U.S. GOVERNMENT PUBLISHING OFFICE

WASHINGTON : 

For sale by the Superintendent of Documents, U.S. Government Publishing Office

Internet: bookstore.gpo.gov Phone: toll free (866) 512–1800; DC area (202) 512–1800

Fax: (202) 512–2104 Mail: Stop IDCC, Washington, DC 20402–0001

95–813 PDF 2015

DODD-FRANK TURNS FIVE: ASSESSING THE 

PROGRESS OF GLOBAL DERIVATIVES 

REFORMS 

HEARING 

BEFORE THE

COMMITTEE ON AGRICULTURE 

HOUSE OF REPRESENTATIVES 

ONE HUNDRED FOURTEENTH CONGRESS 

FIRST SESSION 

JULY 29, 2015 

Serial No. 114–24 

( 

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 

(II) 

(III) 

C O N T E N T S 

Page 

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

statement .............................................................................................................. 1 

Prepared statement .......................................................................................... 3 

Peterson, Hon. Collin C., a Representative in Congress from Minnesota, opening statement ........................................................................................................ 4 

WITNESSES

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

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

Prepared statement .......................................................................................... 6 

O’Malia, Hon. Scott D., Chief Executive Officer, International Swaps and 

Derivatives Association, Inc., New York, NY ..................................................... 9 

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

Edmonds, Christopher S., Senior Vice President, Financial Markets, 

IntercontinentalExchange, Inc., Chicago, IL ..................................................... 22 

Prepared statement .......................................................................................... 23 

Supplementary material .................................................................................. 67 

Submitted reports ............................................................................................. 89 

Thompson, Larry E., Vice Chairman and General Counsel, Depository Trust 

and Clearing Corporation, New York, NY ......................................................... 25 

Prepared statement .......................................................................................... 26 

Parsons, Ph.D., John E., Senior Lecturer, Sloan School of Management, Massachusetts Institute of Technology, Cambridge, MA ......................................... 41 

Prepared statement .......................................................................................... 42 

(1) 

DODD-FRANK TURNS FIVE: ASSESSING THE 

PROGRESS OF GLOBAL DERIVATIVES 

REFORMS 

WEDNESDAY, JULY 29, 2015 

HOUSE OF REPRESENTATIVES, 

COMMITTEE ON AGRICULTURE, 

Washington, D.C. 

The Committee met, pursuant to call, at 10:01 a.m., in Room 

1300 of the Longworth House Office Building, Hon. K. Michael 

Conaway [Chairman of the Committee] presiding. 

Members present: Representatives Conaway, Rogers, Gibbs, Austin Scott of Georgia, Davis, Yoho, Allen, Bost, Abraham, 

Moolenaar, Newhouse, Kelly, Peterson, Walz, McGovern, DelBene, 

Vela, Kuster, Nolan, Bustos, Kirkpatrick, Plaskett, Adams, 

Graham, and Ashford. 

Staff present: Caleb Crosswhite, Carly Reedholm, Haley Graves, 

Jackie Barber, Kevin Webb, Mollie Wilken, Paul Balzano, Scott C. 

Graves, Faisal Siddiqui, Liz Friedlander, Matthew MacKenzie, and 

Nicole Scott. 

OPENING STATEMENT OF HON. K. MICHAEL CONAWAY, A 

REPRESENTATIVE IN CONGRESS FROM TEXAS 

The CHAIRMAN. Good morning. This hearing on the Committee 

on Agriculture, Dodd-Frank Turns Five: Assessing the Progress of 

Global Derivatives Reforms, will come to order. Please join me in 

a brief prayer. Heavenly Father, we thank you, Lord, for the privileges of being able to represent the folks we represent for our districts. We ask, Lord, that we honor that trust that they put in us 

as we consider things before the Committee today. Give us wisdom, 

and knowledge, and discernment that we might come to the right 

conclusions. Forgive us where we fail, Lord. We ask these things 

in Jesus’s name, amen. 

Thank you for being here today and joining us in this full Committee hearing. The 2008 financial crisis prompted global leaders 

to re-evaluate the regulatory regime for derivatives. In Pittsburgh, 

and again in Cannes, global leaders set out five categories of reforms—clearing, margining, electronic execution, data reporting, 

and capital standards—they all agreed would make derivatives 

markets much safer. Perhaps most importantly, though, the G20 

leaders recognized the global nature of swaps markets, and sought 

to ensure that national regulators coordinated these reform efforts. 

In 2008, at the close of the first G20 summit in Washington, the 

assembled heads of state declared: ‘‘our financial markets are globVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00005 Fmt 6633 Sfmt 6633 P:\DOCS\114-24\95813.TXT BRIAN
2 

al in scope, therefore intensified international cooperation among 

regulators, and strengthening of international standards were necessary, and their consistent implementation is necessary to protect 

against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure 

that their actions support market discipline, avoid potentially adverse impacts on other countries, including regulatory arbitrage, 

and support competition, dynamism, and innovation in the marketplace.’’ 

G20 leaders continued to push for cooperation, and cooperation 

between regulators, at every subsequent G20 meeting, including in 

the joint announcement following the 2013 St. Petersburg summit, 

where G20 leaders spoke about the importance of deferring to national regulators. They said, ‘‘We agree that jurisdictions and regulators should be able to defer to each other, when it is justified, by 

the quality of the respective regulatory and enforcement regimes 

based on similar outcomes, in a non-discriminatory way, paying 

due respect to home country regulation regimes.’’ 

As we mark the fifth anniversary of the Dodd-Frank Act, it is important that we take stock of where we were and where we are trying to get to by enacting this legislation. The G20 laid out a road 

map that demanded international action to respond to an international crisis, but left it to national regulators to implement that 

vision. Over the past several years the Agriculture Committee has 

heard from market participants, CFTC Commissioners, and even 

foreign regulators about the struggles national regulators are having living up to the proclamations of the G20. 

Today the Committee is concerned that the lack of coordination 

and harmonization is jeopardizing the implementation of these 

promised and widely sought reforms to global swaps markets. If we 

get these reforms wrong, we will permanently disrupt global financial markets, trapping liquidity behind regulatory barriers, and 

preventing end-users from seeking out their best risk management 

counterparts. Splintering global financial markets through regulatory pride-of-authorship is not reform, it is bureaucratic hubris. 

If that is the ultimate outcome of the Dodd-Frank Act, regulators 

will have squandered the responsibility to which they were entrusted. Today we will begin to examine the progress global regulators have made with derivatives reforms and what work remains 

to be done, where the perils are for market participants. And I look 

forward to the testimony of our witnesses. 

In the background of this debate looms the continued inaction of 

the Congress on the expired authorization of the CFTC. I consider 

it a failure of our institution to allow Federal agencies to operate 

outside the traditional budget process of authorization, appropriation, and oversight. That is why I set an ambitious agenda this 

spring to re-authorize all of our expired or expiring programs and 

agencies. Together we got our work done, we moved the four bills 

through the Committee and the House floor, re-authorizing everything within our jurisdiction that needed to be done this year. 

