriction on execution methods is narrower than those clearly permitted under MiFID II, which may ultimately drive derivatives trading away from 

the U.S. 

The WMBAA urges the CFTC to make clear that SEFs may operate other protocols besides order books or RFQs, including Trading Facilities, under the Commodity Exchange Act (‘‘CEA’’). For example, auction-type systems such as BGC 

Partners’ VolumeMatch meet the CEA definition of trading facility and, therefore, 

should be explicitly permitted as an acceptable execution method for Required 

Transactions. It has been our experience that these new trading protocols continue 

32

21 CEA § 5h(f)(6). 

to gain favor in the marketplace as an alternative to order book and RFQ trading 

and more effectively promote competitive price discovery for interested parties. 

Made Available to Trade. The WMBAA believes the MAT process should be 

amended. While SEFs should commence the review through the filing of the petition, the petition’s approval should not be a ‘‘negative consent’’ process. The CFTC’s 

Part 40 rules’ 10 day negative consent process starts with a presumption of approval 

and removes any real discretion or judgment from the CFTC’s hands. The MAT determinations are important and should benefit from more careful analysis of a wider 

set of information rather than being subject to the single submission of an individual SEF. 

Rather, the CFTC should have the responsibility of making the determination 

based on objective criteria and subject to public notice and comment on the petition. 

The factors that the CFTC considers in deciding whether to impose a SEF trading 

mandate should be consistent with the process and analysis followed by other global 

financial market regulators in order to prevent any bifurcation of the swap markets 

and regulatory arbitrage. 

SEF Position Limit or Position Accountability Regimes. The Dodd-Frank Act requires SEFs to ‘‘adopt for each of the contracts of the facility, as is necessary and 

appropriate, position limitations or position accountability for speculators’’ and then 

to ‘‘[m]onitor positions established on or through the [SEF] for compliance with the 

limit set by the Commission and the limit, if any, set by the [SEF].’’ 21 The WMBAA 

and the broader SEF community, including a SEF chief compliance officer working 

group, have engaged with the CFTC on this issue. Both the National Futures Association and the WMBAA have authored white papers on the topic. 

Simply put, SEFs, as competitive trading platforms, do not possess information 

about a trader’s overall position in any given swap or its underlying instrument or 

commodity because of the inherently competitive nature of swap trading. A SEF is 

not a centralized exchange; each SEF is one of multiple competitive platforms facilitating trading activity in fungible financial products that can and does move easily 

from one venue to another. Unlike listed futures and options where trading and 

clearing is vertically integrated and each centralized exchange has information 

about positions in the marketplace for any specific contract, each SEF only has information about swap transactions that take place on its individual facility and has 

no access to information as to whether a particular trade on the facility adds to an 

existing market-wide position or whether it offsets all or part of an existing position 

in that swap. 

The CFTC should specify that SEFs are not obligated to impose position limits 

or accountability until such time as the CFTC determines that such measures are 

‘‘necessary and appropriate,’’ especially because unified position information is available at the swap data repository level where all SEF trade data is maintained. Further, implementing position limitations or position accountability is not necessary 

and appropriate at this time because, it has not been proven that such limits are 

an effective tool for detecting and preventing manipulation and other abuses for 

swaps. 

SEFs accept and take seriously their obligation as market operators to ensure 

they provide reliable, resilient venues to access competitive pricing. This includes 

monitoring for manipulation and other abusive trading activity that takes place on 

each individual facility which will continue in earnest as part of our responsibility 

to meet existing SEF core principles. 

SEF Financial Resource Requirements. The CEA requires all SEFs to have ‘‘adequate financial, operational, and managerial resources.’’ During the SEF registration review process, we learned that CFTC staff believe that all SEF employees are 

considered part of the SEF’s financial obligation, regardless of the employment arrangement (e.g., at-will, contractual, or guaranteed salary). As a result, SEFs with 

voice-based systems face significantly higher financial resources commitments than 

those facilities that only provide electronic trading access. The Dodd-Frank Act does 

not dictate this outcome. From a public policy standpoint, it prevents investment 

and growth if a SEF must freeze capital to help pay at-will or contracted staff for 

a full year when, in reality, the SEF does not have that liability to simply ‘‘discharge each responsibility of the [SEF].’’

We continue to discuss with the CFTC and staff a more realistic, flexible interpretation that promotes all types of swap trading and only attributes the financial resource requirement to cover the fixed costs associated with compliant SEF operation 

and solely those required to ensure compliant operations. We think that is a more 

appropriate approach than factoring in variable costs and costs related to staff that 

are not core to a compliant operating structure and who would not be associated 

33

1See Keynote Remarks before the Institute of International Bankers Annual Washington Conference (Mar. 7, 2016). 2See Statement of Commissioner Bowen, Dec. 1, 2014 (stating that ‘‘the best way of viewing 

changes to [the CFTC’s Dodd-Frank Act rulemakings] is not that [the CFTC is] tweaking them, 

but rather that [the CFTC is] enhancing them. Sometimes that may mean making the rules 

more cost-effective and leaner, but at other times that will mean making them stronger than 

before. Enhancing a rule can mean reducing burdens to business while strengthening protections for the public’’), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/

bowenstatement120114. 3See Commissioner Giancarlo White Paper, ‘‘Pro-Reform Reconsideration of the CFTC Swaps 

Trading Rules: Return to Dodd-Frank’’ (Jan. 29, 2015), available at http://www.cftc.gov/ucm/

groups/public/@newsroom/documents/file/sefwhitepaper012915.pdf; see also Statement of Commissioner Giancarlo, Six Month Progress Report on CFTC Swaps Trading Rules: Incomplete Action and Fragmented Markets (Aug. 4, 2015), available at http://www.cftc.gov/PressRoom/

SpeechesTestimony/giancarlostatement080415. 4The WMBAA is an independent industry body representing the largest inter-dealer brokers. 

The founding members of the group—BGC Partners, GFI Group, Tradition, and Tullett 

Prebon—operate globally, including in the North American wholesale markets, in a broad range 

of financial products, and have received temporary registration as swap execution facilities. The 

WMBAA membership collectively employs approximately 4,000 people in the United States; not 

only in New York City, but in Stamford and Norwalk, Connecticut; Chicago, Illinois; Jersey City 

and Piscataway, New Jersey; Raleigh, North Carolina; Juno Beach, Florida; Burlington, Massachusetts; and Dallas, Houston, and Sugar Land, Texas. For more information, please see 

www.wmbaa.com. 

with the SEF for the currently-required 12 month timeframe in the event of a 

change to the business. One possible solution involves relying on a rule provision 

that delegates the CFTC’s authority on this issue to the Director of the Division of 

Market Oversight. We look forward to continued engagement with the CFTC on this 

issue. 

IV. Conclusion 

Mr. Chairman, the WMBAA appreciates the opportunity to appear today and discuss the ongoing work to implement the G20 mandates. We look forward to continued work on these developments with Congress, the CFTC, the SEC, and regulatory 

bodies around the world. 

I would be pleased to answer any questions you may have. 

APPENDIX

March 11, 2016

Hon. TIMOTHY MASSAD, Chairman,

Commodity Futures Trading Commission, 

Washington, D.C.

Re: Swap Execution Facility Regulations, Made Available to Trade Determinations, and Swap Trading Requirements

Dear Chairman Massad:

Since the promulgation of the regulations governing swap execution facilities 

(‘‘SEFs’’) pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection 

Act (the ‘‘Dodd-Frank Act’’), Commissioners of the Commodity Futures Trading 

Commission (‘‘CFTC’’ or ‘‘Commission’’) have discussed the Commission’s consideration of potential revisions to various aspects of its swap regulations, including 

those reforms related to SEFs and trade execution. For example, you have stated 

that the Commission is ‘‘focused on issues concerning trading on [SEFs],’’ and that 

you ‘‘will ask the Commission to consider a number of rule changes to enhance SEF 

trading and participation.’’ 1 Calls for the Commission to consider potential revisions 

to its Dodd-Frank Act regulations have also been raised by Commissioner Bowen 2

and Commissioner Giancarlo.3 In addition, Commission staff has indicated that they 

are considering potential no-action relief or guidance with respect to issues that 

market participants have identified as problematic. 

The Wholesale Markets Brokers’ Association, Americas (‘‘WMBAA’’) 4 appreciates 

the Commission’s careful and deliberative approach to the regulation of SEFs and 

extends its appreciation to the Commission for granting permanent registration to 

each of the member firms’ SEFs earlier this year. This milestone represents a significant step toward firmly establishing the regulatory regime for mandatory trade 

execution as envisioned by the Dodd-Frank Act and providing market participants 

with further much-needed regulatory certainty. Against the backdrop of permanent 

SEF registration, the WMBAA looks forward to continuing to work with the ComVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00037 Fmt 6633 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
34

5See Keynote Remarks of Chairman Massad before the Institute of International Bankers Annual Washington Conference (Mar. 7, 2016). 6 Revised regulations should permit SEFs to correct clerical or operational errors on swaps rejected for clearing. In addition, if a swap has been accepted by a DCO for clearing, and a clerical 

or operational error is subsequently identified, the regulations should permit a SEF to correct 

the error in the trade without initiating a ‘‘new trades, old terms’’ offset and resubmission, provided that the DCO has the operational capability to permit such a correction. 7 A WMBAA white paper on position limits, which was submitted to the Division of Market 

Oversight staff, is attached hereto as Appendix B.

mission and its staff on all matters pertaining to SEFs, including on any future 

CFTC rulemakings, amendments, guidance, or interpretations related to trade execution and SEFs, to ensure that the regulations are implemented in accordance with 

the underlying statutory intent and accomplish the Dodd-Frank Act’s goal of 

‘‘promot[ing] the trading of swaps on swap execution facilities.’’

The WMBAA supports the Commissioners’ recognition that the regulations should 

be assessed and reconsidered on an ongoing basis. In particular, the WMBAA supports Commission efforts to ‘‘formalize through notice-and-comment rulemaking a 

number of the ‘no-action’ positions the staff has taken, such as simplifying the confirmation process, streamlining the process for correcting error trades, and others.’’ 5

We support the regulatory certainty that formal rule changes would provide to 

issues related to SEF confirmation and reporting, trades deemed void ab initio,6 and 

trading of block trades ‘‘on facility.’’ The WMBAA also recognizes that certain reporting requirements may merit reconsideration, including the ‘‘embargo rule,’’ and 

would welcome the opportunity to discuss such issues further with the Commission. 

Further, to assist the Commission and its staff in its assessment of the SEF regulations, the WMBAA respectfully offers the attached matrix in Appendix A, which 

we have prepared based on our expertise as over-the-counter market operators for 

over 25 years and a combined tenure in the industry of over 100 years, and our experience to date with the implementation of the SEF related rules. For each of the 

following topics, the matrix notes the relevant statutory provision, describes the implementation issue experienced by market participants, references the relevant 

CFTC rule or staff advisory, and suggests a potential recommendation to address 

the issue. The topics are not presented in order of importance, but rather represent 

the regulatory implementation issues that the WMBAA members are addressing:

• Methods of execution;

• Made available to trade process;

• Audit trail requirements for voice-based executions;

• Position limits; 7

• Financial resource requirements;

• Cross-border issues;

• Margin requirements;

• Embargo rule; and

• SEF record-keeping requirement.

In addition to the specific issues addressed in the matrix, the WMBAA recommends that the Commission examine the commercial impact of its SEF regulations and other rules on the swap market. Specifically, wherever possible, the Commission should seek to ensure a level playing field between the futures and swap 

markets for commercially-equivalent risk management contracts by not permitting 

any unfair regulatory advantage to either market. The WMBAA believes that such 

regulatory instances, in which a swap market requirement that results in additional 

costs or creates disincentives for trading swaps relative to the futures market equivalent, should be reconsidered by the Commission. 

Last, to the extent that Commission action to modify certain swap-related regulations are constrained by statutory language under the Dodd-Frank Act, the WMBAA 

would welcome the opportunity to work with the Commission to advocate for appropriate legislative changes before Congress. However, the attached list includes solely 

those issues which the WMBAA believes can be addressed through regulatory action. 

* * * * *

35

We welcome the opportunity to discuss these comments with you at your convenience. Please feel free to contact the undersigned with any questions you may have 

on our comments. 

Sincerely,

WILLIAM SHIELDS, 

Chairman, WMBAA.

cc:

The Honorable SHARON BOWEN, Commissioner; 

Mr. VINCE MCGONAGLE, Director, Division of Market Oversight.


11453002.eps
36

APPENDIX A: CFTC PART 37 SEF REGULATIONS: RECOMMENDED REVISIONS

Relevant Statutory Provision Issue CFTC Regulation Proposed Solution/Revision 

CEA § 1(a)(50) 

‘‘The term ‘swap execution facility’ means a trading system or platform in which multiple participants have the ability to execute or 

trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility, that—

‘‘(A) facilitates the execution of swaps between persons; and ‘‘(B) is not a designated contract market.’’

Methods of Execution

The SEF definition is broad, flexible, and contemplates execution 

methods beyond an order book or RFQ system. The CFTC regulation artificially restricts the permitted methods of liquidity formation and execution, which may prevent certain technologies from qualifying as a registered SEF, in contravention to Dodd-Frank’s goal of promoting the execution of swaps on SEF. It also does not contain an all-to-all requirement. 

Rule 37.9(a)(2)

‘‘Execution methods. (i) Each Required Transaction that is not a 

block trade . . . shall be executed on a [SEF] in accordance with one of the following methods of execution:

(A) An Order Book . . . ; or (B) A Request for Quote System . . . that operates in conjunction with an Order Book . . . .’’

Add a new clause ‘‘(C)’’ to the execution methods in rule 37.9(a)(2) 

that expands the permissible methods of execution for Required Transactions to include ‘‘or any such other system for trading as may be permitted by the Commission.’’

Codify existing policy that certain systems, including Trading Facilities, fall within the SEF definition and qualify as a permissible 

method of execution for Required Transactions. Additional methods of execution for Required Transactions should include risk-mitigation. 

The WMBAA notes that auction-type systems meet the CEA definition of trading facility and, therefore, should be permitted as an acceptable execution method for Required Transactions in their own 

right and not be subject to the definitions of Order Book or RFQ.

CEA § 2(h)(8) 

‘‘(A) IN GENERAL.—With respect to transactions involving swaps 

subject to the clearing requirement of paragraph (1), counterparties shall—

(i) execute the transaction on a board of trade designated as a 

contract market . . .; or 

(ii) execute the transaction on a [registered SEF] or a swap execution facility that is exempt from registration . . .

Made Available to Trade Process The CEA does not detail a required analysis, enumerate criteria in 

performing a ‘‘made available to trade’’ analysis, or establish that SEFs or DCMs have the burden of persuading the Commission that a swap should be traded on a registered marketplace. 

Rule 37.10(a)(1): ‘‘Required submission. A [SEF] that makes a swap 

available to trade in accordance with paragraph (b) of this section, shall submit to the Commission its determination with respect to such swap as a rule . . . .’’ 

Rule 37.10(c): ‘‘Applicability. Upon a determination that a swap is 

available to trade on any [SEF] or designated contract market . . . all other [SEFs] and designated contract markets shall comply with the requirements of section 2(h)(8)(A) of the Act in listing or offering such swap for trading.’’

Amend the made available to trade (MAT) process so that going forward, SEFs commence the MAT determination process by filing a 

petition, but the CFTC has the responsibility of making the determination based on objective criteria and subject to public notice and comment on the petition. 

In addition, as the WMBAA discussed at the recent DMO roundtable, 

the Commission should harmonize its MAT decisions with those of foreign regulators, including ESMA, in order to prevent any bifurcation of the swap markets and regulatory arbitrage. 

(B) EXCEPTION.—The requirements [above] shall not apply if no 

board of trade or [SEF] makes the swap available to trade or for swap transactions subject to the clearing exception . . . .’’

CEA § 5h(f)(2)(B)(ii) (Core Principle 2) 

‘‘A [SEF] shall . . . establish and enforce trading, trade processing, 

and participation rules that will deter abuses and have the capacity to detect, investigate, and enforce those rules, including means . . . to capture information that may be used in establishing whether rule violations have occurred.’’

Voice Audit Trail CFTC staff has expressed a desire that SEFs must be able to store 

recordings of oral communications in a digital database and convert such recordings into searchable text. 

In addition, CFTC staff has explored the concept of requiring SEFs 

to record or access not only the communications between the SEF’s employees and their customers, and any communications between employees, but also the communications of Introducing Brokers. Introducing Brokers already have the obligation under NFA rules to record communications and SEFs have access to such information pursuant to their rulebooks. 

Rule 37.205Commission rule 37.205 sets forth the audit trail requirement for 

SEFs to ‘‘capture and retain all audit trail data necessary to detect, investigate, and prevent customer and market abuses.’’

The Commission requires that such data is ‘‘sufficient to reconstruct 

all indications of interest, requests for quotes, orders, and trades within a reasonable period of time and to provide evidence of any violations of the rules of the [SEF].’’ Further, an audit trail must also permit a SEF to ‘‘track a customer order from the time of receipt through fill, allocation, or other disposition, and shall include both order and trade data.’’

The elements of an acceptable audit trail program involve (1) original 

source documents, (2) electronic transaction history database, (3) electronic analysis capability, and (4) safe storage capability. 

Revise the rules or provide guidance related to audit trail requirements for voice-based executions on SEFs to account for the unique 

characteristics of voice execution and to recognize the currently available technologies. Any such new rules or guidance would supplement the existing audit trail requirements that are tailored to electronic execution and should more accurately reflect a ‘‘technology-neutral’’ approach to SEF execution. 

In accordance with the preamble discussion to the final rule, the 

WMBAA believes that ‘‘the intent of the final rules is to require that a SEF establish and maintain an effective audit trail program, not to dictate the method or form for maintaining such information. Importantly, the rule, by not being prescriptive, provides SEFs with flexibility to determine the manner and the technology necessary and appropriate to meet the requirements’’ (emphasis added). 78 Fed. Reg. 33,476, 33,518 (June 4, 2013). 

The WMBAA further recommends that the CFTC consider whether 

the audit trail requirements may be satisfied based on exception or risk-based SEF reviews.

37

8The WMBAA white paper is attached as Appendix B. 9This approach was endorsed by a group of SEFs. See SEF CCO Group Discussion Document 

CEA 

Regarding SEF Core Principle 6—Position Limits and Position Accountability (May 21, 2015). 

§ 5h(f)(6) (Core Principle 6) 

‘‘(a) . . . a [SEF] that is a trading facility shall adopt for each of 

the contracts of the facility, as is necessary and appropriate, position limitations or position accountability for speculators. 

(b) POSITION LIMITS. For any contract that is subject to a position 

limitation established by the Commission . . . the [SEF] shall: (1) Set its position limitation at a level no higher than the Commission limitation; and (2) Monitor positions established on or through the [SEF] for compliance with the limit set by the Commission and the limit, if any, set by the [SEF].’’

Position Limits SEFs do not possess information about a trader’s position in any 

given swap or its underlying instrument or commodity. Rather, SEFs only have information about swap transactions that take place on their individual facilities and have no way of knowing whether a particular trade on the facility adds to an existing market-wide position or whether it offsets all or part of an existing position in that swap. 

In addition, if SEFs were required to adopt position limits, market 

participants might abuse such limits. For example, if five SEFs that offer a particular product set their respective limits at a level established by the CFTC, the overall aggregate position available to market participants via trading on such SEFs would be five times greater than the level set by the CFTC. As such, market participants could take advantage of this structure by spreading their transactions across multiple SEFs and DCOs when reaching the limit set by each. While staff has acknowledged that, in lieu of position limits, SEFs may establish accountability provisions related 

to trades rather than positions, the details of such accountability mechanisms and how accountability levels would be set are yet unclear. 

Rule 37.600Same as statutory provision 

Specify that SEFs are not obligated to impose position limits or accountability until such time as the Commission determines that 

such measures are ‘‘necessary and appropriate.’’

Implementing position limitations or position accountability is not 

necessary and appropriate at this time because, for example: (1) unlike futures and options where trading and clearing is vertically integrated and each DCM has information about positions in the marketplace for any specific contract, they are not an effective tool for detecting and preventing manipulation and other abuses for swaps; and (2) individual SEFs do not possess information about a trader’s position in any given swap and, therefore, have no basis of reference as to how and when a position limit should be set. 

In addition to these comments, the WMBAA has submitted to the Division of Market Oversight (‘‘DMO’’) staff a white paper explaining 

why a SEF position limits and position accountability regime is neither necessary nor appropriate.8 Rather than imposing a position limits regime, the WMBAA respectfully reminds the Commission that a SEF is subject to regulatory requirements to provide 

data to the Commission, including data related to the trading activity on the SEF, to assist the Commission with monitoring compliance with Federal speculative position limits.9

A SEF CCO working group, consisting of CCOs of 18 then-provisionally registered SEFs, commissioned the National Futures Association (‘‘NFA’’) to conduct a study regarding swap position limits and 

position accountability. The NFA study suggested that the swap market might not lend itself to notional transaction size position or accountability levels at the SEF level. While this study did not offer an official disposition as to the necessity or appropriateness of position accountability levels at the SEF level, it presented data suggesting that such position limits or accountability levels will do little to ‘‘reduce the potential threat of market manipulation or congestion,’’ the stated goal of the Core Principle. The SEF CCO working group provided DMO staff with a synopsis of this study in the form of a discussion document. 

As an alternative to the above proposed solution, the WMBAA would 

welcome specific guidance on how SEFs can practically comply with an accountability provision, reflecting that: (1) SEFs do not possess position information; and (2) swaps are fungible in terms of being traded on multiple venues and cleared by multiple DCOs. Any accountability level(s) should be established by the CFTC, taking into account the entirety of market activity in a product (both on and off SEFs), and such established level(s) should be applied uniformly to all SEFs.

38

APPENDIX A: CFTC PART 37 SEF REGULATIONS: RECOMMENDED REVISIONS—CONTINUED

Relevant Statutory Provision Issue CFTC Regulation Proposed Solution/Revision 

CEA § 5h(f)(13) (Core Principle 13) 

‘‘(A) IN GENERAL.—The [SEF] shall have adequate financial, operational, and managerial resources to discharge each responsibility of 

the [SEF]. 

(B) DETERMINATION OF RESOURCE ADEQUACY.—The financial resources of a [SEF] shall be considered to be adequate if the value of 

the financial resources exceeds the total amount that would enable the [SEF] to cover the operating costs of the [SEF] for a 1 year period, as calculated on a rolling basis.’’

SEF Financial Resources CFTC staff has indicated its preliminary belief that all SEF employees are considered part of the financial obligation, regardless of the 

employment arrangement, e.g., at-will, contractual, and guaranteed salary. As a result, SEFs with voice-based systems face significantly higher financial resources commitments than those facilities that only provide electronic trading access. 

The Commission’s rules do not recognize that: (1) SEFs do not possess or maintain client funds or open interest; (2) there is no practical need for any individual SEF to maintain sufficient resources 

for a period of 1 year after an event that results in the closure of a SEF, as a SEF could wind down its operations in a much shorter time period; and (3) for SEFs with voice brokers, such voice brokers are not necessary to ensure operation of a compliant SEF and could be removed at any point and for any reason without impacting the SEF’s ability to satisfy the Core Principles. 

Rule 37.1300Same as statutory provision 

Flexibly interpret the SEF financial resources requirements to reflect 

that SEFs are execution venues only and do not ensure contract performance, making their commercial viability less relevant on a post-transaction basis. 

As the Commission has delegated authority to the DMO Director on 

issues pertaining to SEF financial resources, the WMBAA looks forward to working with Commission staff to appropriately account for the following considerations in refining the SEF rules, including with respect to creating an appropriate methodology for computing projected operating costs. See Rule 37.1307. 

The SEF financial resources requirement should focus on the fixed 

costs associated with compliant SEF operation and solely those required to ensure compliant operations, rather than the variable costs and costs related to staff that are not core to a compliant operating structure. The WMBAA notes that the costs associated with employing SEF brokers constitute variable costs and are not core to the compliance regime and the operations of a SEF, or necessary or required to operate a compliant SEF, as is demonstrated by other registered SEFs that do not employ brokers. Therefore, costs related to employing SEF brokers should be excluded from the financial resources calculation. Contrary to DMO letter 15–26, any salary or compensation for SEF employee-brokers should not be included in the calculation of projected operating expenses. 

In addition, the WMBAA has submitted information to DMO staff regarding liquid assets and would welcome any further communication as needed for a rule revision to reduce the burden from 6 

months’ liquid assets to 3 months’ liquid assets. 

Any modification of the financial resource rules should take into account the fact that the exit of an individual SEF (or brokers within 

an operational SEF) would not have broad market-wide or systemic effects on the swap marketplace. This is because the trades previously executed on the SEF would have been fully processed and reported, and the positions resulting from all trades would be unaffected, as they are held either at a DCO for cleared trades or with the counterparties for uncleared trades. Moreover, if a SEF were to experience difficulty or choose to exit the marketplace, the wind-down process would occur quickly. As SEFs do not hold positions, the unwind process would take no longer than a few months.

39

CEA § 2(i) 

‘‘The provisions of this Act relating to swaps . . . (including any 

rule prescribed or regulation promulgated under that Act), shall not apply to activities outside the United States unless those activities—

(1) have a direct and significant connection with activities in, or 

effect on, commerce of the United States; or 

(2) contravene such rules or regulations as the Commission may 

prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision of this Act . . . .’’

Cross-Border Concerns The scope of the Commission’s cross-border guidance is far reaching 

such that a permitted transaction involving two non-U.S. counterparties may be subject to SEF execution under footnote 88. 

This interpretation has had the practical effect of bifurcating markets based on the participants’ jurisdictions, impeding liquidity 

and redirecting activity away from SEFs and, as a result, away from U.S. markets and the oversight of U.S. regulators. 

DSIO Advisory No. 13–69

‘‘DSIO is of the view that a non-U.S. SD (whether an affiliate or 

not of a U.S. person) regularly using personnel or agents located in the U.S. to arrange, negotiate, or execute a swap with a non-U.S. person generally would be required to comply with the Transaction-Level Requirements. For the avoidance of doubt, the Division’s view would also apply to a swap between a non-U.S. SD and a non-U.S. person booked in a non-U.S. branch of the non-U.S. SD if the non-U.S. SD is using personnel or agents located in the U.S. to arrange, negotiate, or execute such swap.’’

CFTC staff has issued no-action relief letters pertaining to advisory 

13–69, including most recently letter 15–48, which extended relief until September 30, 2016. 

Address cross-border issues through a formal rulemaking that invites 

and addresses public comment. 

Carefully consider the adoption of equivalency or substituted compliance regimes, such as the establishment of an exempt SEF category, to prevent further fracturing of markets by jurisdiction. Provide guidance regarding who is considered a U.S. person for execution purposes and, consequently, what types of transactions may 

be conducted off-SEF, such as in the following examples:• A foreign branch of a U.S. person conducting a trade solely in a 

foreign market with a foreign entity; and

• A foreign branch of a U.S. prime broker, acting as a prime 

broker for a foreign customer.

If the Commission engages in a rulemaking pertaining to an exempt 

SEF category, any exempt SEF should be required to comply with all material, transaction-level requirements applicable to SEFs. In addition, the Commission should work with foreign regulators to ensure they have a reciprocity provision for U.S.-registered SEFs. Any such CFTC rulemaking for exempt SEFs should condition the relief for the foreign MTF on the existence of a reciprocity provision in law or regulation of the applicable foreign jurisdiction. 

In addition, while non-U.S. swap dealers located in the U.S. have received no-action relief from the execution mandate, no corresponding relief has been issued with respect to platforms operating in an execution capacity for such non-U.S. swap dealers located in the U.S., adding to the uncertainty around the implementation of rules. In the interest of stability, no-action relief should 

be equally granted to participants and platforms where applicable.

CEA § 5b(c)(2)(D)(iv) 

‘‘MARGIN REQUIREMENTS.—The margin required from each member 

and participant of a derivatives clearing organization shall be sufficient to cover potential exposures in normal market conditions.’’

Margin Requirements CFTC rules related to margin provide a significant commercial advantage to futures over swaps. Specifically, the CFTC’s rules provide a 5 day margin liquidation period for financial swaps, while 

all futures have a 1 day margin liquidation period. 

Rule 39.13(g)(2)(ii):

‘‘A derivatives clearing organization shall use models that generate initial margin requirements sufficient to cover the derivatives clearing organization’s potential future exposures to clearing 

members based on price movements in the interval between the last collection of variation margin and the time within which the derivatives clearing organization estimates that it would be able to liquidate a defaulting clearing member’s positions (liquidation time); provided, however, that a derivatives clearing organization shall use: 

Re-examine the Part 39 margin requirement for swaps to reflect a realistic liquidation time period for swaps. Margins should be based on the economic characteristics of the products, rather than on whether a product is classified as a future or a 

swap. Products with similar risk profiles should have the same margin requirements. 

(A) A minimum liquidation time that is 1 day for futures and 

options; 

(B) A minimum liquidation time that is 1 day for swaps on agricultural commodities, energy commodities, and metals; (C) A minimum liquidation time that is 5 days for all other 

swaps . . . .’’ (emphasis added).

40

APPENDIX A: CFTC PART 37 SEF REGULATIONS: RECOMMENDED REVISIONS—CONTINUED

Relevant Statutory Provision Issue CFTC Regulation Proposed Solution/Revision 

CEA § 2(a)(13)(D) 

‘‘The Commission may require registered entities to publicly disseminate the swap transaction and pricing data required to be reported under this paragraph.’’

Embargo Rule As a result of the embargo rule, SEFs and DCMs that would like to 

continue to permit work-ups may face workflow issues because they cannot share trade information with their customers until such information is transmitted to an SDR. Such delays can have a material effect on market liquidity. 

To operate efficiently and competitively, information which reflects 

current market activity must be available to all market participants without any disruptive pauses for the occurrence of other regulatory activities. Every market participant must have realtime information on executed trades for the entire marketplace to ensure effective price discovery so that they can make informed trading decisions. This allows the market to operate properly as a single liquidity pool. In addition, those SEFs that rely on a third party to transmit information to SDRs are further hindered by the embargo rule in their ability to make available to all market participants current market information. 

Rule 43.3(b)(3)(i)

‘‘If there is a registered swap data repository for an asset class, a 

registered [SEF] . . . shall not disclose swap transaction and pricing data relating to publicly reportable swap transactions in such asset class, prior to the public dissemination of such data by a registered swap data repository unless:

(A) Such disclosure is made no earlier than the transmittal of 

such data to a registered swap data repository for public dissemination; 

(B) Such disclosure is only made to market participants on 

such registered [SEF] . . . ; 

(C) Market participants are provided advance notice of such 

disclosure; and 

(D) Any such disclosure by the registered [SEF] . . . is nondiscriminatory. 

While the WMBAA appreciates the prior no-action relief provided in 

letter 13–68, the WMBAA believes that the problematic aspects of the requirement continue to persist and merit removing the requirement from the Part 43 rules. 

The CFTC should amend its regulations to permit a SEF post-initial 

trade work stream that promotes liquidity formation, including through SEF workups, while ensuring that the Commission’s rules implementing the post-trade transparency requirement for public dissemination of swap data as soon as technologically practicable do not artificially restrict a SEF’s ability to efficiently execute swap transactions. 

Further, the Commission should consider that, due to SDR ‘‘rounding’’ models and ‘‘capping’’ of large notional transactions, the information publicly disclosed is often not identical to specific tradelevel information on the SEF.

CEA § 5h(f)(10) 

‘‘RECORDKEEPING AND REPORTING.—

(A) IN GENERAL.—A swap execution facility shall—

(i) maintain records of all activities relating to the business of 

the facility, including a complete audit trail, in a form and manner acceptable to the Commission for a period of 5 years . . . .’’

SEF record-keeping Requirement CFTC rules requiring SEFs to retain all records through the life of a 

swap and for at least 5 years following a swap’s termination is an onerous and impracticable requirement for SEFs. Following the execution of a swap, a SEF is not necessarily made aware of a swap’s termination. Accordingly, it is often impracticable for a SEF to definitively ascertain the period of time for which it must retain records for a swap and can result in significantly burdensome record-keeping costs. 

Rule 45.2(c):

‘‘All records required to be kept pursuant to this section shall be 

retained with respect to each swap throughout the life of the swap and for a period of at least 5 years following the final termination of the swap.’’ 

Provide guidance to SEFs as to what materials must be retained for 

5 years to satisfy the record-keeping obligation, which reduces the operational burden of maintaining all possible records, particularly those with minimal value from an audit trail perspective. 

For both cleared and uncleared swaps, revise the record-keeping requirement under rule 45.2 to permit SEFs to retain records with 

respect to each swap for a period of 5 years after execution. 

41

1The WMBAA is an independent industry body representing the largest inter-dealer brokers 

operating in the North American wholesale markets across a broad range of financial products. 

The five founding members of the group are: BGC Partners; GFI Group; ICAP; Tradition; and 

Tullett Prebon. The WMBAA membership collectively employs approximately 4,000 people in the 

United States; not only in New York City, but in Stamford, Connecticut; Chicago, Illinois; Louisville, Kentucky; Jersey City, New Jersey; Raleigh, North Carolina; and Houston and Sugar 

Land, Texas. For more information, please see www.wmbaa.org. 2See Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: Return to Dodd-Frank,

CFTC Commissioner J. Christopher Giancarlo White Paper (Jan. 29, 2015), at 45, available at 

http://www.cftc.gov/ucm/groups/public/@newsroom/documents/file/sefwhitepaper012915.pdf. 3See SEF CCO Group Discussion Document Regarding SEF Core Principle 6—Position Limits 

and Position Accountability, May 21, 2015. 4See Letter from the International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association to Ms. Melissa Jurgens, Secretary, CFTC (Feb. 10, 

2014), available at http://www.sifma.org/commentletters/2014/sifma-and-isda-submit-comments-to-the-cftc-on-position-limits-for-derivatives/. 5 Id. at 35. 6 Remarks of CFTC Chairman Timothy Massad before the ISDA 30th Annual General Meeting 

(Apr. 23, 2015), available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-17. 

APPENDIX B: WMBAA WHITE PAPER REGARDING POSITION LIMITS

White Paper: SEF Position Limits and Accountability Regimes are Neither 

Necessary Nor Appropriate 

May 21, 2015

I. Introduction 

The Wholesale Markets Brokers Association, Americas,1 the leading industry organization representing the interdealer broker industry, provides this White Paper 

to explain why a position limits or position accountability regime for swap execution 

facilities (‘‘SEFs’’) is neither necessary nor appropriate. 

Section 5h of the Commodity Exchange Act (‘‘CEA’’), as added by the 2010 DoddFrank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank’’), includes a 

series of core principles for SEFs. In the 5 years since Dodd-Frank was adopted, the 

Commodity Futures Trading Commission (‘‘CFTC’’ or ‘‘Commission’’) has worked to 

implement Section 5h of the CEA, adopting final regulations related to the core 

principles and other requirements for SEFs, including core principle number 6—position limits or accountability. An applicant SEF must comply with core principles 

to receive its permanent registration from the CFTC. 

In practice, as explained in this White Paper, an overly prescriptive interpretation 

of this core principle would be unworkable, cost-intensive, and without any readily 

identifiable public policy benefits. While there have been calls for Congressional review of core principle 6,2 the WMBAA believes, at this point, the Commission should 

consider a regulatory solution. 

The approach described herein has been recently endorsed by a coalition of SEFs 3

and key industry groups.4 The WMBAA supports such arguments, particularly that: 

The Commission should exempt SEFs from any requirement to enforce compliance with Federal limits or to establish SEF limits for contracts subject to 

Federal limits. As an alternative to setting position limits, SEFs should only be 

required to provide data to the Commission to assist it in monitoring compliance with Federal speculative position limits.5

The SEF marketplace is still in its formative years. The CFTC has not yet adopted a position limits regime for swaps. The Commission should tread carefully to 

avoid the imposition of a rigid, unworkable requirement that, without adequate costbenefit analysis, may harm the development of these markets. Rather, as suggested 

by Chairman Timothy Massad, the CFTC should work to create ‘‘the foundation for 

the market to thrive’’ and ‘‘permit innovation, freedom and competition.’’ 6

II. Background 

A. Position Limits, Position Accountability 

The CFTC glossary defines a position limit as ‘‘[t]he maximum position, either net 

long or net short, in one commodity future (or option) or in all futures (or options) 

of one commodity combined that may be held or controlled by one person (other than 

a person eligible for a hedge exemption) as prescribed by an exchange and/or by the 

CFTC.’’ Fundamentally, a position limit caps the size of a position that a trader may 

hold or control for speculative purposes in a derivatives contract in a particular commodity. There are three elements of the regulatory framework for position limits: 

the levels of the limits, the exemptions from the limits (such as for hedging), and 

42

7 Commodity Exchange Act (‘‘CEA’’) § 5h(f)(6). 8 Id.

9 17 CFR § 37.600. 10 Core Principles and Other Requirements for Swap Execution Facilities, 78 FED. REG. 33,476, 

33533 (June 4, 2013). 11 Id. 12 Id. at 33601. 13 Establishment of Speculative Position Limits, 46 FED REG. 50938 (Oct. 16, 1981). 

the policy on aggregating accounts. While the CFTC has set certain commodity position limits, it has not yet established position limits for swaps. 

By contrast, the CFTC glossary defines position accountability as ‘‘[a] rule adopted 

by an exchange in lieu of position limits requiring persons holding a certain number 

of outstanding contracts to report the nature of the position, trading strategy, and 

hedging information of the position to the exchange, upon request of the exchange.’’ 

Position accountability does not, by definition, impose a hard limitation on traders’ 

speculative derivatives positions in a commodity. Instead, position accountability 

provisions grant the exchange additional powers to protect its markets, including 

the ability to obtain additional information from the trader and to limit the size of 

a trader’s position, when a trader’s derivatives position exceeds a specified level. 

B. SEFs and Position Limits 

Core principle 6—codified as CEA Section 5h(f)(6)—mandates that a SEF ‘‘that is 

a trading facility’’ must ‘‘adopt for each of the contracts of the facility, as is necessary and appropriate, position limitations or position accountability for speculators.’’ 7 Furthermore, ‘‘[f]or any contract that is subject to a position limitation established by the Commission pursuant to section 4a(a) of the [CEA], the [SEF] shall 

(i) set its position limitation at a level no higher than the Commission limitation; 

and (ii) monitor positions established on or through the [SEF] for compliance with 

the limit set by the Commission and the limit, if any, set by the [SEF].’’ 8

The CFTC promulgated rule 37.600 by codifying the statutory language.9 In the 

preamble to the final SEF rule, the CFTC noted that ‘‘[s]everal commenters stated 

that SEFs will have difficulty enforcing position limitations’’ because ‘‘SEFs will lack 

knowledge of a market participant’s activity on other venues, and that will prevent 

a SEF from being able to calculate the true position of a market participant.’’ 10 Furthermore, the CFTC describes the guidance and acceptable practices in appendix B 

to the part 37 rules as giving ‘‘reasonable discretion to comply with § 37.600.’’ 11

With respect to core principle 6, the guidance in Appendix B states that:

For Required Transactions, a SEF may demonstrate compliance by setting 

and enforcing position limitations or position accountability levels only with respect to trading on the SEF’s own market. For example, a SEF could satisfy 

the position accountability requirement by setting up a compliance program 

that continuously monitors the trading activity of its market participants and 

has procedures in place for remedying any violations of position levels. 

For Permitted Transactions, a SEF may demonstrate compliance by setting 

and enforcing position accountability levels or sending the Commission a list of 

Permitted Transactions traded on the SEF. Therefore, a SEF is not required to 

monitor its market participants’ activity on other venues with respect to monitoring position limits.12

III. Role of Exchange-Set Position Limits and Position Accountability 

In contrast to SEFs and position limits, the CFTC has historically adopted position limits for certain agricultural commodities and also has required exchanges, as 

part of their self-regulatory responsibilities, to adopt position limits or position accountability provisions in their market surveillance programs. Unlike the OTC swap 

market, futures contracts traded on exchange are owned and exclusively listed by 

an exchange. They are unique contracts that are unavailable anywhere else. 

When the CFTC first promulgated speculative position limits, it noted that ‘‘the 

capacity of any contract to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions, 

i.e., the capacity of the market is not unlimited.’’ 13 In the early 1990s, the CFTC 

adopted rules allowing exchanges to establish position accountability provisions, in 

lieu of position limits, for contracts that had been subject to exchange-set speculative position limits. 

Exchange-based position limits have been adopted by designated contract markets 

(‘‘DCMs’’), or futures exchanges, and the position limits (or position accountability) 

provisions have been enforced through exchange rulebooks and their role as a selfregulatory organization conducting market surveillance programs. These protections 

43

14See CFTC Division of Market Oversight, Rule Enforcement Review of ICE Futures U.S. (July 

22, 2014), at 4, available at http://www.cftc.gov/ucm/groups/public/@otherif/documents/

ifdocs/icemarksurrer072214.pdf. 15See Large Trader Reporting Program, http://www.cftc.gov/IndustryOversight/

MarketSurveillance/LargeTraderReportingProgram/ltrp. 

serve as a prophylactic tool to reduce the threats of market power and to ensure 

the integrity of and orderly trading in the derivatives market. Exchange-set position 

limit and position accountability rules help prevent traders from accumulating concentrated positions that could disrupt a market and cause artificial prices and disorderly trading, such as purposefully through the exercise of market power by the 

position holder (e.g., actual or attempted manipulation) or to prevent one trader 

from negatively impacting market stability by liquidating too large of a position. 

These rules obligate an exchange, as part of its market surveillance effort, to take 

account of large positions in their market either by imposing hard limits on traders’ 

speculative positions or, in the case of position accountability, by providing exchanges with ways to address the market impact of large positions. 

IV. SEFs Cannot Adopt an Exchange-Centric Position Limits or Accountability Regime 

Exchange-based surveillance and position limit and position accountability regimes focus on market participants’ concentrated speculative positions. CFTC staff 

has stated that ‘‘an acceptable market surveillance program should regularly collect 

and evaluate market data to determine whether markets are responding to the 

forces of supply and demand. An exchange also should have routine access to the 

positions and trading of its market participants.’’ 14

Exchanges can readily adopt and enforce position limits or position accountability 

provisions for futures and futures options because they have the means to carry out 

this oversight function. As mentioned before, exchanges own their contracts, the 

trading of which is only allowed on its respective exchange, and exchanges also own 

and operate the derivatives clearing organizations (‘‘DCOs’’), or direct trades to specified DCOs, that process and become the counterparty to each transaction executed 

on the exchange. Further, unlike futures on physical commodities for which the underlying products are in limited supply, the financial instruments underlying swaps 

subject to the trade execution mandate (interest rate and credit default swap indices) generally have very large or nearly inexhaustible deliverable supplies and a 

cash market sufficiently liquid to render swaps traded on those instruments highly 

unlikely to be susceptible to the threat of manipulation. 

Exchanges also have ‘‘large trader reporting systems’’ 15 designed to obtain current information about traders’ positions in their derivatives markets. Futures exchanges possess data showing the positions held by all reportable traders for each 

trading day based on reports from clearing members, futures commission merchants, and foreign brokers detailing close-of-business position data. Each futures 

exchange’s ‘‘large trader reporting system’’ also provides information on the account’s ownership and control and identifies futures and options traders who trade 

for the account. By assigning unique identification numbers to each trader, futures 

exchanges can aggregate traders’ positions across different accounts at multiple 

clearing members to include the positions of all related affiliates. 

By contrast, SEFs are trading platforms that merely foster liquidity for swap execution. They do not have any ownership or proprietary control over the products 

bought and sold on their platforms. SEFs do not hold customer funds. They do not 

guarantee performance by counterparties. And, most importantly as discussed 

below, SEFs do not possess information about a trader’s position in any given swap. 

A. Position Limits 

Under Section 4a of the CEA, the Commission is required to establish position 

limits only after it determines that such position limits are necessary and appropriate. To date, the CFTC has not made that determination for financial swaps and, 

as a result, has not established position limits for these products. However, even 

if such limits were put in place, SEFs are limited in their ability to monitor for position limits violations. SEFs can only monitor market activity for those transactions 

that take place on its trading system or facility. A SEF only has information about 

trading activity on its facility and does not possess, and has limited means to obtain, information about its participants’ positions in swaps from activity on other 

venues. There are currently 24 applicant SEFs, making it impossible for any one 

SEF to know how its participants may transact on the 23 other platforms. 

In practice, while a participant may enter into a transaction of size on one SEF, 

the SEF has no way of knowing if the participant has offset (or increased) its posiVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00047 Fmt 6633 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
44

16 NFA Swap Accountability Levels Study (Apr. 2, 2015). 17 Id. 18 Id.

tion in the swap through trading on other platforms. A swap that is listed and traded on one SEF may, unbeknownst to that SEF, be traded on other SEFs, DCMs, 

or bilaterally between counterparties away from any SEF or DCM. As a result, 

SEFs and DCMs listing swaps do not possess information about a trader’s position 

in any given swap. 

Position limit information is more appropriately collected by other segments of the 

swap market, including market participants, DCOs, and swap data repositories 

(‘‘SDRs’’). However, even a DCO or SDR would only have information about traders’ 

cleared positions or reported positions at its individual organization. Only the participants themselves would have information about their overall cleared and 

uncleared swaps position in a market. 

As a result, it is the WMBAA’s view that only the CFTC (or a self-regulatory body 

possessing position information about swap market participants from SDR and DCO 

reports) can effectively police the swaps market to detect position limit violations 

and have the enforcement tools to take meaningful action to deal with violations. 

Imposing a position-based requirement on SEFs would be ineffective and would 

incur significant redundancies, potential miscounting or double counting of trades, 

and significant impediments related to data standards among the 24 applicant 

SEFs. In addition, if all of the SEFs set their individual position limit thresholds 

equal to the not-yet adopted CFTC’s limits, this regime could encourage ‘‘gaming’’ 

by market participants who could spread their activity across SEFs to avoid triggering a ‘‘limit check’’ by any one SEF. 

B. Position Accountability 

As the National Futures Association (‘‘NFA’’) recently concluded after conducting 

a data-driven analysis, position accountability levels will do little to ‘‘reduce the potential threat of market manipulation or congestion, the stated goal of the [SEF core 

principles].’’ 16

The WMBAA believes the concept of a SEF position accountability regime is 

flawed. Most importantly, as discussed above, position accountability is meaningful 

as a market surveillance tool only in the context of centralized marketplaces such 

as exchanges, which is due to the fact that they own the products traded and possess information about traders’ actual positions in the relevant derivatives marketplace. Because SEFs do not own products, and therefore do not possess the same 

position information, it is not necessary or appropriate for SEFs to adopt position 

accountability. 

Moreover, recognizing the impracticability of SEFs adopting position limits or position accountability regimes, there have been suggestions that SEFs adopt, in effect, ‘‘trading accountability’’ provisions as a means of complying with core principle 

6 (i.e., SEFs would institute enhanced oversight of and data gathering from a trader 

based solely on trading activity or the size of transactions). This suggestion is problematic for two reasons. First, the CEA, as amended by Dodd-Frank, does not contemplate a trading activity-based accountability regime, but rather contemplates a 

position management-focused component. Furthermore, there is no clear metric 

available for SEFs to conduct a position accountability framework. As identified by 

the NFA in its recent report, ‘‘[n]otional transaction size alone is a misleading measure of risk.’’ 17 The NFA further concluded that ‘‘the swap market might not lend 

itself to notional transaction size accountability levels at the SEF level.’’ 18

V. Conclusions 

The WMBAA has always supported efforts to promote stability, efficiency, transparency, and competition in furtherance of Dodd-Frank’s goal to promote the trading 

of swaps on SEFs. This includes taking steps to minimize threats posed to swap 

markets, including market manipulation from concentrated positions in a certain 

swap. 

For the reasons previously stated, however, the WMBAA does not believe that a 

SEF-based position limit or position accountability regime is necessary or appropriate to meet the purposes set forth in Dodd-Frank. 

The WMBAA members and other competitor SEFs want to be part of the solution. 

These venues are bound by a series of core principles to ensure fair, vibrant markets. They provide daily CFTC Part 16 lists of transactions to the CFTC, and they 

transmit full trade details to SDRs pursuant to their Part 43 and Part 45 confirmation and reporting obligations. These data transmissions provide the CFTC with the 

ability to combine data across SEFs to monitor large positions and address position 

45

limit violations should the CFTC determine to establish position limits or position 

accountability provisions for swap contracts. 

In considering ways to monitor swap markets for excessive positions, only the 

CFTC, or a CFTC designated neutral third-party self-regulatory organization would 

be in the position to collect, maintain, and synthesize the data to perform this function in an efficient, cost-sensitive manner. SEFs operating within the unique framework of the execution-only, competitive SEF landscape, in contrast to the verticallyintegrated futures market structure, are ill-suited to establish a position limits or 

accountability regime.