For the CFTC, this Committee has done its work twice over the 

past 2 years, and moved two bipartisan re-authorization packages 

through the House of Representatives, with no corresponding action in the Senate. Despite the lack of authorization, appropriaVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00006 Fmt 6633 Sfmt 6633 P:\DOCS\114-24\95813.TXT BRIAN
3 

tions to the agencies have increased, from $194 million at the end 

of Fiscal Year 2013 to $250 million this year, a 29 percent increase 

in 2 years. 

To that end, I want to publicly state I am opposed to any increase in funding for the Commission until it is re-authorized. Both 

the House and the Senate Appropriations Committee have proposed level funding for the agency, and I do not believe it is appropriate to have any conversation that moves that line, while so 

many end-users and good government issues remain outstanding 

and unresolved. This is not a position I take lightly, which I hope 

highlights the importance in which I hold the re-authorization of 

every agency and program under the jurisdiction of this Committee. 

[The prepared statement of Mr. Conaway follows:] 

PREPARED STATEMENT OF HON. K. MICHAEL CONAWAY, A REPRESENTATIVE IN

CONGRESS FROM TEXAS

Thank you all for joining us today and welcome to today’s full Committee hearing, 

Dodd-Frank Turns Five: Assessing the Progress of Global Derivatives Reforms. 

The 2008 financial crisis prompted global leaders to reevaluate the regulatory regime for derivatives. In Pittsburgh and again in Cannes, global leaders set out five 

categories of reforms—clearing, margining, electronic execution, data reporting, and 

capital standards—they all agreed would make derivatives markets safer. 

Perhaps most importantly though, the G20 Leaders recognized the global nature 

of swaps markets and sought to ensure that national regulators coordinated these 

reform efforts. In 2008, at the close of the first G20 Summit in Washington, the assembled Heads of State declared: 

. . . our financial markets are global in scope, therefore, intensified international cooperation among regulators and strengthening of international 

standards, where necessary, and their consistent implementation is necessary 

to protect against adverse cross-border, regional and global developments affecting international financial stability. Regulators must ensure that their actions 

support market discipline, avoid potentially adverse impacts on other countries, 

including regulatory arbitrage, and support competition, dynamism and innovation in the marketplace. 

G20 leaders continued to push for cooperation and coordination between regulators at every subsequent G20 meeting, including in the joint announcement following the 2013 St. Petersburg Summit, where the G20 Leaders spoke about the 

importance of deferring to national regulators: 

‘‘We agree that jurisdictions and regulators should be able to defer to each 

other when it is justified by the quality of their respective regulatory and enforcement regimes, based on similar outcomes, in a non-discriminatory way, 

paying due respect to home country regulation regimes.’’ 

As we mark the fifth anniversary of the Dodd-Frank Act, it is important that we 

take stock of where we were and where we were trying to get to by enacting this 

legislation. The G20 laid out a roadmap that demanded international action to respond to an international crisis, but left it to national regulators to implement that 

vision. 

Over the past several years, the Agriculture Committee has heard from market 

participants, CFTC Commissioners, and even foreign regulators about the struggles 

national regulators are having living up to the proclamations of the G20. Today, the 

Committee is concerned that the lack of coordination and harmonization is jeopardizing the implementation of these promised and widely supported reforms to global 

swaps markets. 

If we get these reforms wrong, we will permanently disrupt global financial markets, trapping liquidity behind regulatory barriers and preventing end-users from 

seeking out their best risk management counterparts. Splintering global financial 

markets through regulatory pride-of-authorship is not reform, it is bureaucratic hubris. If that is the ultimate outcome of the Dodd-Frank Act, regulators will have 

squandered the responsibility with which they have been entrusted. 

4 

Today, we’ll begin to examine what progress global regulators have made with derivatives reforms, what work remains to be done, and where the pitfalls are for market participants. I look forward to the testimony of our witnesses. 

In the background of this debate looms the continued inaction of Congress on the 

expired authorization the CFTC. I consider it a failure of our institution to allow 

Federal agencies to operate outside of the traditional budget process of authorization, appropriation, and oversight. That is why I set an ambitious agenda this 

spring to reauthorize all of our expired or expiring programs and agencies. Together, 

we got our work done and we’ve moved four bills through this Committee and the 

House floor reauthorizing everything within our jurisdiction that we need to this 

year. 

For the CFTC, this Committee has done its work twice over the past 2 years and 

moved two bipartisan reauthorization packages through the House of Representatives, with no corresponding action in the Senate. Despite the lack of authorization, 

appropriations to the agency have increased from $194 million at the end of FY 

2013 to $250 million this year, an increase of 29% in 2 years. 

To that end, I want to publicly state I am opposed to any increase in funding for 

the Commission until it is reauthorized. Both the House and Senate Appropriations 

Committees have proposed level funding for the agency, and I do not believe it is 

appropriate to have any conversation that moves that line while so many end-user 

and good-government issues remain outstanding and unresolved. This is not a position I take lightly, which I hope highlights the importance in which I hold the reauthorization of every agency or program under the jurisdiction of this Committee. 

The CHAIRMAN.With that, I yield to the Ranking Member for any 

opening statement he has. 

OPENING STATEMENT OF HON. COLLIN C. PETERSON, A 

REPRESENTATIVE IN CONGRESS FROM MINNESOTA 

Mr. PETERSON. Well, thank you, Mr. Chairman, and I thank the 

panel for being here to visit with us today. It has, as you said, been 

about 7 years since the financial crisis, and 5 years since this Committee finished our work on Title VII of Dodd-Frank. In that time 

the CFTC has finished 50 of the 60 rules required by Title VII. 

Central clearing, margin, price transparency are now the rule, 

rather than the exception, in the swaps market. And as a result 

of Title VII the derivatives market, as a whole, is now much safer 

for end-users, consumers, market participants and taxpayers than 

they were 7 years ago. 

Still, there is much work to be done. I look forward to hearing 

our witnesses’ views on the areas that need more work, particularly what they feel would be the most appropriate role for Congress to support Chairman Massad in his efforts to coordinate the 

CFTC’s rules with those of foreign regulators. I think he has done 

a good job. He has been a good leader in that effort, and I do want 

to make sure that whatever action we take enhances that effort, 

and the progress that he has made. 

I also want to hear the witnesses’ views on how we can help to 

improve the Dodd-Frank’s trade data reporting regime. Reporting 

is very important, and it is non-controversial, but it is no secret 

that it isn’t working as well as it should, that something needs to 

be done in that area. So, again, Mr. Chairman, thank you for the 

hearing, and I yield back. 

The CHAIRMAN. I thank the gentleman. The chair would request 

that other Members submit their opening statements for the record 

so that our witnesses may begin testimony to ensure there is ample 

time for questions. 

I would like to welcome to our witness table today Mr. Terry 

Duffy, Executive Chairman and President of CME Group, Chicago 

5 

Illinois, Mr. Scott O’Malia, the Chief Executive Officer, International Swaps and Derivatives Association, Inc. of New York, Mr. 

Christopher Edmonds, Senior Vice President, Financial Markets, 

IntercontinentalExchange in Chicago, Mr. Larry Thompson, Vice 

Chairman and General Counsel, Depository Trust and Cleaning 

Corporation of New York, and Dr. John Parsons, Senior Lecturer, 

MIT Sloan School of Management, Cambridge, Massachusetts. 