The CHAIRMAN. Thank you, Mr. Merkel. 

Mr. Berger. 

STATEMENT OF STEPHEN JOHN BERGER, DIRECTOR,

GOVERNMENT AND REGULATORY POLICY, CITADEL, LLC, 

NEW YORK, NY; ON BEHALF OF MANAGED FUNDS

ASSOCIATION 

Mr. BERGER. Thank you. Chairman Scott, Ranking Member 

Scott, Members of the Subcommittee, my name is Stephen Berger, 

and I am the Director of Government and Regulatory Policy at 

Citadel. 

Citadel is a leading global financial institution that manages 

hedge funds and provides capital market services. 

I am here today on behalf of the Managed Funds Association and 

its members, and I am pleased to provide testimony as part of the 

Committee’s review of the impact of the G20 clearing and trade 

execution requirements. 

MFA represents the majority of the world’s largest hedge funds, 

and is the primary advocate for sound business practices and 

thoughtful regulation of the industry. MFA continues to support reforms to the OTC derivatives markets, including central clearing 

and trading on open, transparent venues. These reforms have reduced systemic risk, increased protections for investors, promoted 

competition, and strengthened our nation’s financial markets. 

I would like to highlight a few recommendations from my written 

statement that I believe would further help realize these benefits. 

With respect to clearing, MFA has been a consistent advocate for 

the central clearing of OTC derivatives transactions. Clearing replaces the interconnected web of counterparty exposures with a 

safer system where all participants face a well-regulated clearinghouse. This reduces systemic risk and enhances the stability and 

efficiency of our markets. Clearing also benefits investors by mitigating counterparty credit risk, increasing transparency, and facilitating greater choice of trading counterparties and platforms. 

In the U.S., clearing has been successfully implemented for a significant portion of the interest rate swap and index credit default 

swap markets. In the U.S. today, approximately 75 percent of these 

swap transactions are cleared, compared to only 16 percent in 

2007. Notably, over the past several years, investors have successfully cleared hundreds of trillions of dollars worth of swap transactions. Nevertheless, there are two areas where further progress 

should be made. 

First, customer clearing in the U.S. must remain affordable and 

robust. MFA is concerned that the Basel Committee’s leverage 

framework will needlessly, but significantly, increase the cost of 

clearing for customers by failing to recognize the exposure-reducing 

46

effects of segregated customer initial margin. The Basel leverage 

ratio should be modified so that it provides an offset for customer 

initial margin, posted to a clearinghouse or segregated under U.S. 

rules. 

Second, further work is required from the CFTC and the SEC to 

implement a viable portfolio margining regime for the CDS market. 

The Dodd-Frank Act specifically sought to promote portfolio margining, which allows customers to realize margin efficiencies by recognizing offsetting risks within their portfolios. However, the interim framework that exists today falls short of meeting this goal, 

and has adversely impacted customer clearing. 

Looking forward, MFA supports further efforts to expand central 

clearing to interest rate swaps denominated in all of the G10 currencies, and to harmonize these requirements globally. While the 

U.S. was the first to implement central clearing, many other jurisdictions have made substantial progress in their own implementation. Notably, Europe is beginning to phase in central clearing this 

year, and the scope of the European clearing obligation is nearly 

identical to that in the U.S. 

Turning now to the implementation of the G20 trade execution 

requirements. MFA continues to support transitioning the trading 

of standardized liquid cleared swaps and to swap execution facilities that provide impartial access and facilitate straight-through 

processing to clearing. This transition promises to benefit investors 

by increasing market efficiency, competition, transparency, and liquidity. Recent research by the Bank of England concluded that 

the implementation of reforms in the U.S. interest rate swaps market yielded significant improvements in pricing and liquidity. 

Although the SEF market continues to evolve, a two-tier structure unfortunately persists, preventing investors from fully participating in all of the various SEF liquidity pools. This two-tier market, which reserves certain liquidity pools for dealers only, and confines investors to others, hinders choice and competition, and frustrates the core principle of impartial access. A key roadblock perpetuating the two-tier SEF marketplace is the practice of posttrade name give-up where the identities of counterparties to otherwise anonymous trades are revealed or given up post-trade. This 

is a legacy practice that no longer serves any legitimate purpose for 

cleared swaps where counterparties face clearinghouses and not 

each other. However, by systematically revealing private trading 

information, name give-up deters investors from participating on 

those SEFs that employ it, namely, the historically dealer-to-dealer 

SEFs. We believe regulatory action is needed to remove this impediment to investors and partial access to all SEFs. 

We appreciate the Committee’s oversight of derivatives clearing 

and trading, and I thank you for the opportunity to speak here 

today. I would be happy to answer any questions. 

[The prepared statement of Mr. Berger follows:]

PREPARED STATEMENT OF STEPHEN JOHN BERGER, DIRECTOR, GOVERNMENT AND

REGULATORY POLICY, CITADEL, LLC, NEW YORK, NY; ON BEHALF OF MANAGED

FUNDS ASSOCIATION

Chairman Scott, Ranking Member Scott, my name is Stephen Berger and I am 

the Director, Government & Regulatory Policy, of Citadel LLC. Citadel is a global 

financial firm built around world-class talent, sound risk management, and innovaVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00050 Fmt 6633 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
47

tive market-leading technology. For more than a quarter of a century, Citadel’s 

hedge funds and capital markets platforms have delivered meaningful and measurable results to top-tier investors and clients around the world. Citadel operates in 

all major asset classes and financial markets, with offices in the world’s leading financial centers, including Chicago, New York, San Francisco, Boston, London, Hong 

Kong, and Shanghai. 

I am here today to speak on behalf of Managed Funds Association (‘‘MFA’’) and 

its members regarding the impact of the G20 clearing and trade execution requirements for OTC derivatives. MFA represents the majority of the world’s largest 

hedge funds and is the primary advocate for sound business practices for hedge 

funds, funds of funds, managed futures funds, and service providers. MFA’s members manage a substantial portion of the approximately $3 trillion invested in hedge 

funds around the world. Our members serve pensions, university endowments, and 

other institutions. 

MFA’s members are among the most sophisticated investors and play an important role in our financial system. They are active participants in the commodity and 

securities markets, including over-the-counter (‘‘OTC’’) derivatives markets. They 

provide liquidity and price discovery to capital markets, capital to companies seeking to grow or improve their businesses, and important investment options to investors seeking to increase portfolio returns with less risk, such as pension funds trying 

to meet their future obligations to plan beneficiaries. MFA members engage in a variety of investment strategies across many different asset classes. As investors, MFA 

members help dampen market volatility by providing liquidity and pricing efficiency 

across many markets. Hedge fund managers are fiduciaries that invest funds on behalf of institutional and high-net worth investors. Our members’ skills help their 

customers plan for retirement, honor pension obligations, and fund scholarships, 

among other important goals. 

As part of their asset management strategies, MFA members are active participants in the derivatives markets, and have consistently supported reforms to the 

OTC derivatives markets in Title VII of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (‘‘Dodd-Frank Act’’) that mitigate systemic risk, increase 

transparency, and promote an open, competitive, and level playing field. We welcomed the market’s transition to central clearing for liquid, standardized swaps that 

occurred over the course of 2013, and actively engaged in the market’s evolution of 

trading liquid, standardized, cleared swaps on registered swap execution facilities 

(‘‘SEFs’’) that commenced in 2014. 

As a result, MFA has a strong interest in the successful implementation of central 

clearing and organized trade execution in the OTC derivatives markets, which further the goals of the G20 and the Dodd-Frank Act to mitigate systemic risk and provide open and accessible markets for investors. In this respect, we believe there are 

several additional steps that the Commodity Futures Trading Commission (‘‘CFTC’’) 

should take to promote further central clearing and the market’s transition to trading on SEFs. These steps include: (1) expanding mandatory central clearing of interest rate swaps (‘‘IRS’’) to include swaps denominated in all the G10 currencies; (2) 

further working with the Securities and Exchange Commission (‘‘SEC’’) to develop 

a viable portfolio margining regime for cleared credit default swaps (‘‘CDS’’) as mandated by Congress in the Dodd-Frank Act, (3) codifying existing CFTC staff guidance addressing impartial access to SEFs; (4) clearly prohibiting post-trade name 

disclosure by SEFs that offer anonymous execution of cleared swaps; and (5) making 

certain other targeted amendments to its final SEF rules to improve the overall 

trading regime. In addition, we believe the Basel Committee on Banking Supervision (‘‘Basel Committee’’) should modify its treatment of segregated initial margin for centrally cleared derivatives for purposes of the Basel III leverage ratio to 

ensure that central clearing remains affordable for customers. 

On behalf of MFA, I appreciate the Committee’s review and oversight of the impact of the G20 clearing and trade execution requirements. MFA has consistently 

provided constructive comments and suggestions to regulators to help implement 

these mandates. We believe our comments are consistent with the Committee’s public policy goals and will further enhance the benefits of OTC derivatives markets. 

As active participants in the U.S. markets for OTC derivatives, we would like to 

work with the G20 countries, Congress, the Committee, the CFTC, and all other interested parties to further the optimal implementation of the clearing and trade execution rules, which will reduce systemic risk, ensure affordable and impartial access 

to our financial markets, and strengthen our nation’s economy. 

Central Clearing and Its U.S. Implementation 

MFA has consistently supported policymakers’ efforts to reduce systemic risk in 

the derivatives markets by transitioning standardized and liquid OTC derivative 

48

1 Remarks of Timothy G. Massad before the Swaps Execution Facilities Conference (SEFCON 

V), November 12, 2014, available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/

opamassad-4. 2See LCH Daily Volumes—SwapClear Global, available at: http://www.lch.com/en/assetclasses/otc-interest-rate-derivatives/volumes/daily-volumes-swapclear-global. 3See CME Open Volume Tracker, available at: http://www.cmegroup.com/education/cme-volume-oi-records.html. 4See https://www.theice.com/clear-credit. 5See CFTC notice of proposed rulemaking on ‘‘Clearing Requirement Determination under 

Section 2(h) of the CEA for Interest Rate Swaps’’ (‘‘CFTC Additional IRS Proposal’’), available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/

federalregister060916.pdf. 

contracts into central clearing. The implementation of central clearing was a central 

goal of the 2009 G20 commitments and the U.S. has been at the forefront of the 

move to central clearing. 

MFA believes that central clearing has reduced systemic risk by eliminating the 

complex, interconnected web of counterparty exposures and replacing it with a safer 

system where all counterparties face a single well-regulated central counterparty 

(‘‘CCP’’). Today, the prominent CCPs serving the U.S. market are operated by CME 

Group (‘‘CME’’), the Intercontinental Exchange, Inc. (‘‘ICE’’), and LCH.Clearnet 

(‘‘LCH’’). While not all derivatives products have sufficient liquidity to merit being 

made subject to the mandatory clearing requirement, in the U.S., we have seen the 

successful implementation of central clearing for a significant portion of the IRS and 

index CDS markets. 

The progress in implementing central clearing in the U.S. has been impressive. 

According to CFTC Chairman Timothy Massad, approximately 75% of outstanding 

U.S. swap transactions (measured by notional value) are being cleared, as compared 

to only 16% in 2007.1 In particular, the progress in implementing central clearing 

for end-users and other customers of OTC derivatives has been notable. LCH has 

approximately $21.3 trillion notional of customer IRS transactions outstanding.2 At 

CME, open interest in IRS is approximately $17.7 3 trillion notional, and predomi- nantly driven by customers. Finally, ICE has cleared approximately $20.8 trillion 

notional of index CDS for customers.4

As a result, in MFA’s view, the implementation of central clearing in the U.S., 

thus far, has been successful and made our financial system much safer. In particular, we believe that central clearing has greatly benefitted the market by:

• Mitigating systemic risk and reducing the risk of contagion;

• Providing a mechanism for the orderly unwind of the portfolio of a defaulting 

market participant that is also designed to protect non-defaulting customers 

from losses;

• Promoting discipline with respect to margin and collateral practices;

• Improving market transparency;

• Increasing competition among potential trading counterparties and liquidity 

providers; and

• Supporting the migration of trading onto more open, transparent, trading 

venues.

In addition, the CFTC has enhanced the integrity of the execution-to-clearing 

workflow by implementing straight-through processing (‘‘STP’’) requirements. The 

CFTC’s STP rules require clearing members to conduct pre-execution credit checks 

in order to pre-empt post-execution rejections of trades submitted for clearing, and 

to establish strict timeframes around how quickly an executed trade must be submitted to, and accepted or rejected by, a CCP. As a result, these STP requirements 

strengthen market resilience, enhance risk management, protect investors by reducing counterparty risk, and promote overall market transparency and efficiency. Importantly, the CFTC’s STP rules established a standard that has now been adopted 

by the European Union (‘‘EU’’) in the context of implementing the Markets in Financial Instruments Directive (‘‘MiFID II’’). 

While not all of the G20 countries have implemented mandatory clearing requirements, we appreciate the positive steps taken by many countries to achieve harmonization and implementation of central clearing on a global basis. For example, 

mandatory central clearing of certain OTC derivatives will begin in the EU later 

this month. In addition, central clearing has already begun in Australia and Mexico, 

and is expected to begin soon in other countries, including Canada, Hong Kong, 

Singapore, and Switzerland. Notably, in light of these global developments, the 

CFTC has recently proposed to expand the central clearing requirement in the U.S. 

to harmonize with these foreign jurisdictions.5 Last, we applaud the CFTC and the 

49

6See The United States Commodity Futures Trading Commission and the European Commission: Common approach for transatlantic CCPs, 10 February 2016, available at: http://

www.cftc.gov/idc/groups/public/@newsroom/documents/speechandtestimony/eu_cftcstate

ment.pdf. 7The G10 currencies are the U.S. Dollar (USD), Euro (EUR), Japanese Yen (JPY), British 

Pound (GBP), Swiss Franc (CHF), Australian Dollar (AUD), New Zealand Dollar (NZD), Canadian Dollar (CAD), Swedish Krona (SEK), and Norwegian Krone (NOK). 8See European Commission Delegated Regulation (EU) . . ./. . . of 10.6.2016 supplementing 

Regulation (EU) No 648/2012 of the European Parliament and of the Council with regard to regulatory technical standards on the clearing obligation, 10 June 2016, available at: http://

ec.europa.eu/finance/financial-markets/docs/derivatives/160610-delegated-regulation_en.pdf. 9 Under CFTC rules, a clearing member must separately account for, and segregate as belonging to the customer, all money, securities and property it receives from a customer as margin. 

See 17 CFR §§ 1.20–1.30; 17 CFR §§ 22.2–22.7; see also CFTC Chairman Timothy Massad, Testimony before the U.S. House Committee on Agriculture (Feb. 12, 2015). 

European Commission for reaching an agreement on a common approach to the regulation of CCPs earlier this year.6 This agreement will help to ensure that the G20 

goal of global, harmonized OTC derivatives regulation is fully achieved. 

Expanding Central Clearing of IRS to Other Currencies 

Consistent with the CFTC Additional IRS Proposal, MFA supports the expansion 

of central clearing to IRS denominated in additional currencies. 

Under current CFTC rules, the clearing requirement applies only to IRS denominated in the G4 currencies, which include U.S. Dollars, Euros, Japanese Yen, and 

British Pound Sterling. MFA believes that the clearing mandate should be expanded 

to include IRS denominated in all of the G10 currencies 7 because those additional 

IRS classes are traded in significant volumes globally. 

The CFTC Additional IRS Proposal to expand the clearing mandate would apply 

to IRS denominated in Australian dollars, Swiss francs, Canadian dollars, Mexican 

pesos, Polish zloty, Swedish Krona, Norwegian Krone, Hong Kong dollars, and 

Singapore dollars. The European Commission has also recently adopted final regulatory technical standards that expand the EU clearing mandate to IRS denominated in Polish zloty, Swedish Krona, and Norwegian Krone.8 The CME and LCH 

already clear IRS denominated in these currencies and market participants already 

voluntarily clear a significant amount of these instruments. 

Consistent with the goal of reducing systemic risk through the international convergence of central clearing, MFA believes that transitioning IRS denominated in 

the G10 currencies to the clearing requirement is appropriate and timely. 

Ensuring the Affordability of Customer Clearing 

Customers are a vital part of the derivatives markets and have been critical to 

the success of central clearing in the U.S. While some clearing of swaps between 

dealers existed prior to enactment of the Dodd-Frank Act, artificial barriers to entry 

prevented customers from similarly participating in the cleared swaps market. Implementation of the central clearing requirement eliminated many of those artificial 

barriers and resulted in substantial customer clearing. 

However, at present, swaps customers exclusively access CCPs indirectly through 

clearing members, rather than becoming direct members of CCPs, for a variety of 

reasons, both financial and operational. MFA expects the demand for clearing services to increase as regulators in different jurisdictions fully implement their respective mandatory clearing initiatives. As a result, it is critical that customer clearing 

services remain available at an affordable price to ensure that customers have fair 

and equal access to CCPs. 

MFA has strong concerns about the Basel Committee’s treatment of segregated 

initial margin for centrally cleared derivatives exposure under the Basel III leverage 

ratio (‘‘Leverage Ratio’’) because it threatens the ability of customers to use centrally cleared derivatives and could limit the ability of end-users to hedge their 

risks. 

CCPs’ risk management methodologies are predicated on the collection of initial 

margin and variation margin from clearing members and customers in order to 

collateralize potential exposure. In addition, direct clearing members guarantee payment of their customers’ obligations to the CCP. Because the initial margin is the 

customer’s money,9 CFTC rules require clearing members to segregate customer 

funds from the clearing member’s own assets. 

While the Basel Committee’s framework captures a clearing member’s guarantee 

to the CCP as an off-balance sheet exposure, the Leverage Ratio fails to provide an 

offset that recognizes the exposure-reducing effect of customers’ segregated initial 

margin. According to the Basel Committee, the reason for the lack of an offset for 

customer initial margin is that segregated customer initial margin not only offsets 

50

10 In the United States, segregated margin cannot be reinvested except for investments in lowrisk and highly liquid assets, such as U.S. government securities, managed ‘‘with the objectives 

of preserving principal and maintaining liquidity’’. See 17 CFR § 1.25(b). 11 Applicable U.S. margin and CCP regulations result in a significant majority of margin being 

passed onto the CCP. Although margin rules vary across jurisdictions outside of the U.S., nonU.S. margin frameworks for centrally cleared derivatives generally result in a substantial portion of margin held at the CCP rather than the clearing member. 12The Commodity Markets Council (‘‘CMC’’) estimates that the Leverage Ratio, as currently 

structured, would increase the cost of using cleared derivatives by more than five times current 

levels. This estimate is based on conversations by CMC members with clearing members. The 

increase in costs would be due to increased fees for cleared derivatives. CMC and MFA members 

also anticipate incurring business costs due to their diminished ability to hedge commercial and 

financial risks. See also, Fiona Maxwell, Non-bank FCMs unlikely to fill OTC gap, RISK, Oct. 

7, 2015, available at: http://www.risk.net/risk-magazine/news/2429225/non-bank-fcms-unlikely-to-fill-otc-gap#. 

exposures, but also can be used by the clearing member for further leverage. In the 

U.S., segregation rules severely restrict the ability of initial margin to be held in 

anything other than extremely low-risk and extremely liquid assets, assuring that 

it is always available to absorb losses ahead of the bank.10 Moreover, the substantial majority of segregated initial margin is posted to the CCP, and therefore, is entirely outside the control of the clearing member.11

The Leverage Ratio’s failure to recognize the purpose of segregated initial margin 

is a threat to the use of cleared derivatives by customers. Because of the lack of 

offset, clearing members will incur large Leverage Ratio exposures, which will likely 

raise prices for customer clearing significantly. The Leverage Ratio, as currently 

structured, is estimated to increase significantly the cost of using cleared derivatives.12 This substantial cost increase may cause customers to reduce their hedging 

activities to levels that are inadequate to manage their risk, which could result in 

price increases and volatility for food, gasoline, and other consumer goods. 

Therefore, to ensure the continued affordability and robustness of customer clearing in the U.S., we respectfully request that the Committee encourage the Basel 

Committee to modify the Leverage Ratio by providing an offset for clearing members 

to the extent that customer initial margin is posted to the CCP, or is segregated 

under the U.S. regulatory regime. 

Ensuring a Viable Portfolio Margining Regime 

The Dodd-Frank Act divided jurisdiction over OTC derivatives between the CFTC 

and the SEC. For CDS, the CFTC has jurisdiction over most CDS indices, while the 

SEC has jurisdiction over single-name CDS. The CFTC has mandated clearing of 

certain CDS indices, but the SEC has not yet issued a clearing mandate for singlename CDS. However, a number of MFA members would like to voluntarily clear single-name CDS in order to take advantage of the portfolio margining benefits arising 

from offsetting positions in cleared index CDS and single-name CDS. 

Portfolio margining simply means recognizing the offsetting positions within a 

cleared OTC derivatives portfolio, resulting in margin efficiencies. Section 713 of the 

Dodd-Frank Act specifically encouraged the SEC and the CFTC to work together to 

implement a regulatory framework that facilitates portfolio margining. 

ICE has an offering that enables market participants to clear both index CDS and 

single-name CDS in a CFTC-regulated account under the Commodity Exchange Act, 

as amended (‘‘CEA’’). In 2011, both agencies issued orders approving ICE’s portfolio 

margining regime for dealers’ proprietary CDS positions. Over a year later, both 

agencies approved ICE’s portfolio margining regime for customers. However, the 

SEC’s approval order imposed a number of conditions on ICE and clearing member 

firms seeking to offer a CDS customer portfolio margining program. 

Notably, each clearing member firm is required to establish its own margin methodology that is different from the margin methodology of the CCP and must submit 

its margin methodology to the SEC for review and approval. The requirement for 

each clearing member to have its own margin methodology undermines one of the 

fundamental benefits of central clearing, which is the ability for all market participants to rely on the same, fully vetted and approved margin methodology maintained by the CCP. In addition, it reduces transparency for clearing customers, as 

it is difficult to evaluate and compare the different margin methodologies separately 

established by each clearing member. 

In our view, the requirements imposed by the SEC have delayed voluntary buyside clearing of single-name CDS, with resulting adverse effects on trading volume 

and liquidity. We urge the SEC to use the CCP’s vetted and approved margin methodology as the baseline, with clearing members able to collect additional margin as 

they deem appropriate according to their assessment of a clearing customer’s credit 

51

13See Staff Working Paper No. 580 ‘‘Centralized trading, transparency and interest rate swap 

market liquidity: evidence from the implementation of the Dodd-Frank Act’’, Bank of England 

(January 2016), available at: http://www.bankofengland.co.uk/research/Documents/

workingpapers/2016/swp580.pdf. 14Pub. L. 111–203, 124 Stat. 1376 (2010). Section 733 of the Dodd-Frank Act amends the CEA 

to require, in pertinent part, that SEFs both establish and enforce participation rules and have 

the capacity to enforce those rules, including the means to provide market participants with impartial access to the market. See also CFTC rule 37.202 in the CFTC final rule on ‘‘Core Principles and Other Requirements for Swap Execution Facilities’’, 78 Fed. Reg. 33476, 33587 (June 

4, 2013), available at: https://www.gpo.gov/fdsys/pkg/FR-2013-06-04/pdf/2013-12242.pdf. 

risk. This approach will enable a viable portfolio margining regime for cleared CDS 

as mandated by Congress in the Dodd-Frank Act. 

Swap Execution Facilities and the Trade Execution Requirement 

MFA continues to support the Dodd-Frank Act’s goal of transitioning the trading 

of standardized, liquid, cleared swaps onto SEFs that provide open and impartial 

access and enable the emergence of an ‘‘all-to-all’’ market (where multiple market 

participants are able to meet and transact). MFA believes the CFTC SEF framework 

benefits the swaps market and its participants by increasing market efficiency, competition, transparency and liquidity. In fact, according to recent Bank of England 

research, the implementation of the clearing and trading reforms in the U.S. interest rate swaps market has already yielded significant improvements in pricing and 

liquidity, with market participants saving as much as $20–$40 million per day, of 

which $7–$13 million is being saved by market end-users alone per day.13

While the SEF market continues to evolve, MFA believes the current SEF regime 

can be enhanced by the CFTC taking certain additional steps to address the current 

two-tier market structure and the legacy practice of post-trade name disclosure on 

SEFs that offer anonymous execution of cleared swaps. 

Two-Tier Market 

Nearly 3 years after the launch of the SEF marketplace, MFA is concerned that 

the swaps market remains bifurcated between ‘‘dealer-to-dealer’’ or inter-dealer 

broker (‘‘IDB’’) SEFs that exclude most buy-side firms and ‘‘dealer-to-customer’’ (or ‘‘D2C’’) SEFs.

• IDB SEFs: In one tier, the IDB SEFs offer central limit order books (‘‘CLOBs’’) 

and voice-brokered request-for-quote (‘‘RFQ’’) models, among others, with trading on an anonymous basis but the identities of counterparties revealed posttrade. While IDB SEFs may have onboarded a number of buy-side firms, there 

is no meaningful buy-side trade execution and participation on IDB SEFs.

• D2C SEFs: In the second tier, D2C SEFs offer electronic RFQ systems, which 

effectively require the buy-side to trade with dealers by requesting quotes on 

a name-disclosed basis. Although D2C SEFs provide order books, there is more 

limited liquidity available. Nearly all SEF trading volume by the buy-side occurs on two dominant D2C SEFs via name-disclosed RFQ.

This two-tier market structure prevents the buy-side from accessing important 

pools of liquidity for cleared swaps, including the liquid order books. This market 

structure also confines the buy-side to a ‘‘price-taker’’ role, rather than providing the 

opportunity to become a ‘‘price-maker’’ as well. 

MFA believes that the persistence of the two-tier swaps trading market structure ‘‘status quo’’ is contrary to Congress’s reform goals. It is inconsistent with the DoddFrank Act’s express impartial access requirement for SEFs.14 In our view, the status 

quo needs to change to improve competition and market liquidity. 

Impartial access has contributed to the health and vitality of several other significant markets (such as equities and futures markets, where any participant can 

‘‘make’’ or ‘‘take’’ prices). By contrast, the two-tier swaps market structure perpetuates traditional dealers’ control of liquidity and protects their role as exclusive 

‘‘price makers’’. It also limits the manner and extent to which buy-side participants 

may interact in the swaps market. Such structural limitations on liquidity provision 

and risk transfer may increase the likelihood of market volatility and instability 

over the long term. The willingness and capacity of traditional dealers to allocate 

balance sheet (i.e., for dealers to use their own funds) to swaps market-making activities appears to be diminishing in certain respects. This trend will likely continue 

over time as traditional dealers continue to restructure their businesses post-financial crisis and adapt to new capital, leverage, and liquidity requirements under 

Basel III and similar rules. Without swaps market reforms that facilitate impartial 

access to all SEFs and encourage alternative forms of price formation and liquidity 

provision and greater diversity of participation (among participants and modes of 

52

interaction), MFA fears that the U.S. swaps market could risk greater volatility and 

dislocation in times of market stress. 

Congress designed the swaps market reforms under Title VII of the Dodd-Frank 

Act to produce a more competitive and transparent swaps market structure. Based 

on the examples set by other significant trading markets noted above, MFA believes 

that true impartial access, once implemented and enforced, will provide a stronger 

foundation for U.S. swaps market liquidity and enhance price transparency in the 

U.S. swaps market. This outcome will contribute beneficial effects to the nation’s 

economy. 

Post-Trade Name Give-Up 

A key mechanism suppressing buy-side trading on IDB SEFs and directly contributing to the current two-tier market structure in the U.S. is the legacy practice of 

post-trade name disclosure (or ‘‘give up’’). We believe that a SEF that imposes access 

limitations that deter buy-side participation in its market contravenes the impartial 

access requirement. Even though otherwise eligible buy-side participants have access to all SEFs in theory, the loss of anonymity caused by the continuation of posttrade name disclosure is a strong disincentive to buy-side participation in IDB SEFs 

in practice. 

The practice of post-trade name give-up originates in anonymous markets for 

uncleared swaps. Participants in the uncleared swaps market reasonably need to 

limit the firms with which they may trade in order to manage counterparty credit 

risk. Further, to record each new bilateral swap with a given counterparty on their 

books, participants need to learn the identity of the counterparty with whom they 

were matched. Thus, post-trade name disclosure and the attendant limitations on 

interactions among market participants are justified in the uncleared swaps markets where counterparties have credit exposure to each other. 

While the practice may have served a purpose prior to the implementation of the 

current swaps trading and clearing regime, today it needlessly reveals the identities 

of counterparties to otherwise anonymous cleared trades. In the early days of the 

cleared swaps market, counterparties used post-trade name disclosure to coordinate 

submission of trades to clearing after trade execution. However, the successful implementation of STP for SEF-executed trades, including the pre-trade credit check 

process, has eliminated any need to use post-trade name disclosure to either manage counterparty credit risk or facilitate clearing submission. Post-trade name disclosure nevertheless continues to occur as a routine practice on IDB SEFs. 

MFA strongly believes that for swaps that are anonymously executed and then 

immediately cleared, there is no legitimate reason for a party to the cleared swap 

to know the identity of its original executing counterparty. Once the CCP accepts 

the trade for clearing, the trade exists only as a cleared trade. The obligations to 

perform on a cleared trade run only between the CCP and the party to the trade 

(and, where applicable, its agent clearing member). In a cleared trade, the CCP is 

the sole counterparty to each of the original transacting parties, and, again, the 

original transacting parties have no rights or responsibilities with respect to each 

other. 

As a result, we firmly believe that the legacy practice of post-trade name disclosure no longer has a legitimate commercial, operational, credit or legal justification 

in cleared swap markets where transacting parties face the clearinghouse and are 

not exposed to each other’s credit risk following trade execution. 

Adverse Effects of Post-Trade Name Disclosure in the Current Swaps Trading and 

Clearing Regime 

Among its other adverse effects, post-trade name disclosure is a source of random 

and uncontrolled ‘‘information leakage’’ of private information on SEFs that offer 

anonymous execution of cleared swaps. It deters buy-side firms from trading on IDB 

SEFs because it reveals a firm’s private trading positions and trading strategies to 

competitors or dealers. By doing so, post-trade name disclosure appears inconsistent 

with CFTC rules prohibiting access to private trading information. In contrast, 

when a buy-side firm discloses its identity and trading interests in the RFQ market, 

a buy-side firm has control of the associated ‘‘information leakage’’ because it can 

choose to whom it sends an RFQ. 

Prohibiting post-trade name disclosure on SEFs would protect the privacy of an 

original counterparty’s identifying information as required by CFTC rule 49.17(f)(2), 

as amended. In response to concerns that MFA and other market participants raised 

that the identity of counterparties to anonymously executed swap trades could be 

inadvertently revealed post-trade by a swap data repository (‘‘SDR’’), the CFTC 

voted unanimously to adopt an interim final rule that amended the scope of CFTC 

rule 49.17(f)(2) by making explicit the limitation on counterparty access to data and 

53

information related to an anonymously executed, cleared swap that applies to SDRs 

by virtue of the privacy requirements of CEA section 21(c)(6). Without further regulatory action to prohibit the practice of post-trade name disclosure, a counterparty 

can continue to obtain the identities of its original transacting parties from the SEF 

or from the affirmation hub that processes the SEF’s trades, even though the SDR 

is required to protect the privacy of such information. Because section 21(c)(6) of the 

CEA mandates the privacy requirement imposed under CFTC rule 49.17(f)(2), MFA 

believes that allowing a SEF to facilitate or permit post-trade name disclosure frustrates clear Congressional intent. 

Post-trade name disclosure also perpetuates informational and trading advantages 

for traditional dealers that benefit from their ability to access and achieve full visibility into both the inter-dealer and dealer-to-customer markets. Buy-side firms do 

not have true impartial access to the IDB SEFs that offer anonymous execution 

through CLOBs and other execution models due to the continued practice of posttrade name disclosure. MFA believes that the continuation of this practice creates 

an uneven playing field and impairs competition, as it reduces pre-trade price transparency for otherwise qualified buy-side market participants and restricts their ability to trade certain swap products anonymously. 

Due to the nature of liquidity in swap markets, it is unlikely that the market will 

resolve this artificial barrier to buy-side participation on IDB SEFs on its own. Posttrade name disclosure appears inconsistent with the letter and intent of the DoddFrank Act’s swaps market reforms and CFTC rules, and in our view the CFTC has 

ample authority to prohibit this practice. MFA believes that regulatory action to 

prohibit post-trade name disclosure would increase the volume of buy-side trading 

on SEFs as it would attract more users and thus more trading volume to these platforms, and allow more flexible and efficient execution of both outright swaps and 

package transactions. 

While some argue that market dynamics will address post-trade name disclosure 

and its adverse effects, we respectfully disagree. Commercial and competitive dynamics make it difficult for any one IDB SEF to disable post-trade name disclosure 

unilaterally, as traditional dealers that opposed such a change might easily shift 

their trading to other IDB SEFs. This is a classic case where only the regulator can 

readily bring competition and fairness to the market by eliminating post-trade name 

disclosure on any SEF that offers anonymous execution of cleared swaps. Doing so 

will increase the diversity, breadth, and depth of liquidity on SEFs and thereby reduce the potential for market volatility and disruptions. 

MFA is aware of several arguments to preserve the practice of post-trade name 

disclosure on IDB SEFs. We summarize below our counter-arguments based on the 

extensive swaps trading experience of many MFA members.

• Post-Trade Name Disclosure is Not Necessary to Deter ‘‘Gaming’’. Some have argued that the practice of post-trade name disclosure should be preserved to prevent buy-side firms from ‘‘gaming’’ the market. Proponents of this view claim 

that buy-side firms could post a low resting bid (or high resting offer) in an 

anonymous CLOB, and then solicit a dealer through an RFQ to motivate the 

dealer to lower its price in reliance upon the price level posted in the CLOB. 

This theoretical risk exists in any market that employs both anonymous and 

disclosed trading protocols and historically, has not risen to a level of serious 

concern. The Treasury securities and foreign exchange markets, for example, 

have operated for years with both anonymous and disclosed execution channels, 

and participants have been able to trade across both without concerns of gaming. Nothing about the swaps market necessitates a different policing paradigm 

from other markets. Further, SEF CLOBs require market participants to post 

firm resting bids/offers. SEF participants that attempt to ‘‘game’’ dealers on 

pricing would be at risk of their firm offers being matched, resulting in potentially unfavorable positions. The likelihood of detection for engaging in any 

gaming behavior, regardless of whether or not a SEF uses post-trade name disclosure in its market, also serves as a strong deterrent. Such actions carry serious reputational and enforcement risks that buy-side market participants naturally avoid.

• Post-Trade Name Disclosure Does Not Facilitate Dealer Capital Allocation. Contrary to some claims, MFA believes that post-trade name disclosure does not 

help dealers in allocating their capital among their customer base. In an anonymously executed market, there is no affirmative decision by a dealer to direct 

business to a particular counterparty based on a pre-existing relationship, or to 

reward loyal customers with better prices—the parties are transacting only on 

the basis of anonymously posted bids and offers. The pricing for a particular 

swap does not change when the parties’ identities are disclosed to each other 

54

15See MFA Petition for Rulemaking to Amend Certain CFTC Regulations in Parts 1 (General 

Regulations under the Commodity Exchange Act), 39 (Derivatives Clearing Organizations, Subpart B—Compliance with Core Principles) and 43 (Real-Time Public Reporting), submitted to 

Mr. Christopher Kirkpatrick, Secretary of the Commission, on October 22, 2105, available at: 

https://www.managedfunds.org/wp-content/uploads/2015/10/CFTC-Petition-for-SEF-RulesAmendments-MFA-Final-Letter-with-Appendix-A-Oct-22-2015.pdf. 

post-execution. MFA does not expect that the elimination of post-trade name 

disclosure will have any impact on future pricing of such swap trades, because 

trading decisions are not based on the identity of the counterparty to begin 

with.

• Concerns that Dealers Will Provide Less Liquidity to Markets Without PostTrade Name Disclosure Lack Precedent in Similar Markets. In electronic orderdriven trading markets, it should not matter whether a dealer’s counterparty 

is another dealer or a buy-side firm. Thus, these markets should remain anonymous to create a level playing field for all participants. Further, as the willingness and capacity of traditional dealers to allocate balance sheet to swaps market-making activities appears to be diminishing in certain respects due to Basel 

III’s higher capital requirements, regulatory steps that promote impartial access 

to all SEFs encourage alternative forms of price formation and liquidity provision and greater diversity of participation (among participants and modes of 

interaction). These steps are essential investments for building a more robust 

and competitive swaps market in our country.

In MFA’s view, the unintended consequence of regulatory inaction may be increased volatility in the U.S. swaps market. It is time for the CFTC to exercise its 

regulatory authority to prohibit post-trade name disclosure for anonymously executed, cleared swaps. By doing so, the CFTC will promote the transition to SEFs 

that operate in accordance with Dodd-Frank’s contemplated reforms for the U.S. 

swaps market. We anticipate that regulatory prohibition of this practice will encourage greater voluntary trading by buy-side firms on IDB SEFs and make the SEF 

regime more attractive internationally, as a result of the true impartial access to 

these markets. 

MFA petitioned the CFTC for this rule change as well as other rule changes to 

improve the SEF regime, as discussed below. We respectfully urge the Committee 

to support such changes at the CFTC. 

Proposed SEF-Related Rule Amendments 

MFA urges the CFTC to modify and update its SEF-related rules in light of experience with SEF trading. In October 2015, MFA submitted a petition to the CFTC 

to amend certain provisions of its regulations related to OTC derivatives trading on 

SEFs, based on MFA members’ experiences to date and the ‘‘lessons learned’’ 

through the implementation process.15 MFA’s proposed amendments would: (1) codify existing CFTC staff guidance around the implementation of the CFTC’s impartial access requirements; (2) codify existing CFTC staff guidance around the implementation of the CFTC’s STP requirements; (3) clearly prohibit post-trade name disclosure by SEFs for swaps that are executed anonymously; (4) facilitate SEF execution of package transactions by requiring the package transaction as a whole to become ‘‘made available to trade’’ in order to be subject to the CFTC’s trade execution 

requirement; (5) provide a mandatory public comment period for every ‘‘made available to trade’’ (‘‘MAT’’) determination submission by a SEF under Part 40 of the 

CFTC’s regulations; (6) establish a clear process for determining when a swap product should no longer be considered available to trade on a SEF; (7) codify existing 

CFTC staff guidance and no-action relief around rejection of swaps from clearing 

and resubmission for operational and clerical errors; (8) clarify the order interaction 

requirements between different SEF trading protocols; and (9) modify the definition 

of ‘‘block trade’’ in Part 43 of the CFTC’s regulations to authorize on-SEF execution 

of a block trade as a ‘‘permitted transaction’’ as defined in section 37.9(c) in order 

to facilitate pre-execution credit checks of block trades that are intended to be 

cleared. 

In addition, in subsequent discussions with the CFTC, the MFA also advocated 

for increased mandatory disclosure from SEFs regarding trading protocols, fees, and 

governance. 

I will review MFA’s supporting arguments for each of MFA’s proposed amendments, other than our rationales for the requested rule to prohibit post-trade name 

give-up discussed above. 

55

Codify Existing CFTC Staff Guidance: Impartial Access 

MFA’s proposed amendments to section 37.202(c) would codify existing staff guidance to prohibit the use of enablement mechanisms and breakage agreements for 

swaps that are intended to be cleared on SEFs. A SEF that requires or permits such 

arrangements imposes barriers to the buy-side’s access to that SEF and contravenes 

the CFTC’s impartial access requirements. In addition, our proposed amendments 

prohibit a SEF from limiting access to certain types of eligible contract participants 

in a discriminatory manner. Such access limitations could be based on the manner 

in which certain types of eligible contract participants typically interact in the market, anticipated levels of trading activity, or entity registration status. These and 

other status-based access criteria also act as artificial barriers to the buy-side’s access to SEFs. 

Codify Existing CFTC Staff Guidance: STP 

MFA’s proposed amendments to section 1.73 would codify existing CFTC staff 

guidance clarifying the pre-execution risk management requirements for clearing futures commission merchants (‘‘FCM’’) and the obligation for SEFs to facilitate compliance with these requirements. 

Consistent with current CFTC staff guidance, MFA’s proposed amendments to 

section 1.74 would establish an outer boundary of 60 seconds after submission of 

a trade to the clearing FCM for acceptance for clearing. Our proposed amendments 

would retain the current timing standard of ‘‘as quickly as technologically practicable if fully automated systems were used’’ (‘‘ASATP’’) to require timing reductions for clearing acceptance from the 60 second outer boundary that continuing improvements in technology will enable. 

Finally, consistent with current CFTC staff guidance, MFA’s proposed amendments to section 39.12(b)(7) would establish an outer boundary of 10 seconds after 

submission of any trade for clearing to a CCP for the CCP to accept or reject a trade 

for clearing. Our proposed amendments would retain the ASATP standard to require timing reductions for clearing acceptance from the 10 second outer boundary 

that continuing technology improvements will enable. 

More Clearly Address Package Transactions in MAT Determination Process 

MFA’s proposed amendments to section 37.9 would revise the definition of a ‘‘required transaction’’ to include ‘‘any transaction involving a stand-alone swap or any 

package transaction that is subject to the trade execution requirement in section 

2(h)(8) of the [CEA]’’. We would also define a ‘‘package transaction’’ as follows:

Package transaction means a transaction involving two or more instruments: 

(1) that is executed between two or more counterparties; (2) that is priced or 

quoted as one economic transaction with simultaneous or near simultaneous 

execution of all components; (3) where the execution of each component is contingent upon the execution of all other components; and (4) where the risk of 

the offsetting components is reasonably equivalent.

A transaction meeting this definition would not be deemed a required transaction, 

unless the package transaction as a whole has become subject to the CFTC’s trade 

execution requirement in section 2(h)(8) of the CEA. 

Based on the implementation experiences of MFA members, we believe a determination should be made regarding the liquidity characteristics of the package 

transaction as a whole. This approach would avoid the need for CFTC staff to resort 

to issuing serial no-action relief as the industry continues to work on the remaining 

execution challenges and infrastructure solutions for certain types of package transactions. 

This approach differs from the current process, where a MAT determination has 

implications not only for the execution of a given swap on a stand-alone basis, but 

also for all package transactions that include such a swap. Both the liquidity profile 

and the ability of market infrastructure to facilitate trading of swaps executed on 

a stand-alone basis versus as part of a package transaction can vary widely. Therefore, our changes to section 37.10 would require SEFs to apply the CFTC’s MAT criteria separately at the package level to avoid execution challenges and the need for 

extended or permanent staff no-action relief from the trade execution requirement 

for certain types of package transactions. 

Provide Public Comment Period for MAT Determinations 

MFA’s proposed amendments would require a public comment period with respect 

to each MAT determination submission by a SEF. We believe a mandatory public 

comment period would provide market participants with a critical opportunity to inform the CFTC as to a swap product’s suitability and the industry’s technological 

56

and operational readiness to move the product from the OTC market to SEF trading. We also believe that our proposed amendments would enable the CFTC to perform a more meaningful oversight role, furthering international harmonization. 

Establish a Process for de-MAT Determinations 

MFA’s proposed amendments would establish a clear process for determining 

when a stand-alone swap or package transaction is no longer available to trade on 

a SEF (a ‘‘de-MAT determination’’), based on the CFTC’s current six MAT factors. 

We believe the CFTC should administer this process by retaining its authority to 

make such a determination on an annual basis or if the CFTC receives notice of 

de-listing submissions from at least two SEFs for a particular swap. Consistent with 

our request for MAT determinations, our proposed amendments would also require 

a public comment period to further inform the CFTC’s consideration of any de-MAT 

determination. 

We believe that a separate de-MAT determination process would serve as an important check-and-balance mechanism, rather than a process that relies exclusively 

on determinations of SEFs. If none of the six MAT factors support a determination 

that a stand-alone swap or a package transaction is made available to trade, as confirmed objectively by the CFTC’s broader view of market trading data for the product in question, the CFTC should issue a public de-MAT determination order that 

will suspend the trade execution requirement for that product. That suspension 

would apply universally to all SEFs. 

Codify Existing CFTC Staff Guidance and No-Action Relief: Rejection from Clearing 

and Resubmission 

MFA’s proposed amendments would codify, with clarifying modifications, existing 

CFTC staff no-action letter 15–24 that facilitates the correction of operational or 

clerical errors made in the submission of a swap to clearing. Specifically, the current 

no-action letter authorizes the resubmission of a corrected trade that matches the 

terms and conditions of the erroneous trade, other than the relevant operational or 

clerical error and the time of execution. MFA’s proposed amendments would also 

further codify the treatment of an intended-to-be-cleared swap that is rejected from 

clearing (i.e., void ab initio), which MFA strongly supports. 

We note that ESMA included both void ab initio and a resubmission procedure 

in its published regulatory technical standards under MiFID II. As a result, codifying these points would further harmonization between SEFs and MiFID II trading 

venues. 

Clarify RFQ and Order Interaction 

MFA’s proposed amendments to section 37.9(a)(3)(i) involve the CFTC’s requirement that firm bids and offers must be taken into account and communicated to an 

RFQ requester along with the RFQ responses. These amendments would further 

clarify that any firm bid or offer that is communicated to an RFQ requester in this 

situation must be provided in an executable form so that the RFQ requester can 

easily access such price if so desired. In addition, as SEFs continue to make innovations in trading protocols, it is important that the order interaction requirement not 

be construed so narrowly as to render it inapplicable for these new trading protocols. As a result, these amendments would clarify that a SEF must communicate 

to an RFQ requester any firm bid or offer pertaining to the same instrument resting 

on any of the SEF’s markets, trading systems or platforms. We believe these amendments promote pre-trade price transparency by ensuring the RFQ requester has the 

ability to view and access competitive firm quotes anywhere on the SEF. 

Codify Existing CFTC Staff No-Action Relief: Eliminate ‘‘Occurs Away’’ Requirement 

for Authorized On-SEF Execution of Block Trades 

MFA’s proposed amendments would codify, with modification, existing CFTC staff 

no-action letter 14–118 by eliminating the ‘‘occurs away’’ requirement for block 

trades. More specifically, our proposed amendments would expressly authorize onSEF execution of any block trade as a permitted transaction. By doing so, a block 

trade can be executed by RFQ to 1 or by voice to facilitate the requisite pre-execution credit checks of block trades that are intended to be cleared. 

Increased Mandatory Disclosure from SEFs regarding Trading Protocols, Fees, and 

Governance 

In November 2015, the CFTC issued a notice of proposed rulemaking regarding 

‘‘Regulation Automated Trading’’, which included a provision requiring a designated 

contract market (‘‘DCM’’) to provide additional public information regarding its market maker and trading incentive programs. MFA supported such requirement and, 

in addition, recommended that the CFTC require SEFs to make similar types of 

57

market maker and trading incentive program disclosures. Applying these transparency requirements to SEFs would level the playing field with DCMs, as DCMs 

may directly compete with SEFs by listing swaps or economically similar contracts. 

MFA believes that such disclosure requirements will provide investors and the 

broader public with more information and transparency into DCM and SEF market 

maker and trading incentive programs, and we agree with the CFTC that such disclosure will enhance market integrity. 

Further, it is our view that market participants can benefit from greater transparency from SEFs regarding other important aspects of their offering, including 

trading protocols, fees, and governance. Ensuring that this type of information is 

consistently provided to market participants, will level the playing field and ensure 

that all investors can make informed decisions regarding whether to join a particular platform. 

Conclusion 

On behalf of MFA, I appreciate the Committee’s review of the impact of the G20 

clearing and trade execution requirements. As discussed, we believe that the CFTC 

should expand mandatory central clearing to IRS denominated in all G10 currencies. We also believe that the CFTC should engage in further rulemaking to ensure anonymous and impartial access to SEFs so as to promote an open, competitive, and level playing field. In addition, we respectfully ask Congress to encourage 

the Basel Committee to modify the Basel III leverage ratio to ensure that central 

clearing remains affordable for customers. We believe that, by promoting central 

clearing and organized trade execution in the OTC derivatives markets, these measures will advance the G20’s and Congress’s goal of reducing systemic risk. 

MFA is committed to working with Members and staff of Congress, the Committee, and regulators to reduce systemic risk, ensure affordable and impartial access to our financial markets, and strengthen our nation’s economy. Thank you for 

the opportunity to appear before you today. I would be happy to answer any questions that you may have.

The CHAIRMAN. Thank you, Mr. Berger. 

Mr. Zubrod. 

STATEMENT OF LUKE D. ZUBROD, DIRECTOR, RISK AND

REGULATORY ADVISORY SERVICES, CHATHAM FINANCIAL, 

KENNETH SQUARE, PA 

Mr. ZUBROD. Good morning, Chairman Scott, Ranking Member 

Scott, and Members of the Subcommittee. I thank you for the opportunity to testify today regarding certain derivatives-related aspects of Dodd-Frank. 