Mr. Duffy, you may begin when you are ready. 

STATEMENT OF HON. TERRENCE A. DUFFY, EXECUTIVE 

CHAIRMAN AND PRESIDENT, CME GROUP, CHICAGO, IL 

Mr. DUFFY. Thank you, Chairman Conaway, Ranking Member 

Peterson, Members of the Committee. I appreciate the opportunity 

to offer CME Group’s perspective on the G20 commitments, and 

whether the U.S. and global regulators are meeting them. 

Since Congress passed the Dodd-Frank Act, the U.S. has imposed 

a clearing mandate for certain swaps. Today they are traded transparently on futures exchanges and SEFs, which are swaps execution facilities, cleared through central clearing houses, and reported. These developments represent progress towards the goals of 

the G20 to strengthen the financial system through reforms that 

increase transparency and reduce systemic risk. 

But the point of the G20 commitments was also to create a global 

framework. As of today, many G20 nations have not implemented 

the core elements of the G20 regulatory reforms that the U.S. has 

in our Dodd-Frank Act. This lack of coordination has led to policies 

that have created inconsistency, uncertainty, and the potential to 

harm efficient functioning of the U.S. and global derivatives markets. 

A few examples would be, first, in the European Union, the current lack of recognition for U.S. clearing houses will prevent EU 

participants from clearing EU mandated products in the United 

States. This will prevent U.S. clearing houses from competing for 

this global business. And it is clearly unfair, given the way the European and other foreign clearing houses have been able to compete 

for U.S. business arising from our Dodd-Frank mandate. 

Of equal concern, the lack of recognition of U.S. exchanges by the 

European Union has begun to drive some trading out of the United 

States. I suggested to this Committee many years ago, when I was 

testifying, that this was exactly what was going to happen, and we 

are seeing that happen today. I am hopeful that the U.S. and European Union will achieve resolution on the equivalence issue in the 

coming months. This would give participants the regulatory certainty they need to effectively manage their global risks. 

Second, global coordination is also essential for an effective position limits regime. If the CFTC adopts an overly prescriptive position limits rule when other G20 nations have not, price discovery 

and risk management for U.S. commodities will likely move 

abroad. For end-users that stay in the United States, their cost to 

hedge will be significantly higher due to the potential lack of liquidity, and the spread is widening. 

Before closing I want to raise one other issue that is contrary to 

the objectives of the G20 commitments, and that is the leverage 

ratio rule adopted by the Basel Committee and the U.S. Federal 

6 

1 CME Group Inc. is the holding company for four exchanges, CME, the Board of Trade of 

the City of Chicago Inc. (‘‘CBOT’’), the New York Mercantile Exchange, Inc. (‘‘NYMEX’’), and 

the Commodity Exchange, Inc. (‘‘COMEX’’) (collectively, the ‘‘CME Group Exchanges’’). The CME 

Group Exchanges offer a wide range of benchmark products across all major asset classes, including derivatives based on interest rates, equity indexes, foreign exchange, energy, metals, agricultural commodities, and alternative investment products. The CME Group Exchanges serve 

the hedging, risk management, and trading needs of our global customer base by facilitating 

transactions through the CME Group Globex electronic trading platform, our open outcry trading facilities in New York and Chicago, and through privately negotiated transactions subject 

to exchange rules. 

Reserve. The rule mistakenly fails to recognize the risk reducing effect of segregated margin. Instead, the rule penalizes the use of 

central clearing houses by banks on behalf of their clients. It forces 

banks to overstate their leverage exposure, and hold more capital 

against their client clearing activities. This is the case even when 

those activities cannot, as a matter of law, increase the bank’s leverage exposure. 

Under this rule, the current calculation of leverage ratio results 

in better treatment for higher risk products, such as credit default 

swaps, versus agriculture or other commodity futures. This makes 

absolutely no practical sense whatsoever. Making clearing more expensive, and less successful, for end-users is directly contrary to 

the objectives of the G20 commitments. For the G20 commitments 

to work globally, each member nation needs to have a workable 

cross-border regulatory framework. CFTC Chairman Timothy 

Massad has been a leader in working with his counterparts among 

the G20 member nations to address that. 

In closing, an effective cross-border regulatory framework does 

not mean that regulators of G20 nations must be identical. The key 

is to whether each nation’s rules achieve the G20 commitments. In 

the global market, the goal should be for nations to adopt frameworks that lead to consistent regulation, and the results that allow 

for appropriate substitutable compliance. I want to thank the 

Chairman and the Members of the Committee for the time. I look 

forward to answering your questions. 

[The prepared statement of Mr. Duffy follows:] 

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

PRESIDENT, CME GROUP, CHICAGO, IL 

Good morning Chairman Conaway, Ranking Member Peterson. I am Terry Duffy, 

Executive Chairman and President of CME Group.1 Thank you for the opportunity 

to offer our perspective on the G20 commitments and whether U.S. and global regulators are meeting them. 

As we know, the G20 Leaders agreed in 2009 to strengthen the financial system 

through reforms that increase transparency and reduce systemic risk in the overthe-counter (OTC) derivatives market. To achieve these commitments, the G20 

agreed to implement reforms requiring: 

• Reporting: All OTC derivatives should be reported; 

• Trading and Clearing: All standardized OTC derivatives should be traded on 

exchanges or electronic trading platforms, and cleared through central counterparties; and 

• Margin and Capital: Uncleared OTC derivatives should be subject to higher 

capital requirements and minimum margin requirements should be developed. 

Since Congress passed the Dodd-Frank Act in 2009, the U.S. has made tremendous progress towards fulfilling its G20 Commitments. A clearing mandate has been 

implemented for certain rates and credit default swaps, swaps are trading on execution venues, and swaps are reported to trade repositories. 

7 

There is more work to be done. A core tenet of the G20 Commitments was to develop a global framework for the regulation of OTC derivatives. The lack of consistency in both substance and timing of regulatory reforms between the U.S. and other 

G20 nations that have yet to implement many OTC regulatory reforms has led to 

uncertainty and the potential for harm to the efficient functioning of the U.S. and 

global derivatives markets. We and the other G20 nations must move carefully to 

avoid undermining this objective. 

Here are a few examples where policymakers and regulators must work to better 

align national and international policies governing the regulation of OTC derivatives markets. 

EU Equivalency Standards 

Among the most critical issues facing the CFTC today is the potential for the 

United States to be denied status as a country whose regulations are equivalent to 

Europe’s. CME operates futures exchanges, clearinghouses and reporting facilities 

in the U.S. and United Kingdom, and our U.S. futures products reach over 150 jurisdictions across the globe. Cross-border access is a core part of our global business 

strategy. CME has long been a strong supporter of mutual recognition regimes that 

(i) eliminate legal uncertainty, (ii) allow cross-border markets to continue operating 

without actual or threatened disruption, (iii) afford U.S.-based and foreign-based 

markets and market participants equal flexibility, and (iv) promote a level playing 

field. 

Historically, both the U.S. and EU have mutually recognized each other’s regulatory regimes to promote cross-border access. Recently, however, the European 

Commission has taken a different approach. Under European law, U.S. clearinghouses and exchanges—like CME—must first be recognized by European regulators 

in order to be treated the same as EU clearinghouses and exchanges. The European 

Commission is conditioning its recognition of U.S. derivatives laws as equivalent to 

European law on demands for harmful regulatory changes by the U.S. that would 

impose competitive burdens on U.S., but not EU, clearinghouses and exchanges, and 

would harm both U.S. and EU market participants. This refusal to recognize U.S. 

derivatives laws as equivalent is already having a negative impact on liquidity in 

our markets by creating trading disincentives and barriers to entry. As a result, diminished liquidity leads to higher hedging costs for commercial end-users in the 

U.S. and ultimately higher commodity prices paid by U.S. consumers. 

After more than 2 years of negotiation and delay, the EU still has refused to 

grant U.S. equivalence. Since his arrival at the CFTC, Chairman Massad has been 

a tremendous leader in working toward a solution that avoids market disruption 

and affords U.S. and foreign-based markets equal flexibility. Yet, the EU continues 

to hold up the U.S. equivalence determination over the single issue of differing initial margining standards for clearinghouses. The specific U.S. margin standards in 

question are an important component, but not the only component, of a robust regulatory structure under the CFTC’s oversight. And even considering just this component of the margin standards, the U.S. rules generally require equal, if not more, 

margin to be posted with clearinghouses to offset exposures than is the case under 

the EU rules. We applaud Chairman Massad’s effective testimony on this issue before the European Parliament last May. Nonetheless, the European Commission has 

thus far insisted that the U.S. accept EU margin requirements. As Chairman 

Massad recently stated, ‘‘[The CFTC has] offered a substituted compliance framework for clearinghouse regulation which was [the European Commission’s] principal 

concern. I believe there is ample basis for [the European Commission] to make a 

determination of equivalence and I hope that they will do so soon.’’ 

By contrast, the European Commission recently granted ‘‘equivalent’’ status to 

several jurisdictions in Asia, including Singapore, which has the same margin regime as the U.S. Treating the U.S. as not equivalent when the European Commission has deemed the same margin requirements equivalent in Singapore illustrates 

clearly the hypocritical and inconsistent position the European Commission is taking. 

Harmonized Global Framework 

For the G20 Commitments to succeed globally, each member nation needs to have 

a workable cross-border regulatory framework. Chairman Massad has been a leader 

in working with his counterparts among the G20 member nations to achieve that. 

An effective cross-border regulatory framework does not require each nation’s law 

to be identical; this is unrealistic and unnecessary. Instead, the goal is to adopt 

frameworks that lead to consistent regulatory outcomes and allow for appropriate 

substituted compliance. 

8 

Unfortunately, recognition for U.S. clearinghouses will not end the cross-border 

regulatory debate between the U.S. and EU. Some of the key policy issues that will 

have to be resolved among the G20 nations in the next few years include: 

• Benchmark administrators—Equivalence provisions for benchmark administrators are being debated in the European benchmark process. Benchmarks integrity is necessary for market confidence, and therefore should be regulated so 

that they are not readily susceptible to manipulation. However, I agree with 

Chairman Massad that direct government involvement, as employed by the EU, 

is not the solution. 

• Trading venues—Although much of the cross-border equivalence discussions 

have focused on new execution venues for swaps, the existing licenses for nonEuropean futures exchanges, including CME Group exchanges, will also be reviewed against new European rules for trading venues under MiFID II. 

• Position Limits—I have previously testified about the importance of the 

CFTC’s position limits policy to risk management for end-users and commodity 

prices. Getting this policy right extends beyond U.S. borders. This necessarily 

requires global coordination between the CFTC and other G20 nations. If the 

CFTC adopts an overly prescriptive position limits rule when other G20 nations 

have not, price discovery and risk management for U.S. commodities will likely 

move abroad. For end-users that stay in U.S. markets, their cost to hedge will 

be significantly higher due to potential lack of liquidity and wider spreads. 

Commercial end-users are critical to the development and success of physical 

commodity markets nationally and internationally. As with other regulatory 

policies adopted by regulators, it is necessary for us to ensure that final position 

limit rules do not unduly restrict commercial hedging activity or unnecessarily 

increase costs. In this regard, it is critical that global policy makers ensure that 

hedge exemptions are not too narrow or overly cumbersome to obtain. Moreover, 

global policy makers must ensure that position limits policy does not undermine 

the integrity of commodity derivatives benchmarks. In particular, global position limits policies must not incent price discovery to move from physical delivery markets to linked cash-settled markets, where there is no index or other 

independent means for assuring that the cash-settled products are not readily 

susceptible to manipulation. 

Supplemental Leverage Ratio 

In addition to harmonizing global frameworks, international regulators must also 

ensure that global regulations further G20 policy objectives and commitments rather than work against them. A key example of global regulations frustrating G20 

commitments is the impact of the Basel III Supplemental Leverage Ratio and its 

potential to undermine the use of central clearing to mitigate systemic risk. 

The Federal Reserve, in consultation with the Basel Committee on Banking Supervision, last year adopted the Supplemental Leverage Ratio rule intended to limit 

the amount of leverage that the largest banking organizations can hold on their balance sheets. By keeping balance sheet leverage low, regulators seek to further mitigate systemic risk in the event of a default, including for a bank that is a clearing 

member of a central clearing counterparty such as CME Group. 

The rule as adopted will increase costs for end-users by up to five times to clear 

trades due to clearing members having to pass along the cost of the additional capital they must hold to meet the rule’s requirements. In fact, under the current leverage ratio framework, capital costs for agricultural products are two times more expensive than for credit default swaps. These excess capital costs have already contributed to the decision by some clearing members to exit the market altogether, 

thus concentrating risk among a smaller pool of central counterparties. Higher 

clearing costs and fewer clearing members will only exacerbate, not mitigate, the 

risks central clearing is intended to address. 

The Supplemental Leverage Ratio’s main flaw is that it overstates clearing member leverage exposures because it does not allow clearing members to net segregated 

margin held for a cleared trade against the clearing member’s exposure on the 

trade. It is directly at odds with the requirements of the Commodity Exchange Act 

that (1) client margin be strictly segregated from clearing member and clearing 

house own funds at all times and (2) investment of client margin is subject to significant restrictions (including that it must always be segregated, and only limited 

investments are permitted). In fact, not only are clearing members significantly restricted in their treatment of customer margin, but the majority of customer margin 

actually gets passed on to the clearing house, which results in the margin being 

completely outside of the clearing member control. 

9 

Despite these clear regulatory restrictions, the Supplemental Leverage Ratio rule 

does not permit banks or bank-affiliated clearing members to offset their cleared derivatives exposures on behalf of their customers with the segregated margin posted 

by those customers, based on the Basel Committee’s mistaken rationale that banks 

and bank affiliates have the ability to use customer margin for purposes other than 

to offset the cleared derivatives exposure of those customers. 

CME Group appreciates the steps this Committee and CFTC Chairman Massad 

have taken in recent months to address this issue with Prudential Regulators in the 

U.S., and we are hopeful that the Basel Committee and Prudential Regulators will 

consider proposed solutions that we and others in the industry have been discussing 

with them since the rule was adopted. 