My name is Luke Zubrod, and I am a Director at Chatham Financial. Chatham is an independent firm providing advice and 

services to businesses that use derivatives to reduce their interest 

rate, foreign currency, and commodity price risks. Based in Pennsylvania, we serve 1,800 firms globally, including clients in every 

state represented by Members of this Subcommittee. 

Our clients’ risk reduction activity benefits the global economy by 

allowing a range of businesses, from manufacturing to agriculture, 

to real estate to financial services, to improve planning and forecasting, and offer more stable prices to consumers and a more stable contribution to economic growth. 

Chatham appreciates this body’s bipartisan efforts to address key 

concerns of non-financial end-users following the passage of DoddFrank, including efforts to clarify that margin and clearing requirements should not apply to nonfinancial end-users and their centralized treasury units. These efforts were instrumental in eliminating 

key barriers to efficient access of the derivatives market. 

Today, I will identify two similar barriers affecting a range of financial end-users that use low volumes of derivatives to reduce 

risk. In particular, clearing and margin requirements when applied 

58

to those transacting low volumes of OTC derivatives deter such 

end-users from managing their risks, cause them to manage their 

risks poorly, or dictate that they do so at significant expense. 

Chatham’s clients facing unwarranted burdens due to clearing 

and/or margin requirements touch a wide variety of industries, including corporates deemed to be financial in nature, real estate and 

infrastructure funds that make cross-border investments in buildings, railroads, ports, et cetera, regional banks that are contemplating using derivatives to serve their customers, reduce risk, or 

compete with larger banks in their footprints, microfinance funds 

whose capital is directed toward enabling the world’s poor to lift 

themselves and their families from poverty in developing countries. 

The first burden such firms face relates to the cost of clearing for 

such low volume users. Clearing members typically charge minimum monthly fees to establish a relationship that would enable a 

customer to comply with the clearing mandate. These fees vary by 

firm and customer, but typical fees amount to $100,000 per year 

or more. A firm hedging interest rate risks for a single 5 year bank 

loan will thus obligate itself to $1⁄2 million in fees over that period, 

just to have the privilege of hedging in the OTC markets. 

The second burden relates to risk imposed by the margin requirements which expose a company to liquidity risk that many firms 

are unwilling to take on. Liquidity risk is the risk that a sudden 

sharp movement in market conditions could force a company to 

come up with sums of cash that are significant to the company on 

short notice. In an extreme case, such margin calls could cause a 

firm to default on an obligation. 

Consider a firm with a 5 year interest rate risk, concerned that 

in today’s historically low interest rate environment, increasing 

rates could adversely affect their ability to make payroll. Such a 

firm could fully eliminate such risk by entering into a 5 year interest rate swap to lock in a fixed interest rate. On $100 million, 5 

year swap, subject to clearing or margin requirements, a firm 

would need to post approximately $2 million at inception, which 

could grow to as much as $12 million in a normally stressed market, and $25 million in an extremely stressed market, such as was 

seen during the financial crisis. These costs and risks create unintended consequences by negatively impacting the risk management 

decisions many firms make, causing them to stop hedging and retain risks that may harm business performance or even firm viability, hedge poorly in ways that cause them to retain risk, or hedge 

at significant expense and attempt to pass on cost to customers. 

While the benefits of clearing were widely understood when Congress enacted the clearing mandate, the costs were not. We now 

understand clearing to be a system that simply does not accommodate small and low-volume users. The consequence is that entities 

whose derivatives use has no ability to undermine financial stability are cut off from properly or effectively managing their risks. 

Small financial end-users are essentially thrown into a raging sea 

of market volatility without a dependable life preserver. 

These concerns could easily be addressed if Congress exempted 

low-volume users from clearing and margin requirements via a financial entities de minimis exception. Such an exception could be 

narrowly tailored to ensure that firms that meaningfully contribute 

59

to systemic risk would not be eligible. Such an approach is consistent with approaches adopted or proposed by Australia, Canada, 

Japan, and Singapore. 

Thank you for the opportunity to testify today, and I am happy 

to address any questions you may have. 

[The prepared statement of Mr. Zubrod follows:]

PREPARED STATEMENT OF LUKE D. ZUBROD, DIRECTOR, RISK AND REGULATORY

ADVISORY SERVICES, CHATHAM FINANCIAL, KENNETH SQUARE, PA 

Good afternoon, Chairman Scott, Ranking Member Scott, and Members of the 

Subcommittee. I thank you for the opportunity to testify today regarding aspects of 

the Dodd-Frank Act that emanated from the G20 agenda for OTC derivatives. My 

name is Luke Zubrod and I am a Director at Chatham Financial (‘‘Chatham’’). Chatham is an independent advisory and technology firm providing services to businesses that use derivatives to reduce their interest rate, foreign currency and commodity price risks (‘‘end-users’’). A global firm based in Pennsylvania, Chatham 

serves as a trusted advisor to over 1,800 end-user clients annually ranging from 

Fortune 100 companies to small businesses, including clients headquartered or 

doing business in every state represented by Members of this Subcommittee. Since 

our founding in 1991, we have advised clients on nearly $4 trillion in hedging transactions. 

Chatham’s clients rely on derivatives to reduce business risks, not for trading or 

speculative purposes. This risk reduction activity benefits the global economy, by allowing a range of businesses—from manufacturing to agriculture to real estate to 

financial services—to improve planning and forecasting, and offer more stable prices 

to consumers and a more stable contribution to economic growth. 

Chatham supports the Dodd-Frank Act’s aims of reducing systemic risk and increasing transparency in the derivatives market. We also appreciate the bipartisan 

efforts of this body to ensure that regulatory burdens are proportionately applied, 

taking into account an entity’s potential ability to jeopardize financial stability. In 

particular, we appreciate efforts to address key concerns of nonfinancial end-users 

following the passage of Dodd-Frank, including efforts to clarify that margin and 

clearing requirements should not apply to such end-users and their centralized 

treasury units. These efforts were instrumental in eliminating key barriers to efficient access of the derivatives market. 

Today, I will identify two similar barriers affecting a range of financial end-users 

that use low volumes of derivatives to reduce risk. In particular, clearing and margin requirements, when applied to those transacting low volumes of OTC derivatives, deter such end-users from managing their risks, cause them to manage their 

risks poorly or dictate that they manage such risks at significant expense. Indeed, 

per transaction costs for low-volume users are especially high when compared to the 

costs applicable to larger users—a fact that is at odds with their relative contributions to systemic risk. 

Chatham’s clients facing unwarranted burdens due to clearing and/or margin requirements touch a wide variety of industries, including the following:

• Corporates deemed to be financial in nature under Title VII (e.g., technology 

companies that process certain types of payments);

• Real estate and infrastructure funds that make cross-border investments in 

buildings, railroads, ports and other such physical assets;

• Regional banks that use limited quantities of derivatives products or are contemplating using such products to serve their customers, reduce risk or compete 

with larger banks in their footprints, and that do not otherwise qualify for the 

small bank exemption; [and]

• Microfinance funds whose capital is directed toward enabling the world’s poor 

to lift themselves and their families from poverty in developing countries.

While the businesses in which these firms engage vary widely, such firms share 

at least two characteristics: they (1) use derivatives to manage and reduce risk and 

(2) do not use quantities of derivatives that are sufficient to jeopardize financial 

market stability. 

Let’s consider the burdens such firms face, assess whether such burdens are necessary for the mitigation of systemic risk and consider what actions might alleviate 

unnecessary burdens. 

60

The first burden relates to the cost of clearing for low-volume users. Clearing 

members typically charge minimum monthly fees to establish a relationship that 

would enable a customer to comply with the clearing mandate. These fees vary by 

firm and customer but typical fees amount to $100,000 per year or more. Consider 

a firm that does not qualify for the end-user exception and needs to hedge a single 

interest rate risk over a 5 year period, as might be the case for a firm entering into 

a variable rate bank loan. That firm will obligate itself to $1⁄2 million in fees over 

that period just to have the privilege of hedging in the OTC derivatives market. 

The second burden relates to risk imposed by the margin requirements applicable to cleared swaps and soon to be applicable to swaps that are not centrally 

cleared. Margin requirements expose a company to new risks that many firms are 

unwilling to take on—especially liquidity risk. Liquidity risk is the risk that a sudden sharp movement in market conditions could cause a company, via a margin call, 

to come up with sums of cash that are significant to the company on short notice. 

In an extreme case, such a margin call could cause a firm to default on an obligation. At a minimum, a firm will need to hold back funds that it might otherwise 

invest in its business to ensure it has enough cash on hand to meet margin calls. 

Consider the aforementioned firm with a 5 year interest rate risk. Such a firm 

might be concerned that in today’s historically low interest rate environment, increasing rates could adversely affect their ability to make payroll. In the OTC derivatives market, such a firm could fully eliminate such risk by entering into a 5 

year interest rate swap to lock in a fixed interest rate. Prior to the clearing mandate, such a firm might have been able to negotiate a credit arrangement that did 

not require it to post cash margin. Rather, banks were able to manage credit risk 

to such borrowers through a variety of other means. The borrower was able to enter 

into the swap without any up-front fees—all costs associated with the swap were 

included in the fixed interest rate paid to the bank. On a $100 million swap, a firm 

would need to post approximately $2 million at inception, which could grow to as 

much as $25 million in a stressed market such as was seen during the financial 

crisis (or approximately $12 million in normalized market conditions). These 

amounts are illustrative of liquidity risks and would not need to be diverted from 

productive use if a firm were exempt from the clearing and margin requirements. 

These costs and risks create unintended consequences by negatively impacting the 

risk management decisions many firms make. In particular, a firm’s risk management behavior may change in three ways: the firm may (1) stop hedging, (2) hedge 

poorly or (3) hedge expensively.

1. Stop Hedging: Some firms respond to the high cost of clearing and margining by choosing not to hedge, retaining risk in their businesses that could 

unnecessarily jeopardize business performance or, in extreme cases, even a 

firm’s viability.

2. Hedge Poorly: Some firms enter into risk management products that force 

them to retain some risks. For example, some firms avoid the liquidity risk 

associated with cleared and margined swaps by managing their risks with 

products like options that do not create uncertain demands on a company’s 

cash. While this may satisfy a firm’s risk management objective in the short 

term, option products generally become very expensive when hedging for 

longer periods, and so companies often buy less protection, increasing their 

exposure to financial market gyrations over the long-term.

2. Hedge Expensively: Some firms may proceed with entering into cleared 

swaps, but incur the substantial costs to do so. This in turn increases the cost 

of their services and/or dampens their ability to deliver returns to investors 

like pension funds.

While the benefits of clearing were widely understood when Congress enacted the 

clearing mandate, the costs were not. We now understand central clearing to be a 

system that simply does not accommodate small and low-volume users. The consequence is that entities whose derivatives use has no ability to undermine financial 

stability are cut off from properly or effectively managing their risks. Small financial end-users are essentially thrown into a raging see of market volatility 

without a dependable life preserver.

These concerns could easily be addressed if Congress exempted low-volume users 

from clearing and margin requirements via a financial entities de minimis exception. Such an exception could be narrowly tailored to ensure that firms that meaningfully contribute to systemic risk would not be eligible. Congress has already recognized the principle underlying such an exception in Title VII of Dodd-Frank. However, that principle was narrowly applied to small banks and credit unions (i.e.,

61

those with less than $10 billion in assets) and does not include the various types 

of market participants identified in this testimony. 

Numerous foreign governments, including Australia, Canada, Japan and Singapore, have exempted or proposed to exempt a range of financial entities whose 

transaction volumes are relatively small from their clearing and/or margining rules, 

effectively acknowledging the burdens such requirements create for smaller entities 

and the limited public policy benefits of encompassing such entities within the requirements’ scope. 

On the basis of the evidence now available on the cost of clearing and margin, 

the extent to which such costs adversely affect low-volume users, the recognition 

that such entities have limited ability to undermine financial stability, and the extent to which foreign governments have similarly exempted low-volume users, we 

urge policymakers to enact a financial entities de minimis exception from clearing 

and margin requirements. We believe such a policy would provide needed relief 

without increasing systemic risk. 

We appreciate your attention to these concerns and look forward to supporting the 

Subcommittee’s efforts to ensure that derivatives regulations, while fully reflecting 

the policy objectives of Dodd-Frank, do not unnecessarily burden American businesses, jeopardize economic growth, or harm job creation by creating barriers to 

tools used to reduce the risk of investing in the economy. 

Thank you for the opportunity to testify today and I am happy to address any 

questions you may have.

The CHAIRMAN. Thank you. Thank you all for your testimony. 

The chair would like to remind Members that they will be recognized for questioning in order of seniority for Members who were 

here at the start of the hearing. After that, Members will be recognized in order of arrival. I appreciate Members’ understanding. 

I now recognize myself for 5 minutes. 

Mr. Edmonds, as we start this hearing, I want to put part of today’s conversation about recovery and resolution in context. U.S. 

clearinghouses are robust financial institutions with significant financial resources at their disposal. The recovery or resolution of a 

clearinghouse like ICE or CME would be unprecedented. Can you 

describe what would have to happen to exhaust the resources of a 

major clearinghouse like ICE? 

Mr. EDMONDS. So let’s back up and remember that we all serve 

international customers, and given the European regulation around 

qualified CCPs coming out of the European equivalence debate that 

we have had, means that if you are deemed systemically important, 

either you have to meet that if you are a European clearinghouse, 

or you are going to voluntarily subscribe to those types of robust 

structures. So that means that simultaneously two of your largest 

members are defaulting on exactly the same day, at the same time. 

And your model right now has to be able to support enough collateral to hold against that happening. 

So if you ask me what happens if we are not going to be able 

to survive that, it is going to be more than what those standards 

are, obviously, to get to that point. And that means you are going 

to be in a very stressed market situation, one that is likely unprecedented. If you look back at the history of the 2008 crisis, you are 

going to find yourself in a position where we all stress test to what 

those events were, the price shocks that we saw to the marketplace 

and the instruments that we held or we do hold now, based on a 

historical look back to that. So we know we can sustain two. We 

know we can sustain likely more than that, but we have to prove 

every day that we have tool sets in order to survive that. 

If you ask me what happens if it is five or six, I am not sure you 

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lem going on in the global financial markets at that point in time. 

But the short answer is you have to be able to cover at least more 

than two going down at the same time. 

The CHAIRMAN. Ms. Rosenberg, clearinghouses are bigger today, 

but as we talked about at our last hearing, clearing members are 

also required to hold more capital than they did before the crisis. 

How has this changed your concerns about clearinghouse risk? 

Ms. ROSENBERG. Thank you for the question. I would just reiterate one point that my colleagues here at the table also made, is 

that in terms of capital that we have to hold against the guarantee 

that we provide on behalf of our customers to the clearinghouse. 

We are currently facing a situation with the leverage ratio where 

the cash that we receive from our customers is actually risk-reducing because it offsets the exposure that we have to the clearinghouse. And so that has been an impact from our standpoint in 

terms of the capital that we need to hold, and as a result, we are 

seeing a contraction with several other clearing members actually 

exiting the market, and there is greater concentration with respect 

to the market, which is not a good thing for end-users. 

The CHAIRMAN. Mr. Duffy, in a speech last year, Chairman 

Massad noted that clearinghouse risk couldn’t just be understood 

in terms of skin-in-the-game, and that you also had to look at the 

full picture of policies and practices that mitigate risk. What policies and practices have changed over the last 6 years to better 

manage risk within your clearinghouse? 

Mr. DUFFY. Well, there have been a number of different situations that we have done, and Mr. Edmonds outlined them, but we 

are all new to OTC clearing, which is what we are talking about 

today. Historically, when you look at CME Group and our base 

businesses, which is futures, we have never had a default to date 

due to a customer loss. So that is one of the biggest issues. 

When you look at the way things are margined today, since 

Dodd-Frank was put into place, we mark-to-market every day, and 

we can mark-to-market every hour. The capital that we accept 

today is different than it was as little as 5 or 10 years ago, so it 

is much more liquid than it was before. 

Those are a couple of the different issues that we have done to 

bolster our clearinghouse. And we have, again, the risk management associated with the clearinghouse is critically important to 

us. The governance that is associated with our clearinghouse is important. We are working with agencies constantly. We are deemed 

a systemically important financial market, so these are all different 

things that we have to cooperate with and we have done a good job 

at it. 

The CHAIRMAN. Thank you. I have a couple of other questions 

but I am going to try to hold to the 5 minute rule and come back 

for a second round of questions, and try to hold every Member to 

that as close as we can. 

I will now recognize the Ranking Member, Mr. Scott, for 5 minutes. 

Mr. DAVID SCOTT of Georgia. Thank you, Chairman Scott. 

My concern in this entire harmonization cross-border equivalency 

issue has been to make sure that our financial firms, our clearinghouses, our market participants, are not put in a competitive disVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00066 Fmt 6633 Sfmt 6601 P:\DOCS\114-53\20492.TXT BRIAN
63

advantage in the global marketplace. Mr. Duffy, from your testimony I get a sense of rising concern, even though we have had the 

December 2015 moved by the CFTC, and now we have the May 24 

rule, but you still have some great concerns. And from your testimony, as I was reading it, you said, ‘‘that if this is not the case, 

then regulation will artificially influence liquidity, price discovery, 

risk management, and competitively disadvantage our market participants in an increasingly competitive global marketplace’’, which 

goes to my concern. 

So you are telling me that instead of let my heart not be troubled, you are saying let our hearts be troubled. Could you tell us 

why you feel, even in the midst of the great work, and I tip my 

hat, that Chairman Massad has done, that you still have some indigestion on this issue, that you and I both are very much concerned about. 

Mr. DUFFY. Thank you, sir. One of the things that I have noticed 

in my 36 year career at the CME, and trading for 23 of those, and 

then being in management for the last 15, and especially going 

through regulation, is uncertainty from market participants. It is 

the worst thing you could possibly have is not knowing what the 

rules of the road are. So when we talk about the equivalence equation that was originally done in February, what happens is they 

keep bumping up against the dates, the market participants aren’t 

certain what the rules or the regs are going to be, what jurisdiction 

they can participate in. And that is exactly what happened again 

under the equivalence. 

Mr. DAVID SCOTT of Georgia. Yes. 

Mr. DUFFY. And as you know, we are waiting for the ESMA recognition, which I referenced in my testimony, which hopefully we 

were getting today or tomorrow. But we need to have that by June 

21. So we are trying to keep participants knowing what their capital costs are going to be, if they are going to clear at a U.S. entity 

or not, because they are going to be completely different if we are 

not recognized. And we can’t continue to bump up against these 

dates. Certainty is the clearest thing I can say to that, sir. 

Mr. DAVID SCOTT of Georgia. All right. And, Mr. Edmonds, let me 

ask you, first of all I want you to give me an update on where we 

are with equivalence for clearinghouses. 

Mr. EDMONDS. Well, as Mr. Duffy said, we still have these dates. 

So we know where we are going to land the airplane. We may not 

know when we are going to land that airplane, is the easiest way 

I could give you that analogy. 

Mr. DAVID SCOTT of Georgia. Yes. Okay. 

Mr. EDMONDS. So the conceptual agreement that the global regulators have on the equivalence is well understood. It is still the details in that concept that are causing some people angst, as you articulated in previous comments on that. Things like anti-pro-cyclicality measures, you have three different options that you can use 

in order to meet the global benchmark. Well, no one yet knows 

which of those three everyone is going to use at a given time. So 

we know we have to get to that endpoint, but that endpoint is not 

there yet, and then while that endpoint is well defined, the path 

there is not yet well defined. That is where we are going to——

64

Mr. DAVID SCOTT of Georgia. All right. And, Ms. Rosenberg, let 

me ask you, do you think that the clearing mandate that we have 

has been a positive development, and if not, or even if so, what 

more do you specifically think the CFTC should do? 

Ms. ROSENBERG. Thank you for the question. I think that the 

G20 global derivatives reforms overall have made the system safer 

and more resilient and increased transparency. 

It has been several years now since global standards have been 

developed for clearinghouses. They were set in 2012 by the global 

standard setter, CPMI–IOSCO. We believe it is time, and it has 

been, and regulators have been taking a step back over the last 18 

months to revisit those standards, as market participants have 

raised concerns about different areas. I spoke about this in my oral 

remarks, which is CCP risk governance and capital contributions, 

stress testing, specifically setting minimum prescriptive standards 

for clearinghouse stress testing, as well as with respect to stress 

testing, ensuring that there is a supervisory regulatory-driven 

stress test that reviews those financial safeguards to ensure that 

they are adequate. 

CPMI–IOSCO has taken that feedback onboard from market participants and is in the process of developing a market consultation 

to cover all of these areas; capital, skin-in-the-game, governance, 

margin, as well as stress testing. And we look forward to U.S. regulatory participation and support, including the CFTC, in those discussions. 

Mr. DAVID SCOTT of Georgia. Thank you very much, Mr. Chairman. 

The CHAIRMAN. I now recognize Mr. Lucas. 

Mr. LUCAS. Thank you, Mr. Chairman. And I appreciate you 

holding this hearing. These, obviously, are complex issues, and it 

is an example of why it is so important that we hear directly from 

the financial sector that is impacted by the reforms that have 

taken place in our markets and our market participants. 

I would like to continue the discussion that has been going on 

about the CCP risk management and the equivalency, and my first 

question I will throw out to the crowd, it becomes quite clear there 

is an agreement with the panel that significant progress has been 

made in enhancing the standards for risk management at CCPs, 

and that global coordination among regulators in developing those 

standards. And obviously, the European Commission is preparing 

legislation to address CCP recovery and resolution. 

Would the group, and whoever would prefer to go, in what order 

I don’t care, would you expand for a bit about the various challenges that the CCP equivalency agreement, that was just reached 

between CFTC and European Commission, represent to your industry and ultimately to your consumers or customers? 

Mr. DUFFY. I will start. I think that the agreement that we 

reached is one of those agreements that, as I said earlier, took way 

too long, which could affect the consumers because of the uncertainty of it. I think that we had to bend it a little bit here in the 

United States in order to get deemed equivalent, which concerns us 

a little bit. We want to make certain that our regulators are regulating the U.S. markets, and not a foreign regulator regulating the 

65

U.S. markets. That is the way I look at it. So I don’t want them 

being our Prudential Regulator. 

There was a lot of back and forth, and hopefully we are in a 

place right now, Mr. Edmonds mentioned pro-cyclicality, there has 

been a lot of pro-cyclicality back and forth on these agreements 

that we never had to adhere to before as a U.S. entity, that we are 

adhering to today, in order to be deemed equivalent in the European Union. 

Maybe that is just progress, the way it goes back and forth; but, 

overall, it should not hurt the business here in the United States 

now that we have gotten to this certain point. 

Mr. LUCAS. Absolutely. And that makes me think of Mr. Scott, 

the Ranking Member’s comment about the disadvantage. I don’t 

think anyone in this Committee wants the industry and the United 

States or the participants here to be put at a disadvantage. And 

where are we in those circumstances? And I throw that again to 

the rest of the panel. 

Ms. ROSENBERG. So one of the things going on in Europe right 

now is that we expect the European Commission to be drafting legislation on CCP recovery and resolution. We expect that to come 

out close to the end of the year. I suspect it could go into next year. 

In any case, in the U.S. market, we don’t require any specific legislation to implement recovery and resolution standards. Okay. 

What we want to make sure about also is that any legislation that 

is developed in Europe does not cause differences with the U.S. 

rules and legal environment. The Financial Stability Board is in 

the process of developing global standards with respect to resolution planning for clearinghouses, what the plans, what the guidance should be around developing those plans for resolution authorities with respect to CCPs. We would encourage the Europeans 

and Chairman Massad, through his discussions with the European 

Commission, to ensure that those standards that are developed are 

consistent across Europe and U.S. We wouldn’t want any differences and go through another equivalence type of discussion 

that we have had, and Mr. Duffy elaborated on. 

Mr. LUCAS. Mr. Duffy. 

Mr. DUFFY. Yes, what I think is important is we do have a resolution recovery and stress testing here on U.S. CCPs that is overseen by our regulator. I don’t disagree with my colleague, it would 

be nice to have a uniform approach across the globe, but what is 

important to us is that we do have that within our U.S. regulator 

right now. 

Mr. LUCAS. Ms. Rosenberg, let’s continue along this vein. Could 

you discuss with us for a moment the current models for stress 

testing, what weaknesses that might exist, how those could be addressed, because it seems, and Mr. Edmonds too, for that matter, 

it seems that the stress testing process modeling is absolutely important? 