Conclusion 

CME Group is concerned that as more time passes without consensus on developing a global framework, regulation will artificially influence liquidity, price discovery and risk management. We also are concerned that continued uncertainty in 

these areas will competitively disadvantage U.S. markets—far beyond just clearinghouses—in an increasingly competitive global marketplace. 

The CHAIRMAN. Thank you, Mr. Duffy. Mr. O’Malia? 

STATEMENT OF HON. SCOTT D. O’MALIA, CHIEF EXECUTIVE 

OFFICER, INTERNATIONAL SWAPS AND DERIVATIVES 

ASSOCIATION, INC., NEW YORK, NY 

Mr. O’MALIA. Chairman Conaway, Ranking Member Peterson, 

and Members of the Committee, thank you for the opportunity to 

testify here today. It has now been 5 years since the Dodd-Frank 

Act was signed into law. In that time, significant progress has been 

made in implementing key elements of the Act, particularly in derivatives clearing, reporting, and trade execution. Today approximately 3⁄4 of the interest rate derivatives in CDS indexed daily volume is now cleared. More than 1⁄2 of the interest rate derivatives, 

and 65 percent of CDS indexed volume is traded on a SEF. All 

swaps are reported to a swap data repository, providing regulators 

with the ability to scrutinize individual trades and counterparties, 

and margin and capital requirements are being phased in to further mitigate risk. 

Today, the derivatives sector is more transparent than before, 

and counterparty risk has been substantially reduced. It has become clear, however, that new challenges have emerged, and certain areas need to be re-assessed. The speed with which DoddFrank was implemented has resulted in significant differences in 

trading, clearing, and reporting, exposing derivatives users to duplicative and inconsistent requirements. These divergences not only 

increase compliance costs, but they have split liquidity along geographic lines. In other words, fractured rules, fractured markets, 

and fractured liquidity. ISDA and its members would suggest several concrete steps that could be taken to make Dodd-Frank more 

effective, and I have provided specific recommendations in my written testimony. I will go over a few of these highlights right now. 

Broadly, regulators must work to harmonize their rules domestically and on a global basis, as they promised in their rulemaking. 

Regulators should set out clear, transparent guidelines for achieving equivalence determinations based on broad outcomes, not specific rule-based tests. Final rules on non-cleared margining are expected soon, and it is vital that regulators implement rules that are 

consistent, and create a level playing field, and enable cross-border 

trading. Upon finalization of national rules, adequate time must be 

10 

provided for implementation. ISDA has been leading in the preparation efforts, notably through the development of a common initial 

margin methodology, and for the necessary legal and documentation changes to support the collateral management and segregation. 

With regards to reporting, regulators should agree on common 

reporting requirements within and across jurisdictions, and adopt 

common data standards. ISDA has developed standards in common 

reporting formats that could be used to ensure the reporting and 

analysis of data transactions to be more effective. Capital requirements should be globally consistent and coherent. The interplay of 

the various components should be comprehensively assessed to ensure that the cumulative impact of market liquidity, borrowing 

costs and the economy as a whole, are fully understood. Immediate 

recognition should be given to CCPs that meet the CPMI/IOSCO 

principles. 

Regulators have recently also turned their attention to CCP resiliency. ISDA has been active in this regard, and has circulated a 

letter recommending best practices on stress testing. I fear trade 

execution is the next area where global regulators will struggle to 

harmonize rules. Regulators must take steps now to minimize the 

differences in trade execution rules, and to avoid cross-border problems that have occurred in clearing and reporting. The CFTC 

should also take action on ISDA’s petition to amend the SEF rules 

in order to increase the use of SEFs and facilitate cross-border 

trading. 

Congress also has a role to play in making necessary adjustments to Dodd-Frank. The cross-border approach by the CFTC and 

the SEC should be examined. The approach taken is not in line 

with the CEA, which states U.S. rules should only be applied to 

those activities that have a significant and direct effect on U.S. 

commerce. Congress should closely monitor the finalization of the 

new margin regime to ensure that U.S. rules are aligned with 

those overseas, particularly in the issue of inter-affiliate trades. We 

welcome the recent bipartisan letter from Chairman Conaway and 

Ranking Member Peterson that highlight this issue. It is important 

that banks can manage risk on a global basis. Without global rule 

consistency, we will see further market fragmentation as a result 

of these rules. 

Section 21(d) of the CEA, which requires indemnification of 

SDRs, should be repealed, and it is included in your legislative reforms. Legislation should clarify that commercial end-users that 

hedge their risk through centralized Treasury units should not be 

denied the end-user clearing exemption, also part of your legislation. Congress should continue to use its oversight roles in asking 

regulators to conduct quantitative assessments on new capital, liquidity, and leverage rules to ensure that the cumulative impact on 

the economy and market liquidity is fully understood. 

Five years on from the enactment of Dodd-Frank, the vast majority of the requirements on derivatives have been implemented, but 

differences in the schedule, and in the substance of the regulation 

across jurisdictions have emerged. I hope the specific reforms suggested by ISDA in my testimony can be implemented to correct the 

existing problems, and avoid international disputes and fragmentaVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00014 Fmt 6633 Sfmt 6601 P:\DOCS\114-24\95813.TXT BRIAN
11 

1Margin Requirements for Non-centrally Cleared Derivatives, Basel Committee on Banking 

Supervision, International Organization of Securities Commissions, September 2013: http:// 

www.bis.org/publ/bcbs261.pdf. 

tion of global markets. Thank you for your time. I am happy to answer any questions. 

[The prepared statement of Mr. O’Malia follows:] 

PREPARED STATEMENT OF HON. SCOTT D. O’MALIA, CHIEF EXECUTIVE OFFICER, 

INTERNATIONAL SWAPS AND DERIVATIVES ASSOCIATION, INC., NEW YORK, NY 

Chairman Conaway, Ranking Member Peterson, and Members of the Committee. 

Thank you for the opportunity to testify today. 

It has now been 5 years since the Dodd-Frank Wall Street Reform and Consumer 

Protection Act was signed into law. In that time, significant progress has been made 

in implementing key elements of the Dodd-Frank Act, particularly in derivatives 

clearing, reporting and trade execution. 

Today, approximately 3⁄4 of interest rate derivatives and credit default swap 

(CDS) index average daily notional volumes are now cleared. More than 1⁄2 of interest rate derivatives and 65% of CDS index average daily notional volumes are traded on swap execution facilities (SEFs). All swaps are now required by the Commodity Futures Trading Commission (CFTC) to be reported to swap data repositories (SDRs), providing regulators with the ability to scrutinize individual trades 

and counterparties. Registration requirements are in place for swap dealers and 

major swap participants, with those entities subject to strict rules meant to protect 

their counterparties. And margin and capital requirements are being phased in to 

further mitigate risk. 

Together, this represents a major step forward in the reform of derivatives markets. Today, the derivatives sector is more transparent than ever before, and 

counterparty credit risk has been substantially reduced. 

It has become clear, however, that new challenges have emerged, and that certain 

areas need to be reassessed. For instance, the speed with which Dodd-Frank was 

implemented has resulted in divergences in the timing and substance of national 

rules. We now see significant differences in trading, clearing and reporting requirements, exposing derivatives users to duplicative and sometimes inconsistent requirements. These divergences not only increase compliance costs, but have led to a split 

in liquidity along geographic lines, which reduces choice, increases costs, and could 

make it more challenging for end-users to enter into or unwind large transactions, 

particularly in stressed markets conditions. 