Ms. ROSENBERG. Yes, it absolutely is important. And I just want 

to mention my partners over here, Mr. Edmonds and Mr. Duffy, I 

don’t want there to be any perception that the companies they 

work for, the stress testing models are not robust, or anything like 

that. What I am talking about is, I have responsibility for overseeing JPMorgan’s 50 derivative clearinghouse memberships globVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00069 Fmt 6633 Sfmt 6601 P:\DOCS\114-53\20492.TXT BRIAN
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ally, and from that perspective, I will say that the current global 

standards rules that govern clearinghouses on stress testing are 

very light. They effectively say that clearinghouses should stress 

test their portfolios and use scenarios that are extreme but plausible. It is very light on the prescriptive standards. And so what 

we have raised, JPMorgan, other clearing members, as well as endusers, to the global standard setters, that there needs to be more 

prescriptive standards. And that would cover those kinds of assumptions and basic parameters about how that work should be 

done. 

Separate from that, we do believe that there should be, like 

ESMA has just completed, ESMA is the European regulator that 

oversees CCPs in Europe, they just completed a stress test, overseen by the regulator, across 17 European CCPs. We believe, and 

the results were transparent to the market, and we believe something like that would provide more confidence in CCP structures. 

Mr. LUCAS. Mr. Chairman, my time has expired, but if there is 

another round, we may continue along this vein. 

The CHAIRMAN. Yes, sir, and it expired a minute ago. 

The chair now recognizes the gentleman from California, Mr. 

Aguilar. 

Mr. AGUILAR. Thank you, Chairman Scott. And I don’t want to 

be admonished so I will make sure I stick to my time. 

Some of my colleagues have gone down this road. And, Mr. Edmonds, you talked about the global nature of this market, and, Ms. 

Rosenberg, you just commented on the same from the regulatory 

framework abroad. So I will make this to Mr. Berger, Mr. Merkel, 

Ms. Rosenberg, and Mr. Zubrod. 

Can we go down that path a little further? I am interested to 

know about the financial regulatory structure in other countries 

and how that is going to impact the swaps market. 

Ms. Rosenberg, you just talked about the European discussion 

moving forward, and earlier you talked about continued discussions 

in the regulatory structure abroad. Can we talk about the impact 

that will have on the U.S. swaps market? 

Ms. ROSENBERG. Sure. I am happy to start. Thank you for that 

question. That is a very important question. 

One of the things we have seen with respect to SEFs and market 

liquidity is that there could be certain enhancements made in the 

U.S. CFTC rules to curtail the current market fragmentation that 

we have seen between Europe and the U.S. We expect the European regulators to develop specific rules around SEFs going into 

next year. And currently, the U.S. rules are very prescriptive with 

respect to how swap dealers can execute trades, and we do believe 

that there needs to be more flexibility on that front because we expect that is where the Europeans are going. And that is very important. And I do believe that the CFTC and Chairman Massad are 

very supportive of this. 

Mr. AGUILAR. Mr. Merkel? 

Mr. MERKEL. I would agree with that. What we have seen is that 

there were good intentions on the part of the CFTC to try to lead 

and try to get other jurisdictions to harmonize forms of execution. 

It just didn’t work. What ultimately ended up happening was it 

chased away non-U.S. participants, and led to markets developing 

67

outside the United States, which did fragment liquidity. It is not 

a crisis, just unfortunate, and doesn’t really benefit anyone. From 

our perspective, we will do the business wherever it is. We will do 

it in New York, we will do it in London. And we will have to see 

what happens with MiFID II and how the U.S. agency approaches 

it. I do think that one should be realistic and be somewhat courteous of what is going on in Europe, and understand that they 

don’t have to come here. And it may well be that we may face a 

situation in which at some point U.S. firms aren’t going to be able 

to do business in Europe as easily, and that would be unfortunate 

for a number of reasons. And the best way to do this is to encourage what we think is starting to occur, which is a different approach that Chairman Massad is taking, and see what develops. 

We are in a cautiously optimistic mode, provided something happens. If nothing occurs, we are going to have a problem. I just 

don’t, at the moment, think I might be optimistic, but that is not 

likely. 

Mr. AGUILAR. Thank you. Mr. Berger? 

Mr. BERGER. We are likewise optimistic that a harmonized and 

mutually recognized regime can be put in place for both clearing 

and trading. On the clearing front, as I noted in my opening remarks, the scope of the clearing obligation that is going to be 

phased in in Europe beginning this year is identical in scope to 

what has been already put in place in the U.S. 

On the execution side, the good news is there is common architecture that has been developed. Europe has adopted the same execution of clearing workflow and straight through processing rules 

that the CFTC has put in place. And there is a commitment in both 

regimes that trading venues should provide impartial and nondiscriminatory access to all market participants. 

There is a path forward. Obviously, the European regime is a few 

years being. Clearing is just being phased in there this year, and 

we phased clearing in in 2013. And as other commenters have 

noted, the MiFID II reforms, which will affect trading in Europe, 

come into effect in 2018. So there is a timing differential, but the 

objectives and the end state is consistent across both. 

Mr. AGUILAR. Thank you. Mr. Zubrod, real briefly. 

Mr. ZUBROD. Yes, I will note with respect to my testimony the 

comparison with Singapore, Australia, Japan, and Canada, these 

are governments who have enacted what amounts to exceptions to 

clearing and/or margin in their regimes, and the implication for 

them is that such market participants will not be unnecessarily 

burdened, whereas those here in U.S. markets will be by these requirements. 

Mr. AGUILAR. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. The chair now recognizes Mr. Neugebauer, for 5 

minutes. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. 

Mr. Duffy and Mr. Edmonds, we have talked a lot about clearinghouse governance, and so how do you determine what level of risk 

a clearinghouse takes on, and then what are your primary tools 

that you use to manage that risk? 

Mr. EDMONDS. Those decisions are made at a risk committee 

level, which is part of the defined part of the governance structure. 

68

A recommendation is made, whether it is a new product, a new 

member coming into the clearinghouse that is going to bring their 

own level of customer flow into the clearinghouse at the time. And 

once that decision is made to launch those new products or to add 

on that new member, we are constantly looking at the entire book, 

the match book. At no point in time do we run an unmatched book. 

The only time that ever happens is if one of the members is defaulting, and our job at that moment in time is to bring it back to 

match book as quickly and as efficiently as possible, with as little 

disruption to the marketplace as possible. 

Making certain that all of the members that we govern through 

the clearinghouse structure and the way it is set up under the 

CFTC, that we understand the risks they are bringing, and the collateral they bring to support that risk on a daily basis is the function of the clearinghouse, and continues to be the primary responsibility that we have to the marketplace. 

From a tools perspective, this is everything in the waterfall. Membership, not everyone qualifies. If I have $5 and you have $5 

million, chances are you are a better member than I am at that 

day. 

Mr. NEUGEBAUER. Yes. 

Mr. EDMONDS. Okay. Making sure that the qualified members 

are there, and making sure there are operational risk controls 

there so they can process the customer flow. Our members, who are 

very important partners with us, ultimately make the decision of 

who gets access to our clearinghouse services. If they have done a 

poor job, we need to be able to spot that, and we need to be able 

to have a consultation with them. We don’t like this position, it is 

too concentrated. If it is too concentrated, there are other premiums of collateral we bring in there. You may want to hold a very 

concentrated position, and we may be able to get comfortable with 

that, but you might be collateralizing that more than 100 percent 

of the risk that we hold. If that is something you are willing to pay, 

we will take that at the end of the day. And then making sure that 

we get all the way down through, okay, what happens if it goes the 

wrong way. What happens if the collateral wasn’t what we thought 

it was going to be? How do we manage that process all through 

again? Membership committee: It is the same for every single person. No one is making a bilateral decision. Clearing member A gets 

this function. Clearing member B gets a separate function. Everyone is managed to absolutely the same standard at all times. 

Mr. DUFFY. I would just add, I agree with Mr. Edmonds completely on everything he said there, but I would just add that one 

of the things that we have the ability to do under the Dodd-Frank 

Act, which was critically important when we are talking about 

swaps, is the ability to reject a swap at the clearinghouse CCP 

level if we are not comfortable with the risk that it is bringing into 

our institution. I think that is something we use, and margin is another tool that Mr. Edmonds also referenced. Margin is something 

that is important for the CCPs always to have the ability to set. 

We are not interested in if the price goes up or down, we are interested in managing the risk. These are the tools that we have put 

in place today, and I am only outlining a couple of them, Mr. Edmonds did a good job outlining the others, but these are critically 

69

important tools. When you don’t have an interest in the market 

going up or down, that is who should be setting the margin, and 

the ability to reject something that you are not quite sure how to 

risk manage is also critically important. 

Mr. NEUGEBAUER. The leverage ratio as several of you alluded to 

that, and so the question I have is: leverage ratio, has it caused 

margins to go up. So, in order to adhere to whatever the leverage 

ratio is pegged at, would you get credit for additional margin that 

you request from your members? 

Mr. EDMONDS. Now, that is a bit of the perplexing piece because 

the more margin our members collect on their client positions and 

post to us, the way the rules currently stand today, the more capital they have to hold against it. So at a time where we are trying 

to encourage more and more individuals to use clearing services because of the risk-reducing nature of it, we are adding to that cost. 

The more collateral we get, the more the bank clearing members 

are having to hold against that. Well, they have to then charge for 

holding that capital against that, from a regulatory capital perspective. That increases the cost to your end-clients. And that is where 

this thing begins to spiral out and more people are making the decision today, if they possibly can, to choose not to be in that situation. 

Mr. NEUGEBAUER. That is counterintuitive. In other words, what 

you are saying is the less risky you make that position, the more 

capital that you have to keep. Do I understand that correctly? 

Mr. EDMONDS. You do. And yes, it sounds illogical, and we are 

trying to have a logical conversation. 

Mr. NEUGEBAUER. Mr. Duffy? 

Mr. DUFFY. May I just jump in real quick? What I think is critically important, and Ms. Rosenberg can answer this better than 

any of us because this affects her more than anybody, but what is 

important is her bank, or any other bank, cannot touch that collateral that is in the clearinghouse because it is segregated. There is 

no reason to have the leverage ratio charge put up against it. They 

have no access to that capital or collateral. 

The CHAIRMAN. The chair now recognizes Mr. Davis, from Illinois, for 5 minutes. 

Mr. DAVIS. Thank you. Thank you, Mr. Chairman. And thank 

you to everyone for coming here today to talk about this important 

issue. A lot of the questions that I had planned to ask have been 

asked by my colleagues. And that is the benefit of being a little further down the seniority ladder, like we are. 

Let me start with you, Mr. Zubrod. Can you go into a little more 

detail on the impact to agricultural and energy firms moving away 

from the swaps market to the futures market to possibly hedge 

their risks? 

Mr. ZUBROD. It is a good question, and I appreciate its premise. 

If I can discern correctly, the premise is that we should really give 

due consideration to players who are involved in helping to provide 

price stability to the kitchen table, to energy bills that consumers 

pay at home. My view on the key obstacles to smaller players like 

that in accessing the markets tends to be focused, again, on the 

issue of clearing and margin costs for those smaller players, not 

necessarily the obstacles, for example, created by SEFs or other 

70

things. There are legitimate debates about whether or not one 

needs to be prescriptive in defining all aspects of how SEFs need 

to operate, but that being said, I think that is not the key obstacle 

for a lot of the clients that we work with in accessing the markets. 

It is the significant costs associated with clearing and margin. 

Mr. DAVIS. Okay. Do you have any suggestions to address some 

of these obstacles? 

Mr. ZUBROD. Yes, again, for the clearing and margin requirements, it could be addressed very simply, and the simplistic solution is to exempt small, low-volume players from the clearing and 

margin requirements. 

Mr. DAVIS. Okay. Mr. Duffy. How are you, sir? 

Mr. DUFFY. I am good, sir. How are you? 

Mr. DAVIS. Good. Nice to see you are on your wing again here. 

As many of you know, it was named the Terry Duffy Wing, one of 

the last Subcommittee hearings that I had. It was just me that 

named it, so sorry, Terry. We don’t have a plaque up yet. Can you 

fix that, Chairman Scott? 

Mr. Duffy, how does the CME strike the appropriate balance between profits and risk management? 

Mr. DUFFY. How do they—between what, profits and risk management? 

Mr. DAVIS. Yes. How does your company strike the balance between profits and risk management? 

Mr. DUFFY. Risk management comes first, sir. Without risk management, we don’t have profits. I have said this a million times 

over, the credibility of our marketplace is of the utmost importance 

to CME Group. We cannot shortcut any of the risk management 

tools or protocols that we put into place, or continue to put into 

place, or we will not have shareholders. We do not put profits in 

front of risk management. Again, this is something that is near 

and dear to my heart, and near and dear to everybody in the organization, because we will not shortcut that process one cent. 

Mr. DAVIS. And we appreciate that. 

And I will yield back the balance of my time, Mr. Chairman. 

The CHAIRMAN. Thank you, Mr. Davis. I now recognize Mr. Kelly, 

from Mississippi, for 5 minutes. 

Mr. KELLY. Thank you, Mr. Chairman and Ranking Member 

Scott, for having this hearing. And thank you, witnesses, for being 

here. 

I have been in and out so if I ask you something that has already 

been asked, I apologize. 

Mr. Davis talks funny beside me, so I know that you guys can 

understand my accent much better than his. 

Ms. Rosenberg, you were partially answering this when I walked 

back in, but if you want to add anything, has the clearing mandate 

been a positive development for the market? 

Ms. ROSENBERG. Thank you for the question. Yes, we believe it 

has been a positive development for the market. The G20 reforms 

have made the system safer and more transparent. And what we 

are collectively doing now, market participants as well as regulators and clearinghouses, are reviewing current standards. We do 

expect market consultation at the global level to come out over the 

next couple of months to cover many of these standards that are 

71

being revisited, and they include stress testing, initial margin, governance, as well as recovery tools. And we look forward to providing that input into that process. 

Mr. KELLY. And kind of as an unintended follow up, I guess, as 

a member of many clearinghouses, does your firm have any say in 

the products that are cleared in each venue, and do you have any 

concerns about the products that might be cleared in the central 

clearing counterparties JPMorgan is a member of. Further, do you 

think the capital and margin rules are incentivizing products to be 

cleared that perhaps shouldn’t be? 

Ms. ROSENBERG. That is near and dear to our firm’s heart, as 

well as other clearing firms. What I haven’t said in my testimony 

is that JPMorgan, as a firm, there are employees at JPMorgan that 

do sit on clearinghouse risk committees, but that role that we participate in is as a fiduciary on behalf of the clearinghouse, or as a 

market expert. It is not representing us as a clearing firm. What 

we have seen, and we think we expect it to continue to go in this 

direction, particularly with the non-cleared margin rules coming 

out, starting in September, there is an interest by participants and 

CCPs to clear more products. There is going to be a demand to 

clear more products, even if they are not mandated, more complex 

products. And we do think there needs to be more involvement 

with key stakeholders, like members, through a mandatory consultation process early in determining whether a product is suitable to clearing because the impact of clearing more complex products could impact our capital that we contribute through the loss 

mutualization process. 

Mr. KELLY. Mr. Berger, I am talking about swaps execution facility, the SEF, can market participants limit themselves to using 

only one SEF, or do they need to use multiple SEFs? And if the 

latter, if they need to use multiple SEFs, what problems does that 

pose? 

Mr. BERGER. Market participants are free to use one or multiple 

SEFs. Many buy-side market participants use the two SEFs that 

serve the buy-side community: Bloomberg or Tradeweb, so many 

buy-side market participants will use one or both of those venues. 

There are probably, serving the interest rate swap market and the 

credit default swap market, eight or nine SEFs that have a decent 

amount of liquidity. One of the concerns that the Managed Funds 

Association has, however, is that there are really only two SEFs 

that are truly open and accessible to customers in the market, and 

five or six of the other SEFs that have liquidity have to maintain 

certain barriers. So it would be beneficial if investors could access 

the full array of swap execution facilities that have liquidity. 

Mr. KELLY. Thank you. And, Mr. Edmonds, we talk a lot about 

models and stress testing, but how good are the models and how 

do we know that the models developed will work in a time of 

stress? 

Mr. EDMONDS. We have to use the best information available to 

us at the time. I will tell you, spending time, in my previous role 

at ICE, running the CDS Clearinghouse, we went back and we continued to look back at the 2008 crisis, and we looked at that and 

we said what if it was two times as big, what if the price differential from the Lehman Brothers’ default and its impact on credit deVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00075 Fmt 6633 Sfmt 6601 P:\DOCS\114-53\20492.TXT BRIAN
72

fault swaps was 200 percent of what we witnessed that day. And 

we still hold enough capital against that today. If it is 400 percent, 

we might have a different conversation, but as I said earlier in one 

of my remarks, I might not be the thing you are looking at that 

day, it might be a much bigger piece. 

Mr. KELLY. And thank you, Mr. Chairman. I yield back. 

The CHAIRMAN. We are going to go on to our second round of 

questioning now. And I yield myself for 5 minutes. 

Mr. Berger, members of your firm have been enthusiastic about 

the impact of Dodd-Frank on cleared derivatives transactions, and 

have worked hard to build a business as a nontraditional liquidity 

provider in certain swaps. Do you see the success of Citadel as the 

new model for swaps liquidity as banks retreat from their traditional role in these markets? 

Mr. BERGER. Just one note up-front, I am here today representing Citadel’s hedge funds businesses, speaking on behalf of 

the Managed Funds Association and Citadel Securities, which conducts swap market-making activities operates independent of Citadel’s hedge funds. That said, a central goal of the swaps markets 

reforms was to lower barriers to entry and increase competition, 

and that does directly benefit investors by providing more competitive pricing and more diverse sources of liquidity beyond the historical incumbent intermediaries in the marketplace. 

The CHAIRMAN. Do you think that all swaps markets are suitable 

for electronic market-making, and are there any liquidity challenges created by Dodd-Frank, despite the success you have seen 

at Citadel? 

Mr. BERGER. I don’t think all swap markets are suitable for electronic trading. There are portions of the swap market that remain 

uncleared, for example, but the portions of the swap market that 

are cleared and that are highly liquid and transparent, are standardized, liquid, and transparent, are appropriate to trade on swap 

execution facilities through electronic RFQ and order books as well. 

Research that has looked at the impact of the migration to SEF 

trading has shown that it has improved pricing and liquidity. We 

have heard referenced today already to the Bank of England research that was released earlier this year or, sorry, at the end of 

last year, that reached that conclusion, and that research has been 

independently validated by some other market researchers, including Claris. There are tangible benefits that market participants are 

realizing from these reforms. 

The CHAIRMAN. So you think it has improved liquidity, and you 

don’t see any challenges with liquidity because of it? 

Mr. BERGER. I think that it has improved pricing and liquidity, 

and the challenges that exist with respect to liquidity in the marketplace are best addressed by ensuring that more market participants can join all the venues that are available, and that there are 

more diverse means of risk transfer and price discovery. So that a 

broader array of market participants who can be both price makers 

and price takers, and a more kind of diverse marketplace is the 

long-term solution to any liquidity challenges we face today. 

The CHAIRMAN. All right. Ms. Rosenberg, late last week the European Union announced that it was delaying its margin for 

uncleared swaps rules. Chairman Conaway stated that this is yet 

73

another failure of international cooperation which will have real 

consequences for U.S. market participants. How does this sudden 

shift in coordination impact a bank like JPMorgan, and what other 

potential failures of cooperation are you worried about? 

Ms. ROSENBERG. This is a really—pressed the wrong button, 

sorry. 

The CHAIRMAN. That is all right. 

Ms. ROSENBERG. This is a really important question, and it is 

something that policymakers and regulators need to be focused on. 

As you mentioned, it is a recent announcement, it just happened 

on Friday, and we are still considering the implications for 

JPMorgan, but our initial concern is that it may create disadvantage for U.S. banks. A primary priority for the industry throughout 

the development of these margin rules has been consistency and 

content and timing. So we don’t want a delay in timing in one jurisdiction that could create undue burden or lack of competitiveness for U.S. firms. 

The CHAIRMAN. Mr. Zubrod, if U.S. regulators go it alone with 

the uncleared margin rule because the European Union failed to 

follow through with its commitments, what will be the impact of 

end-users like your clients? 

Mr. ZUBROD. Sure. Thanks for the question. I would say global 

margin rules really reflected the most careful and deliberate process across all of derivatives regulation to reach a globally coordinated outcome, and to line up the start dates globally as well. And 

it would be valuable to endeavor to retain a key benefit of that coordination by maintaining those aligned start dates. Failures to do 

so will drive imbalances in counterparty selection that have competitive implications. For example, if I were a European entity, and 

I had the choice of facing a European bank or a U.S. bank, one who 

was subject to U.S. margin rules that started earlier, and another 

who was subject to European rules that had not yet taken effect, 

if those start dates didn’t match, I would have the incentive to 

transact with the European bank. So that is certainly a real-world 

implication of becoming misaligned on those dates, and we should 

endeavor to move forward in lockstep with Europe. 

The CHAIRMAN. Yes. Thank you. I would now recognize Mr. Conaway, the Chairman of the full Committee. 

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A 

REPRESENTATIVE IN CONGRESS FROM TEXAS 

Mr. CONAWAY. Thank you, Mr. Chairman. 

I apologize for popping in and out, but thank you all for being 

here. 

In Chris Giancarlo’s white paper in 2015, he was critical of the 

limitation on methods of execution available for swap SEFs which 

was needed in the G20 rules and/or Dodd-Frank, but it was a part 

of the Gensler regime. Can any of you comment on the impact that 

that limitation has on the way you do your business, good or bad? 

Yes, Mr. Merkel? 

Mr. MERKEL. Thank you, Mr. Chairman. We would agree with 

Commissioner Giancarlo in that respect. We faced at the WMBAA 

early on, there had been a bias towards exchanges and towards 

electronic marketplaces, and we worked hard to make sure that 

74

Dodd-Frank ultimately provided a technology-neutral approach 

with respect to marketplaces that used any means of interstate 

commerce. And we thought at that point that the debate was over, 

but it turned out it was just beginning. When the proposed rules 

came out, they were constrained. They really were. 

They continued to have issues with voice brokerage, there were 

issues with respect to trying to put in and prevent certain matching protocols that otherwise should have been permitted, and were 

successful all over the world, but the agency didn’t want. Over 

time, we were able to work with the staff to get to a better place, 

but we continued to have some regulatory uncertainty. Letters for 

relief or guidance have been unanswered. Other areas we are in a 

tacit form. And you see that MiFID II has a much more expansive 

and flexible approach to execution than you see here. Again, while 

I am optimistic that it will all be harmonized, we have noticed that 

it has taken time and it has been difficult to get to where we have 

finally gotten to with respect to most, but not all, of the auction 

protocols. Some of the issue may be that, for the most part, the 

agency was used to futures exchanges but not necessarily over-thecounter markets. And what you see in the over-the-counter markets are a much broader range of methods of execution, levels of 

opacity versus transparency. And what we see with the swaps markets has been most successful, and derivatives are most robustly 

traded, is where you don’t limit the means of execution. 

Mr. CONAWAY. Right. Mr. Edmonds? 

Mr. EDMONDS. I would echo that point. From a clearinghouse 

perspective, certainly, we run exchange businesses and we have 

execution protocols, but the goal of the G20 was to reduce the risk. 

And the only way you are going to achieve that goal at the end of 

the day is to be as open and agnostic as possible of how that trade 

is executed. But once it is executed, it goes into a system that is 

very regulated, very transparent, and understood about how the 

risk is going to be managed. And if we are going to do things that 

take us down a path different than that, we are not going to 

achieve the ultimate efficiency of that goal. 

Mr. CONAWAY. The Chairman has asked about the delay by the 

Europeans on their uncleared swaps margin. Is there an argument 

to be made that the U.S. and the Asian markets should continue 

with that implementation date, because these are simply the biggest banks, dealer-to-dealer, and it really won’t have any real impact? Is there an argument to be made about that as to why it 

would not be necessarily a competitive disadvantage to all the rest 

of the markets in the world if Europe delays it by a year? Anybody? 

Mr. DUFFY. I am sure Ms. Rosenberg can speak as well as anybody on this issue, but this puts the U.S. banks at a huge disadvantage to the European banks, just for the example that was 

laid out at the end of the table here. I am hopeful that this implementation date that the U.S. and other countries around the world 

are looking at can be postponed in coordination with the European 

date. I just think it puts the U.S. banks at a huge disadvantage. 