In other words, fractured rules, fractured markets, fractured liquidity. 

This is contrary to the G20’s 2009 commitments, which specifically called for the 

rules to be implemented in a way that does not fragment markets. 

Discrepancies in regulatory reporting and data requirements within and across 

borders also mean no single regulator is currently able to get a clear view of global 

derivatives trading activity. This means a key objective of Dodd-Frank has not been 

fully met. 

Even where global bodies have taken the lead in developing regulatory requirements—for instance, the capital requirements and margin for non-cleared derivatives—discrepancies have emerged in national implementations, creating competitive distortions. In some cases, certain elements of the capital rules appear to contradict the intentions of other requirements implemented as part of the G20 objectives. For instance, the U.S. supplementary leverage ratio acts to discourage banks 

from offering client clearing services. As the various rules have been developed in 

isolation, the cumulative impact of the capital requirements and the interaction 

with market-based reforms is unknown, and no comprehensive analysis on economic 

impact or the impact on market resilience and economic growth has been undertaken. 

On the margin rules for non-cleared derivatives, a number of discrepancies have 

emerged in national-level proposals, which, in some cases, could put firms operating 

in the U.S. at a competitive disadvantage internationally and reduce choice for U.S. 

end-users domestically. 

And while a final framework for the margining of non-cleared derivatives was 

published by the Basel Committee on Banking Supervision and International Organization of Securities Commissions (IOSCO) in September 2013,1 final national-level 

rules have not yet been published. While the International Swaps and Derivatives 

(ISDA) has worked to prepare the industry for implementation, continued progress 

12 

2 Report from the Financial Stability Board Chairman for the G20 Leaders’ Summit, September 2013: ‘‘Instead, substituted compliance and equivalence assessments of others’ regulatory 

regimes should be based on whether jurisdictions broadly achieve similar outcomes. At the same 

time, in applying such an overall broad approach, regulators will need to decide in different policy areas how much flexibility to apply in assessing the similarity of outcomes. For instance, 

there may be some particular policies (such as CCP margin rules) where differences in key requirements between jurisdictions could lead to regulatory arbitrage, and where further discussion between regulators is needed. Detailed work, and a timeline for action, is thus needed to 

address the challenges in translating the encouraging recent cross-border regulatory understandings into practice.’’ http://www.financialstabilityboard.org/wp-content/uploads/ r_130902a.pdf?page_moved=1. 

is dependent on the timely publication of final rules by both prudential and market 

regulators. These rules should be consistent. 

I applaud the work that went into developing and implementing this ambitious 

piece of legislation from scratch. The fact that so much was done so quickly speaks 

volumes about the dedication of Congress and its staff, as well as the staff at the 

regulatory agencies. ISDA also welcomes the CFTC’s flexibility and willingness to 

react quickly to snags by issuing no-action letters. 

But the wide-scale use of exemptive relief is a symptom of larger problems that 

need to be addressed. Ongoing uncertainty regarding Dodd-Frank implementation 

for global market participants and the resulting fragmentation of liquidity indicates 

that Congress and regulators need to move quickly to review where changes can be 

made to ensure the financial stability and transparency objectives of Title VII of the 

Dodd-Frank Act are successfully achieved. ISDA and its members would suggest 

several concrete steps that could be taken to improve Title VII of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act of 2010. 

• Regulators should work to harmonize their rules on a global basis within specified time frames. Organizations such as IOSCO could play a role here. Existing 

industry definitions and standards should be used to the extent possible. Regulators should also set out clear, transparent guidelines for achieving equivalence 

determinations, consistent with the approach set out in a report by the Financial Stability Board Chairman to G20 leaders in 2013.2 This reflects an agreement that equivalency/substituted compliance assessments should be based on 

whether other regulatory regimes achieve broadly similar outcomes. ISDA has 

proposed specific fixes, which are outlined in more detail below. 

• The CFTC and the Securities and Exchange Commission (SEC) should harmonize their cross-border rules and guidance. More effort is needed to turn the 

aspirational words on substituted compliance into action. In addition, where the 

Federal Reserve Board has jurisdiction over swap dealers and major swap participants, it should work with the CFTC and SEC to ensure the rules do not 

conflict or undermine the financial stability objectives of Title VII of the DoddFrank Act. 

• Regulators should agree on common regulatory reporting requirements within 

and across jurisdictions and adopt common data standards such as unique legal 

entity identifiers (LEIs), unique trade identifiers (UTIs) and unique product 

identifiers (UPIs). ISDA has proposed a path forward, and has worked to develop common standards and reporting formats that could be used to ensure the 

reporting and analysis of transaction data is more effective. 

• Divergences in national implementations of non-cleared margin rules should be 

reduced as far as possible to avoid an unlevel playing field and enable crossborder trading. Once national-level rules are finalized, adequate time must be 

provided for implementation and preparation, particularly as many market participants subject to the new requirements will be posting initial margin on their 

non-cleared trades for the first time. Implementation of global margining and 

segregation requirements will involve major changes to documentation, technology and business practices. ISDA has been leading efforts to prepare the industry for implementation, notably through the development of a common initial margin methodology. But work cannot be completed until final rules are released globally. 

• Capital requirements should be globally consistent, coherent and appropriate to 

the risk of a given activity. The interplay of the various regulatory components 

should be comprehensively assessed to ensure the cumulative impact is fully 

understood to avoid excessively high financing costs for borrowers and increased 

hedging costs for end-users, and to encourage appropriate risk management incentives. 

13 

3Principles for Financial Market Infrastructures, CPSS/IOSCO, April 2012: http:// 

www.bis.org/cpmi/publ/d101a.pdf. 4 CFTC Letter No. 14–16, February 12, 2014: http://www.cftc.gov/ucm/groups/public/ 

@lrlettergeneral/documents/letter/14-16.pdf. 5 ISDA’s petition to the CFTC: http://www2.isda.org/attachment/NzY2Mg==/ 

ISDA%20CFTC%20Petition.pdf. 

• Negotiations with the European Securities and Markets Authority (ESMA) over 

the recognition of U.S. clearing houses have stalled over technical differences 

in margin methodologies. Immediate recognition should be given to central 

counterparties (CCPs) that meet the Committee on Payment and Settlement 

Systems and IOSCO Principles for Financial Market Infrastructures.3 Further 

work is also needed by regulators, CCPs and market participants to develop and 

implement best practices. ISDA has been active in this regard, and recently circulated a letter that recommends best practices on stress testing. 

• Regulators must work to minimize the differences in trade execution rules to 

avoid the cross-border problems that have occurred in data reporting and clearing. An attempt by the CFTC in February 2014 to introduce a so-called qualifying multilateral trading facility (QMTF) regime 4 for trading venues in Europe 

clearly showed that insisting on the adoption of U.S. rules will not work. 

• The CFTC should take action on ISDA’s petition 5 to review and modify the SEF 

rules in order to increase use of U.S. SEFs and facilitate cross-border trading. 