Mr. CONAWAY. How would the argument go as to say that if we 

make international agreements, and we all agree to a date, and 

then when we get right here at the last minute we let the lowest 

common denominator drop out, and then we are going to reward 

75

that bad behavior by delaying everybody else. Is there an argument 

that way to say, ‘‘Look, we are going to stick with it, and you guys 

are going to have to come to the table and get your job done the 

way that you should have done it the way we agreed to a year 

ago?’’ Ms. Rosenberg, or anybody? 

Ms. ROSENBERG. I was just going to say that the date that is 

going to be the most impactful from a U.S. bank perspective is the 

phase two when the customers start having to post noncleared 

margin. That is later on to next year. As I said, we haven’t looked 

at the full implications for JPMorgan as a firm in terms of the impacts, whether it be 6 or 9 months, and we are happy to provide 

more feedback on that. 

Mr. CONAWAY. Well, obviously, this just happened Friday, and 

there are a lot of folks trying to figure out what we did to whom 

on that. 

Thank you very much. I appreciate it. Mr. Merkel, did you have 

a comment? 

Mr. MERKEL. It may be obvious, but I did want to make the point 

that there is always a trade-off between U.S. regulators wanting to 

insist on certain safety prudential or fairness issues to govern its 

participants against what the effect would be on a global basis. 

And they have to make a judgment at what point they need to insist upon the virtues and understand what the negative consequences would be, but it does seem as though this particular area 

is one in which one would expect there should be some flexibility 

as to the date of implementation. There does not seem to be a great 

urgency about it, and there would seem to be some benefit in trying to see whether or not there can be coordination globally. 

Mr. CONAWAY. Yes. Mr. Berger, you had a comment? 

Mr. BERGER. Thank you. I was just going to add that the 

timeline in both the U.S. and Europe for the implementation of 

these rules is phased in from 2016 to 2020 as originally envisioned, 

and the new uncleared margin rules don’t hit the end-user or buyside community until 2019, based on the different thresholds they 

have set. The September 2016 date that is being discussed now is 

relevant for counterparties with above $3 trillion notional in 

uncleared derivatives outstanding. That is really a handful of the 

biggest banks, but there is not a direct impact at least on the enduser in the current community. 

Mr. CONAWAY. Yes. Okay. Mr. Chairman, thank you for your indulgence. I yield back. 

The CHAIRMAN. Thank you. The chair will now recognize Mr. 

Scott. 

Mr. DAVID SCOTT of Georgia. Yes. I want to get clarity now. The 

date of implementation is September what did you say? 

Mr. BERGER. September 1, 2016, is the first implementation date. 

Mr. DAVID SCOTT of Georgia. Yes. And so, Mr. Duffy, you are 

saying that that date puts our U.S. businesses at a competitive disadvantage if we don’t move it back? 

Mr. DUFFY. It certainly could. Ms. Rosenberg, obviously, works 

for a very global bank, and maybe it won’t affect their European 

business, I am not sure, but the banks that are primarily U.S. 

banks, U.S.-regulated banks, it will affect them. But, the point is, 

and it is a good point, and the Chairman raised it, this just came 

76

out Friday, details are a little sketchy, and the implementation 

date of 2016 and then followed on by 2017. It goes back to my further point, Mr. Scott, and this is just another example of how we 

are going to have uncertainty in the marketplace where the market 

does not need uncertainty, it needs clarity. And one of the things 

that I have heard here amongst this panel, which, on a whole host 

of issues, is we need to have continuity within our European and 

Asian counterparts, so we can have one set of rules. 

Mr. DAVID SCOTT of Georgia. I see. And you say, Ms. Rosenberg? 

Ms. ROSENBERG. I would just add to what Mr. Duffy just said, 

which is, it is very complex. We are looking at our legal entities, 

we are looking at our counterparties, we are looking at where we 

do swaps and who we do swaps with. In September, it will impact 

U.S. banks, which means any counterparty that we do business 

with will have to post noncleared margin to us. In that instance, 

if our counterparties can operate or trade and execute with nonU.S. counterparties, where they don’t have to post margin, then 

they may choose to do so. That is what we are evaluating right 

now, what that impact could be. 

Mr. DAVID SCOTT of Georgia. When should we do it? As the 

Chairman has said, we have been kicking the can down the road, 

kicking the can down the road, kicking the can down the road 3 

years, 2 years, I don’t know. This Committee does not want to 

move in any way, we are very, very, very cautious about putting 

our United States companies in at a competitive disadvantage. And 

if you all, the banks, the clearinghouses, are agreeing that this 

does, let me ask you to describe that competitive disadvantage if 

we don’t do it. What would that cause you to do? 

Ms. ROSENBERG. In terms of how it would impact us, 

counterparties could choose to execute a swap and clear a swap bilaterally with a European counterparty that is not yet subject to 

these uncleared margin rules. 

Mr. DAVID SCOTT of Georgia. Okay. 

Ms. ROSENBERG. I mean that is the base of it. I would say that 

our folks internally at JPMorgan, are looking to see how much of 

an impact that could be. But, it gets back to the timing and the 

differences in timing and there was a real effort that was put forth 

to have consistent standards and consistent timing of implementation to avoid things like this. 

Mr. DAVID SCOTT of Georgia. Yes. 

Ms. ROSENBERG. So, as I said, we are looking at this, and we can 

come back to you with more information once we have done the full 

evaluation. 

Mr. DAVID SCOTT of Georgia. Is there a dollar figure, is there 

something that is tangible that the regulators, the CFTC or whoever we would need to talk to about this date, that we could say 

X amount of money would be lost? Is there something we could put 

our hands around to really show how large and how significant an 

impact this would be on our American businesses if we do not adjust this September date? 

Mr. EDMONDS. I don’t know that we could say a dollar amount, 

but you could say that there is a limitation in choice because if you 

are going deal, assuming the date doesn’t move, you are going to 

deal with a U.S. counterparty that is going to have to charge you 

77

some number. You may have the option to deal with a European 

entity that is not required to charge you some number. 

Mr. DAVID SCOTT of Georgia. Yes. 

Mr. EDMONDS. If you decide that, all things else being equal, you 

are just going to take the path of least resistance as long as you 

can, that may be fine, but you also may have much, much less 

choice as to the number of counterparties that you can deal with. 

And the European counterparties realizing that you have less 

choice, might have the ability to increase that cost, for their benefit, to you. 

Mr. DAVID SCOTT of Georgia. I see. Thank you, Mr. Chairman. 

The CHAIRMAN. The chair now recognizes Mr. Lucas, for 5 minutes. 

Mr. LUCAS. Thank you, Mr. Chairman. Just in a way of a followup, Mr. Duffy, any more observations about stress test issues, 

weaknesses, overcoming those? The earlier discussion we had, you 

seemed to have an observation. 

Mr. DUFFY. On the stress test? The only thing I was pointing out 

was that I didn’t want to have the perception that CCPs in the 

United States don’t have stress tests under its U.S. regulator, 

which we do. I do agree with Ms. Rosenberg, we need to have coordination with our European counterparts on this because of the 

businesses that they run. JPMorgan, you said, has 71 different 

clearing entities that they are associated with. I understand that 

part, but the only thing I was trying to stress was that we do have 

very rigorous stress tests that are overseen by our U.S. regulator 

today, there is just not a global standard, to Ms. Rosenberg’s point. 

Mr. LUCAS. So it is an ongoing, evolving process you all are completely engaged in? 

Mr. DUFFY. It is always going to be ongoing. Absolutely. 

Mr. LUCAS. With that, Mr. Chairman, I yield back. Thank you. 

The CHAIRMAN. Mr. Conaway, do you have any thoughts? 

Mr. CONAWAY. No. 

The CHAIRMAN. Mr. Scott, I now recognize the Ranking Member 

to make any closing remarks he has. 

Mr. DAVID SCOTT of Georgia. Well, again, Mr. Chairman, this has 

been a very timely and, quite honestly, necessary hearing. It has 

been very revealing. We do have some issues and concerns here. I 

do think we need to take under consideration the concerns that 

several of the panelists have raised, particularly, regarding taking 

a good jaundiced eye look at this date. We certainly don’t want to 

put our businesses at a disadvantage. This is an evolving issue, it 

is complicated, it is confusing. You are trying to get 20 nations to 

harmonize, and do it on a timely basis. We do not want to do anything that would hurt American businesses. That is just my concern. 

I am also concerned about this Basel III situation and the leverage ratio. I think that that is a serious issue too. 

So I come away from this hearing with a heightened sense of 

concern. Our Committee needs to make sure we address all these 

issues, and make sure we move, communicate with the CFTC and 

continue to soldier on. And we hope we can move forward and get 

an execution date, but I certainly want to see some of these issues 

examined and cleared. 

78

Thank you, Mr. Chairman. 

The CHAIRMAN. Thank you, Mr. Scott. 

Ma’am, gentlemen, thank you for being here and participating in 

this hearing. 

Under the Rules of the Committee, the record of today’s hearing 

will remain open for 10 calendar days to receive additional material and supplementary written responses from the witnesses to 

any questions posed by Members. 

This hearing of the Subcommittee on Commodity Exchanges, Energy, and Credit is adjourned. 

[Whereupon, at 11:40 a.m., the Subcommittee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

79

SUBMITTED QUESTIONS

Response from Hon. Terrence A. Duffy, Executive Chairman and President, 

CME Group Inc. 

Questions Submitted by Hon. Collin C. Peterson, a Representative in Congress from 

Minnesota 

Question 1. At a recent CFTC Market Risk Advisory Committee meeting a number of buy-side witnesses testified that the practice of post-trade name-give up—that 

is: the removal of anonymity from the market after execution, has prevented them 

from participating in the SEFs offered by the Inter-Dealer Brokers. Further, two 

class-action lawsuits alleging anti-trust violations against the largest dealers and 

several of the interdealer brokers have been filed in the credit default swap and interest rate markets respectively. These suits both allege that the practice of posttrade name give-up has been planned by the largest participants and forced on to 

the inter-dealer brokers in restraint of trade. One of them settled late last year for 

$2bn. 

The SEF Core principles in Dodd Frank require impartial access for all eligible 

market participants. The CFTC’s SEF Rule mandates that a SEF must ensure ‘‘impartial access to its markets and market services’’ for eligible participants—and that 

eligibility itself must be set in an impartial, transparent, fair and non-discriminatory manner. 

Do all eligible market participants have impartial access to each and every SEF? 

If not, why not? 

Answer. We are not familiar with the practices of other SEFs. However, CME 

Group’s SEF operates in strict accord with the SEF Core principles, including supporting CFTC rules and interpretations respecting impartial access for all eligible 

market participants. Our SEF access rules are transparent and readily available in 

chapter I of the SEF rulebook (http://www.cmegroup.com/rulebook/SEF/cme-sefrulebook.pdf).

Question 2. There was a great deal of testimony regarding harmonization with 

European Rules. However, from published reports a number of trade organizations 

representing incumbent firms with significant market power have been arguing to 

European regulators and legislators to make changes to the proposed trade execution regime in MiFID II. If that effort is successful, we will be asked to harmonize, 

or to push the CFTC to harmonize, our clear rules on impartial access to the SEF 

marketplace for eligible participants with rules that include no such mandate. In 

that eventuality should harmonization still be our top priority? 

Answer. CME Group favors fair and impartial access to U.S. based SEFs and 

DCMs. We favor cross border harmonization to the extent it is necessary to permit 

us to operate for the benefit of customers in other jurisdictions. We do not believe 

that harmonization principles will require U.S. law and regulation to permit practices that are inconsistent with the existing access standards in this country. It is 

our view that harmonization requires a defined level of protection for customers or 

institutions. It should not be interpreted to require any jurisdiction to weaken its 

market protection standards.

Question 3. The swaps we discussed at the hearing are not customized—they are 

standardized. Standardized swaps are the only swaps that are subject to the trading 

mandate—they are cleared and are subject to the straight-through-processing requirement. And yet, we repeatedly hear that the swaps market is fundamentally different than other standardized markets: that it is characterized by episodic liquidity 

and that its bifurcated, two-tiered structure is the ‘‘natural’’ evolution of the market. 

Do you agree or disagree with that characterization? 

Answer. We agree that episodic liquidity stemmed from the natural evolution of 

the market. 

While the interest rate swaps that are subject to the trading mandate are referred 

to as ‘‘vanilla’’ and are comparatively standard in contrast to more highly customized interest rate swaps, most highly standardized derivatives products (such as 

many futures contracts) are characterized by an even greater degree of standardization than is present in most ‘‘vanilla’’ OTC interest rate swaps. In most cases, a 

swap traded today will not be offset by the same swap traded the next day. This 

results in very different liquidity characteristics from futures contracts, which have 

the same expiration and which are fungible regardless of the trade date. 

The majority of ‘‘vanilla’’ interest rate swaps subject to a trading mandate do not 

have standardized coupons or dates. Products with non-standardized coupons and 

dates can allow market participants to achieve specific risk management needs, but 

will typically have a greater number and variety of instruments traded. This results 

in different liquidity formation characteristics than more fully standardized prodVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00083 Fmt 6621 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
80

ucts that aggregate liquidity of participants across multiple dates and potential coupon rates. 

The emergence of more standardized interest rate swaps, such as MAC (Market 

Agreed Coupon) swaps, and the development of related swap futures by multiple 

global exchanges are likely to have a significant impact on the evolution of the swap 

market toward a more standardized, liquid trading venue. 

Response from Christopher S. Edmonds, Senior Vice President, Financial 

Markets, Intercontinental Exchange, Inc. 

Questions Submitted by Hon. Collin C. Peterson, a Representative in Congress from 

Minnesota 

Question 1. At a recent CFTC Market Risk Advisory Committee meeting a number of buy-side witnesses testified that the practice of post-trade name-give up—that 

is: the removal of anonymity from the market after execution, has prevented them 

from participating in the SEFs offered by the Inter-Dealer Brokers. Further, two 

class-action lawsuits alleging anti-trust violations against the largest dealers and 

several of the interdealer brokers have been filed in the credit default swap and interest rate markets respectively. These suits both allege that the practice of posttrade name give-up has been planned by the largest participants and forced on to 

the inter-dealer brokers in restraint of trade. One of them settled late last year for 

$2bn. 

The SEF Core principles in Dodd Frank require impartial access for all eligible 

market participants. The CFTC’s SEF Rule mandates that a SEF must ensure ‘‘impartial access to its markets and market services’’ for eligible participants—and that 

eligibility itself must be set in an impartial, transparent, fair and non-discriminatory manner. 

Do all eligible market participants have impartial access to each and every SEF? 

If not, why not? 

Answer. ICE Swap Trade offers a multitude of methods of access related to credit 

default swaps including an all to all anonymous marketplace, broker access and 

name give ups. By offering various methods of access, ICE complies with SEF regulations which are intended to promote fair, non-discriminatory and open access. The 

ICE Swap Trade platform will accept a transaction, either cleared or bilateral, as 

long as the transaction meets the SEF requirements.

Question 2. There was a great deal of testimony regarding harmonization with 

European Rules. However, from published reports a number of trade organizations 

representing incumbent firms with significant market power have been arguing to 

European regulators and legislators to make changes to the proposed trade execution regime in MiFID II. If that effort is successful, we will be asked to harmonize, 

or to push the CFTC to harmonize, our clear rules on impartial access to the SEF 

marketplace for eligible participants with rules that include no such mandate. In 

that eventuality should harmonization still be our top priority? 

Answer. The Rules on access to trading venues under MiFID II were agreed to 

in the Level 1 legislation. The Level 1 legislation requires trading venues to have 

in place transparent and non-discriminatory rules based on objective criteria which 

govern access to their facility. These requirements are comparable to the impartial 

access rules for SEFs. ICE believes harmonization between global regulators is critical and should be a prioritized accordingly.

Question 3. The swaps we discussed at the hearing are not customized—they are 

standardized. Standardized swaps are the only swaps that are subject to the trading 

mandate—they are cleared and are subject to the straight-through-processing requirement. And yet, we repeatedly hear that the swaps market is fundamentally different than other standardized markets: that it is characterized by episodic liquidity 

and that its bifurcated, two-tiered structure is the ‘‘natural’’ evolution of the market. 

Do you agree or disagree with that characterization? 

Answer. ICE agrees that although certain interest rate and credit default swaps 

have been standardized and mandated for both execution and clearing, current regulations have unintentionally created a bifurcation in these swaps markets. New 

regulations that require fully anonymous trading would be necessary to remove this 

bifurcation. 

Response from Marnie J. Rosenberg, Global Head, Clearinghouse Risk and 

Strategy, JPMorgan Chase & Co. 

Questions Submitted by Hon. Collin C. Peterson, a Representative in Congress from 

Minnesota 

Question 1. At a recent CFTC Market Risk Advisory Committee meeting a number of buy-side witnesses testified that the practice of post-trade name-give up—that 

81

is: the removal of anonymity from the market after execution, has prevented them 

from participating in the SEFs offered by the Inter-Dealer Brokers. Further, two 

class-action lawsuits alleging anti-trust violations against the largest dealers and 

several of the interdealer brokers have been filed in the credit default swap and interest rate markets respectively. These suits both allege that the practice of posttrade name give-up has been planned by the largest participants and forced on to 

the inter-dealer brokers in restraint of trade. One of them settled late last year for 

$2bn. 

The SEF Core principles in Dodd Frank require impartial access for all eligible 

market participants. The CFTC’s SEF Rule mandates that a SEF must ensure ‘‘impartial access to its markets and market services’’ for eligible participants—and that 

eligibility itself must be set in an impartial, transparent, fair and non-discriminatory manner. 

Do all eligible market participants have impartial access to each and every SEF? 

If not, why not? 

Answer. Yes. All eligible market participants, as defined by each SEF, are given 

the same access. Each SEF is responsible for determining its own participation 

rules, which apply equally to sell-side and buy-side participants.

Question 2. There was a great deal of testimony regarding harmonization with 

European Rules. However, from published reports a number of trade organizations 

representing incumbent firms with significant market power have been arguing to 

European regulators and legislators to make changes to the proposed trade execution regime in MiFID II. If that effort is successful, we will be asked to harmonize, 

or to push the CFTC to harmonize, our clear rules on impartial access to the SEF 

marketplace for eligible participants with rules that include no such mandate. In 

that eventuality should harmonization still be our top priority? 

Answer. As a general matter, global harmonization of rules is important to ensure 

well-functioning derivatives markets. We do not have a view as to how the Committee should prioritize the hypothetical situation identified.

Question 3. The swaps we discussed at the hearing are not customized—they are 

standardized. Standardized swaps are the only swaps that are subject to the trading 

mandate—they are cleared and are subject to the straight-through-processing requirement. And yet, we repeatedly hear that the swaps market is fundamentally different than other standardized markets: that it is characterized by episodic liquidity 

and that its bifurcated, two-tiered structure is the ‘‘natural’’ evolution of the market. 

Do you agree or disagree with that characterization? 

Answer. There are fundamental differences between the swaps market and other 

standardized markets. For example, liquidity in swaps markets tends to be thinner 

and more episodic compared to the futures and equities markets. This episodic liquidity leads to differences in market structure and a broader range of methods of 

execution sought by market participants. The CFTC’s rules set out minimum liquidation periods for initial margin levels that differ between swaps and futures (currently five days for most cleared swaps and one day for futures), demonstrating 

their own view that the liquidity profile of the products is different.

Question 4. In your testimony you both described the swaps market as being 

‘‘fragmented’’ as a result of differences in cross-border regulatory progress, but you 

didn’t identify who was responsible for that fragmentation. The latest OCC report 

on swaps trading finds that the four largest banks control 91% of the notional market. Are trading decisions at the firms with that much control of the market responsible for fragmentation? If not, who else is fragmenting it? 

Answer. The four largest banks are not responsible for the fragmentation, and it 

would not be accurate to state that those banks control 91% of the notional market 

for swaps trading; the OCC report does not reflect the swaps flow executed by the 

banks. According to the latest research from the International Swaps and Derivatives Association (ISDA), the global interest rate swaps market has fragmented 

along jurisdictional lines since the US swap execution facility rules came into force 

in October of 2013. This fragmentation has been most pronounced in the euro-denominated interest rate swaps markets, where 91.2% of cleared euro IRS activity 

in the European interdealer market was transacted between European 

counterparties in December 2015. In September 2013, immediately prior to the introduction of the SEF rules, the figure stood at 70.7%. 

This data is an indication that non-U.S. market participants are choosing to 

transact less with U.S. persons, or certain foreign subsidiaries or affiliates of U.S. 

persons, as such transactions would be required to be executed on SEF platforms.

Question 5. The CFTC has required trade data to remain anonymous at the SDR 

level. What do you feel the impact would be if the CFTC imposed a requirement 

82

that if a trade is entered anonymously it would need to stay anonymous throughout 

its life-cycle? 

Answer. Venues exist today for anonymous trades to remain anonymous throughout their life cycle, and therefore there is not a need for the CFTC to mandate such 

a requirement. Markets function best with sound regulation, open competition and 

customer choice.

Question 6. We have rules in place to ensure a fair, anonymous, all-to-all swaps 

markets where multiple participants can make both bids and offers—that type of 

structure is much more balanced—and historically as we’ve seen with the futures 

and equity’s markets, much more resilient in times of stress. Please comment on the 

structural stability that could be supplied if these markets truly operated in the 

anonymous all-to-all manner we intended? 

Answer. We respectfully disagree with the two assumptions that underlie this 

question: (1) anonymous all-to-all swaps markets are ‘‘much more balanced’’ and 

more resilient in times of stress; and (2) swaps are similar to futures and equities 

(we refer you to our response to Question 3). 

Avenues for anonymous all-to-all trading of swaps already exist alongside trading 

through Request-for-Quote (RFQ). Thus, customers have a choice between the two 

execution methods. Efficient and stable markets are best achieved through sound 

regulation and free and open competition.

Question 7. We wrote the SEF Core Principles to require impartial access, the 

CFTC’s SEF rule requires impartial access and yet market participants don’t have 

impartial access to the full market—what needs to change for all eligible market 

participants to have the kind of access we envisioned? 

Answer. We refer you to our response to Question 1.

Response from Stephen M. Merkel, J.D., Executive Vice President, General 

Counsel and Secretary, BGC Partners, Inc.; Director, Wholesale Markets Brokers’ Association, Americas 

Questions Submitted by Hon. Collin C. Peterson, a Representative in Congress from 

Minnesota 

Question 1. At a recent CFTC Market Risk Advisory Committee meeting a number of buy-side witnesses testified that the practice of post-trade name-give up—that 

is: the removal of anonymity from the market after execution, has prevented them 

from participating in the SEFs offered by the Inter-Dealer Brokers. Further, two 

class-action lawsuits alleging anti-trust violations against the largest dealers and 

several of the interdealer brokers have been filed in the credit default swap and interest rate markets respectively. These suits both allege that the practice of posttrade name give-up has been planned by the largest participants and forced on to 

the inter-dealer brokers in restraint of trade. One of them settled late last year for 

$2bn. 

The SEF Core principles in Dodd Frank require impartial access for all eligible 

market participants. The CFTC’s SEF Rule mandates that a SEF must ensure ‘‘impartial access to its markets and market services’’ for eligible participants—and that 

eligibility itself must be set in an impartial, transparent, fair and non-discriminatory manner. 

Do all eligible market participants have impartial access to each and every SEF? 

If not, why not? 

Answer. As envisioned by Congress, the SEF landscape is competitive, with over 

two dozen registered trading venues competing for liquidity and trading activity in 

the over-the-counter marketplace. The WMBAA member firms’ SEFs are among 

those platforms. Each of these SEFs has demonstrated compliance with CFTC regulation 37.202(a) and has set forth clear criteria for market participants who wish 

to access its market and market services. 

With any competitive marketplace, customers have the option to conduct business 

with an array of companies and different types of trading platforms. Very few market participants will engage with all 24 SEFs. For each SEF, eligible market participants have to review and compare individual execution models, rule books, analyze 

different cost structures, and consider the legal and technical components of 

onboarding when deciding whether to access a market. As the structure of the market evolves in the aftermath of the credit crisis and financial regulatory reform implementation, trading methodologies and structure will continue to evolve as well. 

True to the Dodd-Frank statutory intent, we look forward to continued competition 

among resilient, innovative trading venues to promote the trading of swaps through 

registered intermediaries.

Question 2. There was a great deal of testimony regarding harmonization with 

European Rules. However, from published reports a number of trade organizations 

83

1See Leaders’ Statement, the Pittsburgh Summit, September 24–25, 2009, available at

https://www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_sum

mit_leaders_statement_250909.pdf. 

representing incumbent firms with significant market power have been arguing to 

European regulators and legislators to make changes to the proposed trade execution regime in MiFID II. If that effort is successful, we will be asked to harmonize, 

or to push the CFTC to harmonize, our clear rules on impartial access to the SEF 

marketplace for eligible participants with rules that include no such mandate. In 

that eventuality should harmonization still be our top priority? 