This includes allowing for more flexibility in execution mechanisms in limited 

circumstances, which would bring the rules more in line with European proposals. ISDA also recommends changes to the ‘made-available-to-trade’ process 

to give the CFTC the authority to make final determinations, following a short 

public consultation period. 

• Regulators should ensure the costs and compliance burdens for end-users are 

minimized to enable them to effectively hedge their risks. Regulators should 

consider the cumulative impact of the rules on end-users, including indirect effects. 

• The CFTC must provide final registration to swap dealers, SDRs and SEFs, 

which have been in regulatory limbo for as long as 3 years. 

Congress also has role in reviewing and making the necessary adjustments to the 

Dodd-Frank Act. This includes: 

• Examination of the misapplied cross-border authorities implemented by the 

CFTC and the SEC, which have expanded U.S. regulatory reach well beyond 

U.S. boundaries. This approach ignores the requirement of Section 2(i) of the 

Commodity Exchange Act (CEA), which states that the swaps provisions of the 

CEA shall not apply to activities outside the U.S. unless those activities have 

a direct and significant connection with activities in, or effect on, commerce of 

the U.S. 

• Legislators should oversee the process of finalizing the new margin regime to 

ensure U.S. rules are aligned with those overseas, particularly on the issue of 

inter-affiliate trades, to ensure financial institutions operating in the U.S. are 

not put at a competitive disadvantage. Without the ability to efficiently centralize risk management activity, banks may stop providing products in certain 

markets or to certain customers via local affiliates because inter-affiliate margin 

would make these products less economically viable. The result would be a further fragmentation of markets and reduction in liquidity. 

• Repeal of Section 21(d) of the CEA, which requires indemnification of SDRs. 

This has become a barrier to sharing data among regulators in the U.S. and 

internationally. 

• Legislative action to make clear commercial end-users that hedge their risk 

through centralized Treasury units are not denied the end-user clearing exemption. 

• Congress should continue to use its oversight role by asking regulators to conduct a quantitative assessment on new capital, liquidity and leverage rules to 

ensure the cumulative impact on the economy and market liquidity is fully understood. 

* * * * * 

I would like to address each of my points in more detail. Before I do, I would like 

to stress that ISDA supports the intent of Dodd-Frank to strengthen financial markets and reduce systemic risk. That includes the reporting of all derivatives trades 

14 

6 Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations; Rule, FEDERAL REGISTER/Vol. 78, No. 144/July 26, 2013: http://www.cftc.gov/ucm/ 

groups/public/@lrfederalregister/documents/file/2013-17958a.pdf. 

and clearing of standardized derivatives products where appropriate. ISDA has 

worked constructively and collaboratively with policy-markers in the U.S. and across 

the globe to achieve these objectives. In fact, this work began even before the passage of Dodd-Frank, as part of the ‘voluntary commitment process’ overseen by the 

Federal Reserve Bank of New York. 

This is very much in line with our mission statement: to foster safe and efficient 

derivatives markets for all users of derivatives. Since ISDA’s inception 30 years ago, 

the Association has worked to reduce credit and legal risks in the derivatives market, and to promote sound risk management practices and processes. This includes 

the development of the ISDA Master Agreement, the standard legal agreement for 

derivatives, and related collateral documentation, as well as our work to ensure the 

enforceability of netting. 

Today, ISDA has over 800 member institutions from 67 countries. These members 

comprise a broad range of derivatives market participants, including corporations, 

investment managers, government and supranational entities, insurance companies, 

energy and commodities firms, and international and regional banks. In addition to 

market participants, members also include key components of the derivatives market infrastructure, such as exchanges, clearing houses and repositories. 

End-users of derivatives are the largest constituent, accounting for roughly 1⁄2 of 

our membership. Approximately 1⁄3 is located in North America. 

* * * * * 

Before I expand upon the challenges faced by derivatives market participants, I 

would like to briefly summarize the commitments made by the G20, which were reflected in Dodd-Frank. They were: 

• Non-cleared derivatives should be subject to higher capital requirements; 

• Standardized derivatives should be cleared through CCPs; 

• Derivatives should be reported to a trade repository; 

• Standardized contracts should be traded on exchanges or electronic trading 

platforms where appropriate. 

A requirement for non-cleared derivatives to be subject to margin requirements 

was also later agreed by G20 leaders. 

Underlying these commitments was a pledge that regulators ‘‘are committed to 

take action at the national and international level to raise standards together so 

that our national authorities implement global standards consistently in a way that 

ensures a level playing field and avoids fragmentation of markets, protectionism, 

and regulatory arbitrage’’. 

As noted earlier, significant progress has been made in meeting the clearing, trading and reporting requirements included in Dodd-Frank. This progress will continue 

as clearing houses expand their product offerings and new clearing and trading 

mandates come into force. 

Unfortunately, much less progress has been made on ensuring consistency and 

harmonization and in avoiding the fragmentation of markets. 

Cross-Border Harmonization 

The derivatives markets are, and always have been, global markets. European 

banks can trade with U.S. asset managers; Asian banks can trade with European 

hedge funds; U.S. banks can trade with Asian companies. That choice has benefited 

end-users. They can easily tap into a global liquidity pool with few barriers and 

choose who they want to trade with. 

That global liquidity pool is now at risk because of a lack of consistency in the 

timing and substance of national-level rules. This lack of harmonization is a particular concern because of the extraterritorial reach of some domestic rules, meaning 

counterparties are potentially subject to two or more possibly contradictory sets of 

requirements—those of their own jurisdiction and the extraterritorial rules of foreign jurisdictions. 

Section 2 of the CEA (7 U.S.C. 2) stipulates that Dodd-Frank should not apply 

to activities outside the U.S., unless those activities have a ‘‘direct and significant 

connection with activities in, or effect on, commerce of the United States’’. However, 

the CFTC’s cross-border guidance 6 takes a much broader approach to capture overseas activities. This has resulted in non-U.S. firms turning away from any trade or 

15 

7 CFTC Staff Advisory No. 13–69, November 14, 2013: http://www.cftc.gov/ucm/groups/public/@lrlettergeneral/documents/letter/13-69.pdf. 8Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants— 

Cross-Border Application of the Margin Requirements; Proposed Rule, FEDERAL REGISTER/Vol. 

80, No. 134/July 14, 2015: http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2015-16718a.pdf. 9 ISDA research on fragmentation of global derivatives markets, April 2015: http:// 

www2.isda.org/attachment/NzUzMQ==/Market%20fragmentation%20FINAL.pdf. 

counterparty that would result in them being subject to U.S. rules and regulatory 

oversight, on top of their own jurisdiction’s rules. 

CFTC Staff Advisory 13–69 7 is an example of U.S. regulatory overreach. It clarifies that a non-U.S. swap dealer should comply with Dodd-Frank transaction-level 

requirements when trading with another non-U.S. person if the trade is arranged, 

negotiated or executed by personnel or agents of the non-U.S. swap dealer located 

in the U.S. 

ISDA believes U.S. regulators should focus on practices that pose a risk to the 

U.S. It is difficult to see why a trade between two non-U.S. entities that is booked 

overseas should be subject to CFTC oversight and Dodd-Frank transaction-level 

rules, simply because a U.S.-based employee has provided input to the transaction. 