Answer. As noted in my testimony, OTC swap markets are global in nature. The 

WMBAA remains supportive of coordinated global efforts to promote trading on regulated venues, central counterparty clearing, and public reporting of standardized 

OTC derivative contracts in order to ‘‘improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse.’’ 1

In just the last few years, we have seen liquidity move across borders forming regional liquidity pools. Global regulators should carefully coordinate regulatory efforts so as to not fragment markets, reduce liquidity, and increase costs to users 

by rupturing the existing methods by which U.S. and non-U.S. swap dealers, international banks, global asset managers, and end-users access competitive, transparent OTC markets in the U.S. or in other jurisdictions. Global regulatory gaps 

have not only promoted bifurcation of trading patterns but can be exploited to the 

detriment of investors.

Question 3. The swaps we discussed at the hearing are not customized—they are 

standardized. Standardized swaps are the only swaps that are subject to the trading 

mandate—they are cleared and are subject to the straight-through-processing requirement. And yet, we repeatedly hear that the swaps market is fundamentally different than other standardized markets: that it is characterized by episodic liquidity 

and that its bifurcated, two-tiered structure is the ‘‘natural’’ evolution of the market. 

Do you agree or disagree with that characterization? 

Answer. Yes, the swaps market is fundamentally different than other standardized markets. It is a wholesale market where institutional market participants can 

hedge risk exposures. Congress recognized the distinctions between exchange-traded 

financial products like futures and equities, on the one hand, and over-the-counter 

products such as swaps. The Dodd-Frank Act provides unique statutory provisions 

to preserve and enhance the unique liquidity characteristics, institutional nature of 

market participants, and bespoke nature of many of the instruments. 

As referenced in my testimony, a 2011 Federal Reserve Bank of New York 

(FRBNY) report found that the vast majority of single-name credit default swap 

(CDS) contracts traded less than once per day and index CDS contracts traded less 

than ten times per day, but in very large sizes. Similarly, the vast majority of interest rate swap contracts traded only once during the 3 month period studied. In comparison, many more exchange-traded products tend to have continuous liquidity. 

Certain Eurodollar futures contracts trade on the Chicago Mercantile Exchange 

(CME) over 375,000 times per day. 

The FRBNY study affirms that there are different levels of liquidity in the marketplace, even among ‘‘standardized’’ products. This is why Dodd-Frank correctly ensured flexibility in how market participants can meet the trading mandate and 

transact ‘‘through any means of interstate commerce.’’

We support revising the CFTC’s swap rules to bring them more in line with the 

statutory intent of Dodd-Frank to ‘‘promote SEF trading’’ and also to ensure that 

the global OTC swap market is made more competitive and resilient, all while protecting the unique market structure that continues to evolve over time.

Question 4. In your testimony you both described the swaps market as being 

‘‘fragmented’’ as a result of differences in cross-border regulatory progress, but you 

didn’t identify who was responsible for that fragmentation. The latest OCC report 

on swaps trading finds that the four largest banks control 91% of the notional market. Are trading decisions at the firms with that much control of the market responsible for fragmentation? If not, who else is fragmenting it? 

Answer. As I noted in my testimony, fragmentation is driven by the CFTC’s SEF 

rules and the lack of regulatory harmonization with respect to permitted modes of 

trade execution. Anecdotally, we have seen market participants refrain from 

transacting with counterparties in certain jurisdictions to avoid the CFTC’s regulatory burdens. As a result, liquidity has formed by jurisdiction. Trading has become 

more regionalized with Asian, European and U.S. counterparties trading in separate 

jurisdictions and with a reduced number of potential counterparties. My testimony 

cites to recent ISDA and Bank of England research supporting these observations. 

84

We have concerns that these regulatory gaps will have a more pronounced effect 

as we approach the impending MiFID II January 2018 target compliance date. 

These differences must be resolved as soon as possible. We urge the Subcommittee 

to prioritize execution equivalence and global coordination as the primary tool to 

counter the increasingly well-entrenched trend for liquidity to be split along regional 

lines.

Question 5. The CFTC has required trade data to remain anonymous at the SDR 

level. What do you feel the impact would be if the CFTC imposed a requirement 

that if a trade is entered anonymously it would need to stay anonymous throughout 

its life-cycle? 

Answer. I cannot speculate on the possible market structure impact this requirement may have if imposed. However, I strongly encourage the CFTC—for this or 

any other policy proposal—to engage in data-driven analysis based on timely, accurate information, to quantify the costs and benefits of its proposals. These proposals 

should be published in the Federal Register for an appropriate public notice and 

comment period. These procedural protections will help to produce the soundest policy and reflect the input of market participants. 

The CFTC is the beneficiary of several years of comprehensive swap market data 

through SDR reporting. The Commission should closely consider the value of this 

information and perform a rigorous review of the information in light of its policy 

initiatives. As I said at the hearing, if ISDA and the Bank of England can conduct 

research and publish their findings for public review, the CFTC should too.

Question 6. We have rules in place to ensure a fair, anonymous, all-to-all swaps 

markets where multiple participants can make both bids and offers—that type of 

structure is much more balanced—and historically as we’ve seen with the futures 

and equity’s markets, much more resilient in times of stress. Please comment on the 

structural stability that could be supplied if these markets truly operated in the 

anonymous all-to-all manner we intended? 

Answer. Please see my response to Question 5.

Question 7. We wrote the SEF Core Principles to require impartial access, the 

CFTC’s SEF rule requires impartial access and yet market participants don’t have 

impartial access to the full market—what needs to change for all eligible market 

participants to have the kind of access we envisioned? 

Answer. Please see my response to Question 1.

Response from Stephen John Berger, Director, Government and Regulatory 

Policy, Citadel, LLC; on behalf of Managed Funds Association 

Questions Submitted by Hon. Collin C. Peterson, a Representative in Congress from 

Minnesota 

Question 1. At a recent CFTC Market Risk Advisory Committee meeting a number of buy-side witnesses testified that the practice of post-trade name-give up—that 

is: the removal of anonymity from the market after execution, has prevented them 

from participating in the SEFs offered by the Inter-Dealer Brokers. Further, two 

class-action lawsuits alleging anti-trust violations against the largest dealers and 

several of the interdealer brokers have been filed in the credit default swap and interest rate markets respectively. These suits both allege that the practice of posttrade name give-up has been planned by the largest participants and forced on to 

the inter-dealer brokers in restraint of trade. One of them settled late last year for 

$2bn. 

The SEF Core principles in Dodd Frank require impartial access for all eligible 

market participants. The CFTC’s SEF Rule mandates that a SEF must ensure ‘‘impartial access to its markets and market services’’ for eligible participants—and that 

eligibility itself must be set in an impartial, transparent, fair and non-discriminatory manner. 

Do all eligible market participants have impartial access to each and every SEF? 

If not, why not? 

Answer. The CFTC provided additional clarity regarding the Dodd-Frank Act’s impartial access requirement in the final SEF rules and in subsequent impartial access guidance issued in November 2013. This additional guidance from the CFTC 

has been critical in dismantling certain barriers that prevented market participants 

from accessing certain trading venues for OTC derivatives, such as restrictive access 

criteria that limited membership only to banks. 

However, we believe that barriers still remain that prevent buy-side market participants from fully interacting on each and every SEF in the market. One such significant barrier is the continued use of post-trade name give-up by the legacy interdealer SEFs. By revealing counterparty identities post-trade to a swap that was initially executed anonymously, these legacy interdealer SEFs inhibit buy-side particiVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00088 Fmt 6621 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
85

1Directive 2014/65/EU of The European Parliament and of the Council of 15 May 2014 on 

markets in financial instruments, available at http://eur-lex.europa.eu/legal-content/EN/ALL/

?uri=CELEX:32014L0065.

pation even though buy-side participants are now theoretically able to join these 

trading venues. 

The practice of post-trade name give-up originated in uncleared markets, where 

counterparties needed to know each other’s identity in order to properly book and 

risk manage the swap. However, for cleared swaps that are executed anonymously, 

we believe that there is no legitimate reason that one party needs to find out the 

identity of the other party post-trade, given that both parties immediately face the 

clearinghouse and do not have any bilateral counterparty credit exposure to each 

other. If two parties agree to execute anonymously, this choice should be respected 

throughout the life cycle of the swap. 

Post-trade name give-up inhibits buy-side participation on legacy interdealer 

SEFs in several ways. First, post-trade name give-up is a source of random and uncontrolled ‘‘information leakage’’ of private trading positions and strategies, given 

that participants are not able to control who they may be matched with when executing anonymously on the SEF. Second, post-trade name give-up perpetuates the 

informational and trading advantages of traditional dealers that benefit from their 

ability to access and achieve full visibility into both the inter-dealer and dealer-tocustomer markets. In many cases, buy-side participants are discouraged from ever 

even beginning to trade on these legacy interdealer SEF platforms as long as the 

practice continues. 

MFA therefore believes that impartial access to SEFs will only be realized once 

post-trade name gave-up is prohibited for all anonymously-executed cleared SEF 

trades.

Question 2. There was a great deal of testimony regarding harmonization with 

European Rules. However, from published reports a number of trade organizations 

representing incumbent firms with significant market power have been arguing to 

European regulators and legislators to make changes to the proposed trade execution regime in MiFID II. If that effort is successful, we will be asked to harmonize, 

or to push the CFTC to harmonize, our clear rules on impartial access to the SEF 

marketplace for eligible participants with rules that include no such mandate. In 

that eventuality should harmonization still be our top priority? 

Answer. In MFA’s view, ensuring impartial access to trading venues is critical in 

the continued implementation of the G20 reforms for the swaps markets. MFA believes that U.S. and European regulators should push for harmonization with respect to the implementation of impartial access requirements for trading venues and 

that this is an achievable, mutually beneficial priority that will benefit the longterm health and vitality of the global swaps markets. 

Similar to the U.S. impartial access requirement, the European MiFID II legislation requires trading venues to provide non-discriminatory access to market participants (see Article 18(3) of the MiFID II Directive governing multilateral trading facilities (MTFs) and organized trading facilities (OTFs), and Article 53(1) of the 

MiFID Directive 1 governing regulated markets). As such, there should be no difference between the two regimes on this topic, though European regulators may be 

required to issue additional guidance (similar to the CFTC’s November 2013 impartial access guidance) in order to ensure that the non-discriminatory access requirement is properly implemented. We believe that ensuring equivalent standards with 

respect to the implementation of impartial access should be a key focus in future 

discussions regarding harmonization and regulatory equivalence. 

Question 3. The swaps we discussed at the hearing are not customized—they are 

standardized. Standardized swaps are the only swaps that are subject to the trading 

mandate—they are cleared and are subject to the straight-through-processing requirement. And yet, we repeatedly hear that the swaps market is fundamentally different than other standardized markets: that it is characterized by episodic liquidity 

and that its bifurcated, two-tiered structure is the ‘‘natural’’ evolution of the market. 

Do you agree or disagree with that characterization? 

Answer. MFA disagrees with that characterization for standardized and liquid 

cleared swaps. While more bespoke customized swaps may trade relatively infrequently, experience with the reforms in the U.S. has shown that a great many 

cleared swaps are standardized and highly liquid, and are suitable for SEF trading. 

In fact, recent Bank of England research found that the implementation of the clearVerDate 0ct 09 2002 09:03 Sep 20, 2016 Jkt 041481 PO 00000 Frm 00089 Fmt 6621 Sfmt 6621 P:\DOCS\114-53\20492.TXT BRIAN
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2See Staff Working Paper No. 580 ‘‘Centralized trading, transparency and interest rate swap 

market liquidity: evidence from the implementation of the Dodd-Frank Act’’, Bank of England 

(January 2016), available at: http://www.bankofengland.co.uk/research/Documents/

workingpapers/2016/swp580.pdf. 

ing and trading reforms in the USD interest rate swaps market has already yielded 

significant improvements in pricing and liquidity for investors.2

As such, MFA does not believe that the current bifurcated, two-tiered market 

structure is the ‘‘natural’’ evolution of the market. The two-tier structure impairs 

pre-trade transparency for buy-side market participants and prevents buy-side market participants from accessing important sources of liquidity in the marketplace. 

This two-tier structure also confines the buy-side to a ‘‘price-taker’’ role, rather than 

providing the opportunity to become a ‘‘price-maker’’ as well, and can impair price 

discovery and competition. In MFA’s view, the two-tier market needs to evolve in 

order to improve competition and market liquidity, and fully implementing the 

Dodd-Frank Act’s impartial access requirement is critical to allowing this evolution 

to occur.

Question 4. The CFTC has required trade data to remain anonymous at the SDR 

level. What do you feel the impact would be if the CFTC imposed a requirement 

that if a trade is entered anonymously it would need to stay anonymous throughout 

its life-cycle? 

Answer. In MFA’s view, the imposition of such a requirement would be consistent 

with prior CFTC rulemaking to ensure that trade data remains anonymous at the 

SDR level. Currently, this CFTC rule is undermined by the continued use of posttrade name give-up, as a counterparty can find out the identity of the other party 

to a trade from the SEF even though they are prohibited from doing so at the SDR. 

If two parties agree to execute anonymously, this choice should be respected 

throughout the life cycle of the swap. 

As stated above, MFA believes that ending the practice of post-trade name giveup for anonymously executed cleared swaps will lead to more buy-side participation 

on legacy interdealer SEFs. In our view, impartial access requirements have contributed to healthy liquidity conditions in several other significant markets, such as 

the equities and futures markets. Based on these examples, MFA believes that true 

impartial access will provide a stronger foundation for U.S. swaps market liquidity 

and enhance price transparency and competition in the U.S. swaps market.

Question 5. We have rules in place to ensure a fair, anonymous, all-to-all swaps 

markets where multiple participants can make both bids and offers—that type of 

structure is much more balanced—and historically as we’ve seen with the futures 

and equity’s markets, much more resilient in times of stress. Please comment on the 

structural stability that could be supplied if these markets truly operated in the 

anonymous all-to-all manner we intended? 

Answer. Fully implementing and enforcing the Dodd-Frank Act’s impartial access 

requirement would allow an all-to-all market for cleared swaps to emerge (where 

multiple market participants are able to meet and transact). In our view, an allto-all market has contributed to healthy liquidity conditions in several other significant markets, such as the equities and futures markets. 

By contrast, the current bifurcated two-tier swaps market structure entrenches 

traditional dealers as exclusive ‘‘price makers’’. It also limits the manner and extent 

to which buy-side participants may interact in the swaps market. Such structural 

limitations on liquidity provision and risk transfer may increase the likelihood of 

market volatility and instability over the long term. The willingness and capacity 

of traditional dealers to allocate balance sheet to swaps market-making activities 

appears to be diminishing in certain respects. This trend will likely continue over 

time as traditional dealers continue to restructure their businesses post-financial 

crisis and adapt to new capital, leverage, and liquidity requirements under Basel 

III and similar rules. Without swaps market reforms that facilitate impartial access 

to all SEFs and encourage alternative forms of price formation and liquidity provision and greater diversity of participation (among participants and modes of interaction), MFA fears that the U.S. swaps market could risk greater volatility and dislocation in times of market stress.

Question 6. We wrote the SEF Core Principles to require impartial access, the 

CFTC’s SEF rule requires impartial access and yet market participants don’t have 

impartial access to the full market—what needs to change for all eligible market 

participants to have the kind of access we envisioned? 

Answer. MFA would encourage the CFTC to take action to prohibit the use of 

post-trade name give-up for cleared swaps executed anonymously on SEFs. MFA 

has submitted a petition to the CFTC in this regard and is hopeful this prohibition 

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will be included in any proposed modifications to the SEF rules. Without CFTC action, commercial dynamics make it difficult for any one legacy interdealer SEF to 

unilaterally stop using post-trade name give-up while others still do. 

In addition, MFA would encourage the CFTC to prioritize the enforcement of impartial access. It would be useful for the CFTC to actively monitor the progress of 

trading reforms in the swaps markets, and what barriers may continue to affect 

participation and trading activity. We also continue to urge the CFTC to finalize 

dealer ownership and governance restrictions for SEFs, as otherwise potential conflicts of interest could arise that inhibit natural market structure evolution. 

Response from Luke D. Zubrod, Director, Risk and Regulatory Advisory 

Services, Chatham Financial 

Questions Submitted by Hon. Collin C. Peterson, a Representative in Congress from 

Minnesota 

Question 1. At a recent CFTC Market Risk Advisory Committee meeting a number of buy-side witnesses testified that the practice of post-trade name-give up—that 

is: the removal of anonymity from the market after execution, has prevented them 

from participating in the SEFs offered by the Inter-Dealer Brokers. Further, two 

class-action lawsuits alleging anti-trust violations against the largest dealers and 

several of the interdealer brokers have been filed in the credit default swap and interest rate markets respectively. These suits both allege that the practice of posttrade name give-up has been planned by the largest participants and forced on to 

the inter-dealer brokers in restraint of trade. One of them settled late last year for 

$2bn. 

The SEF Core principles in Dodd Frank require impartial access for all eligible 

market participants. The CFTC’s SEF Rule mandates that a SEF must ensure ‘‘impartial access to its markets and market services’’ for eligible participants—and that 

eligibility itself must be set in an impartial, transparent, fair and non-discriminatory manner. 

Do all eligible market participants have impartial access to each and every SEF? 

If not, why not? 

Answer. The segment of the market Chatham Financial serves has not had difficulty accessing SEFs. Chatham’s clients are end users, and generally use SEFS to 

hedge interest rate risk. Thus, we are not in a position to offer expert insight into 

the nature of access in the credit default swap market. End-users generally use derivatives to manage and reduce risk (i.e., to hedge)—not for speculative or trading 

purposes. Those that use derivatives to hedge, generally rely on SEFs that price 

transactions via the request for quote (i.e., RFQ) model because it permits greater 

flexibility to structure a hedge to offset a firm-specific risk. While hedgers and those 

using derivatives for investment purposes alike could make use of central limit 

order books (i.e., CLOB)—the pricing model in which Inter-Dealer Brokers excel—

the RFQ model in which Inter-Dealer Brokers do not play a significant role is, in 

our view, best suited for end-user hedgers. 

Buy side asset managers use derivatives for both hedging and investment purposes; thus, the optimal execution method—whether RFQ or CLOB—may differ 

from those of other kinds of financial end users, such as those whom we advise and 

on whose behalf we transact. As a general principle, Chatham appreciates the value 

of anonymous trading and we do not see a benefit to most end-users of name-disclosed approaches. However, our experience does not allow us to offer material input 

on the question of access to the central limit order books offered by Inter-Dealer 

Brokers.

Question 2. There was a great deal of testimony regarding harmonization with 

European Rules. However, from published reports a number of trade organizations 

representing incumbent firms with significant market power have been arguing to 

European regulators and legislators to make changes to the proposed trade execution regime in MiFID II. If that effort is successful, we will be asked to harmonize, 

or to push the CFTC to harmonize, our clear rules on impartial access to the SEF 

marketplace for eligible participants with rules that include no such mandate. In 

that eventuality should harmonization still be our top priority? 

Answer. Chatham sees growth in electronic trading in the OTC derivatives market 

as a positive development. This growth has been spurred both by technological advancement and by regulatory mandates in the U.S. and Europe. The principle benefits of electronic trading are the ease of facilitating competition and the benefits of 

straight through processing, especially where a party transacts in high volumes. 

These benefits must be set against the costs of evaluating electronic marketplaces, 

reviewing rulebooks of those marketplaces, and setting up systems to facilitate 

straight-through processing. Transaction volumes will often dictate whether the 

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benefits of electronic trading outweigh the costs. Those that transact in high volumes will generally see benefits in adopting electronic trading and will often choose 

to transact electronically whether or not regulation requires them to do so. 

Chatham believes it is not necessary to tightly prescribe protocols by which electronic marketplaces operate. The U.S. has generally taken a more prescriptive approach relative to Europe with respect to trading protocols imposed on SEFs. For 

example, U.S. regulations require that a minimum number of dealers participate in 

swap auctions via electronic marketplaces, while requirements on European trading 

platforms are subject to lower requirements. We believe the benefits of competition 

and straight-through processing can accrue under various protocols and rule sets, 

and that the prescriptive approach adopted by the U.S. is not necessary to ensure 

a competitive marketplace. 

As a general principle, we believe it beneficial to market participants when regulators globally coordinate and harmonize their rules—both with respect to their content and timing—and we believe such efforts with respect to trading rules should 

be given due consideration.

Question 3. The swaps we discussed at the hearing are not customized—they are 

standardized. Standardized swaps are the only swaps that are subject to the trading 

mandate—they are cleared and are subject to the straight-through-processing requirement. And yet, we repeatedly hear that the swaps market is fundamentally different than other standardized markets: that it is characterized by episodic liquidity 

and that its bifurcated, two-tiered structure is the ‘‘natural’’ evolution of the market. 

Do you agree or disagree with that characterization? 

Answer. Yes. Bilateral, uncleared swaps (i.e., typically customized swaps) play an 

important role in allowing market participants to manage risk. When risk management is the objective, such swaps are generally superior to standardized swaps 

which cannot be customized to perfectly offset idiosyncratic risks. Absent customized 

swaps, market participants would be forced to retain risks that they might otherwise have been able to transfer. In addition to the economic benefits of 

customization, market participants who perfectly match their hedge to their risk 

achieve accounting results—via hedge accounting treatment—that are more consistent with the economic outcome achieved through hedging. That is, income statement volatility is reduced or eliminated in line with the risk reducing nature of the 

hedges. 

Additionally, bilateral, uncleared swaps permit customization with respect to the 

credit arrangements used to manage risk associated with the swap. Just as banks 

are able to accept various forms of collateral with respect to loans, end-users value 

their ability with bilateral, uncleared swaps to customize the credit support arrangements they enter into with swap dealers. For example, centrally cleared swaps 

are secured by initial and variation margin. While bilateral, uncleared swaps may 

be similarly secured, end users may negotiate credit support arrangements that are 

better tailored to their needs. For example, a real estate firm may grant a security 

interest in a real estate asset to its swap counterparty, who also may serve as lender on loan that the swap hedges. Real estate firms, among others, own physical assets and do not carry significant amounts of cash greatly benefit from such 

customizable credit arrangements. 

At the same time, firms that transact in significant volumes, have low cost of capital and ready access to liquid resources (e.g., cash and certain securities) may find 

that the centrally cleared market meets their risk management needs. Such participants may prefer the risk management characteristics of a centralized market. 

Thus, we believe a two-tiered market benefits the market and is not inconsistent 

with public policy objectives related to systemic risk and transparency.

Question 4. The CFTC has required trade data to remain anonymous at the SDR 

level. What do you feel the impact would be if the CFTC imposed a requirement 

that if a trade is entered anonymously it would need to stay anonymous throughout 

its life-cycle? 

Answer. We believe it appropriate that regulators implement rules in a manner 

that prevents market participants from having visibility into an individual company’s positions. However, we believe it appropriate for regulators to have such visibility with respect to all positions.

Question 5. We have rules in place to ensure a fair, anonymous, all-to-all swaps 

markets where multiple participants can make both bids and offers—that type of 

structure is much more balanced—and historically as we’ve seen with the futures 

and equity’s markets, much more resilient in times of stress. Please comment on the 

structural stability that could be supplied if these markets truly operated in the 

anonymous all-to-all manner we intended? 

89

Answer. We believe that structural stability can be supplied to these markets 

without an all-to-all market. Indeed, we believe the principle contribution of an allto-all model in the derivatives market relates more to transparency than it does systemic stability, and even the transparency benefits can be achieved in ways that are 

less prescriptive than a mandated all-to-all market structure. We believe other 

mechanisms can adequately address systemic stability concerns, including clearing, 

margin and capital requirements. In essence, we think while there may be benefits 

in some cases for all-to-all markets, we do not believe there are sufficient benefits 

to justify that such a structure be mandated. Indeed, we believe end-user risk management objectives are furthered by way of a variety of means of execution.

Question 6. We wrote the SEF Core Principles to require impartial access, the 

CFTC’s SEF rule requires impartial access and yet market participants don’t have 

impartial access to the full market—what needs to change for all eligible market 

participants to have the kind of access we envisioned? 

Answer. As noted, Chatham’s experience - principally focused on interest rate 

markets and the RFQ model—does not suggest a significant concern with impartial 

access to SEFs. Nonetheless, we think it not inappropriate for policy makers to carefully consider the concerns of market participants transacting in other asset classes 

(e.g., credit default swaps) and other execution methods (e.g., central limit order 

books).

Æ