In these cases, the trade would be subject to U.S. clearing, trading and reporting 

rules, as well as potentially inconsistent requirements from the non-U.S. entity’s 

home regulator. These kinds of personnel-based tests could result in firms excluding 

their U.S.-based personnel from certain trades, or relocating them elsewhere. 

The CFTC has issued four successive no-action letters since November 2013 to exempt market participants from compliance with Staff Advisory 13–69. But concerns 

about being subject to multiple sets of requirements are prompting market participants to change behavior in some cases. This is causing liquidity to fragment along 

geographic lines. 

The CFTC’s recent proposed cross-border treatment for margin on non-cleared derivatives transactions 8 is another example of regulators taking an expansive approach, as it captures non-guaranteed non-U.S. affiliates in certain cases. That’s despite the fact the non-cleared margin rules were agreed at a global level, and will 

likely be applied in the U.S., Europe and Japan at the same time. This approach 

could further contribute to the fragmentation and regionalization of liquidity pools. 

ISDA research shows 87.7% of regional European interdealer volume in euro interest rate swaps was traded between European dealers in the fourth quarter of 

2014, compared with 73.4% in the third quarter of 2013.9 The change in trading behavior coincided with the introduction of U.S. SEF rules, which required all electronic venues that provide access to U.S. entities to register with the CFTC as 

SEFs. Many non-U.S. platforms chose not to register, meaning U.S. persons were 

no longer able to access liquidity on these platforms. Following the first SEF trading 

mandates in February 2014, non-U.S. participants opted to avoid trading mandated 

products with U.S. counterparties, so as not to be required to trade on CFTC-registered SEFs that offer restrictive methods of execution for these instruments. U.S. 

entities, conversely, are unable to access the most liquid pool for euro interest rate 

swaps, which is centered in Europe, away from SEFs. 

Many of the problems could be resolved through an effective process for granting 

equivalence/substituted compliance. A transparent substituted compliance mechanism based on broad outcomes, rather than a granular rule-by-rule comparison, 

would help minimize the compliance challenges and fragmentation of liquidity. The 

CFTC should clearly articulate how substituted compliance decisions will be made 

in order to shed light on this currently theoretical and opaque process. 

Regulators should also work to harmonize rules sets as far as possible, particularly in clearing, trading and reporting. The CFTC and the SEC must resolve the 

differences in their respective rules to foster greater consistency and clarity within 

the U.S. Greater harmonization with global regulations is also necessary. Differences in national-level rules have already led to protracted—and still unresolved—negotiations over whether U.S. clearing houses should be recognized by the 

ESMA. A restrictive interpretation of Dodd-Frank SEF rules by the CFTC means 

a similar outcome may emerge for trading rules, further exacerbating the fragmentation of markets, to the detriment of end-users. 

Congress should give careful consideration to legislative changes based on the following principles: 

• Emphasize the results and outcomes of foreign regulatory requirements, rather 

than the design and construction of specific rules; 

16 

10 Industry trade association letter, June 2015: http://www2.isda.org/attachment/ 

NzY1OA==/Joint%20Trade%20Association%20Data%20Harmonization%20letter.pdf. 11 ISDA principles on improving regulatory transparency of global derivatives markets, February 2015: http://www2.isda.org/attachment/NzI4NQ==/Improving%20Regulatory%20 

Transparency%20FINAL.pdf. 

• Make clear that the location of personnel should not be a factor in determining 

whether activities have a direct and significant connection with activities in, or 

effect on, commerce of the U.S.; 

• Establish separate criteria regarding the application to end-users and transactions involving end-users, and mitigate the direct and indirect costs or other 

burdens imposed on end-users. 

Reporting 

Cross-border issues have also hampered the effectiveness of derivatives reporting. 

A lack of standardization in reporting formats across different repositories, and 

inconsistencies in what is reported, mean accurate data aggregation is currently impossible. Differences in regulatory reporting requirements within and across jurisdictions also mean regulators are unable to gain an accurate picture of risk exposures on a global basis. These differences increase operational complexities for endusers and make aggregation across corporate groups difficult. It also increases the 

cost of reporting for firms that have reporting obligations in multiple jurisdictions. 

To resolve this, regulators across the globe should identify and agree on the trade 

data they need to fulfill their supervisory responsibilities, and then issue consistent 

reporting requirements across jurisdictions. Further work is also needed by the industry and regulators to develop and then adopt standardized product and transaction identifiers, as well as reporting formats. ISDA has played a leading role in 

this area through its taxonomies, FpML reporting standard and unique trade identifier prefix service (UTIPrefix.org), among other things. 

Even then, it will be difficult for regulators to obtain an accurate picture of global 

risk exposures because of the Dodd-Frank SDR indemnification requirement and 

privacy laws in some jurisdictions prohibiting the disclosure of certain counterparty 

information. Until these two issues are resolved, the ability of regulators to build 

a comprehensive picture of derivatives positions across the globe and to spot potential systemic risks will be stymied. 

Reporting mandates have been in place in the U.S. for over 2 years, while Europe 

has had similar rules in place for nearly 18 months. However, little tangible 

progress has been made over that time to resolve differences in their respective requirements and facilitate the sharing of information. As a first step to resolving 

this, global regulatory institutions such as IOSCO could play a greater role to agree 

common requirements. Regulators and market participants should also work to 

identify, develop and adopt common data standards where necessary. 

ISDA has recently joined with ten other international trade associations to send 

a letter 10 to global regulators that calls for rule harmonization consistent with a 

set of principles developed by ISDA.11

The principles are: 

• Regulatory reporting requirements for derivatives transactions should be harmonized within and across borders. 

• Policy-makers should embrace and adopt the use of open standards—such as 

LEIs, UTIs, UPIs and existing messaging standards (e.g., FpML, ISO, FIX)— 

to drive improved quality and consistency in meeting reporting requirements. 

• Where global standards do not yet exist, market participants and regulators can 

collaborate and secure agreement on common solutions to improve consistency 

and cross-border harmonization. 

• Laws or regulations that prevent policy-makers from appropriately accessing 

and sharing data across borders must be amended or repealed. 

• Reporting progress should be benchmarked. The quality, completeness and consistency of data provided to repositories should be tracked, measured and 

shared with market participants and regulators in order to benchmark, monitor 

and incentivize progress in reporting. 

Margin Requirements for Non-cleared Derivatives 

Dodd-Frank recognizes there is a place for bespoke derivatives instruments that 

enable corporate and financial institution end-users to closely match and offset 

risks. It also acknowledges that less liquid derivatives instruments, currencies and/ 

or maturities may not be suitable for clearing. This point was echoed in a recent 

17 

12Keynote address, Timothy G. Massad before the District of Columbia Bar (Washington, 

D.C.), July 23, 2015: http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-26. 13Margin and Capital Requirements for Covered Swap Entities; Proposed Rule, FEDERAL REGISTER/Vol. 79, No. 185/September 24, 2014: http://www.gpo.gov/fdsys/pkg/FR-2014-09-24/pdf/ 

2014-22001.pdf. 14Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants; 

Proposed Rule, FEDERAL REGISTER/Vol. 79, No. 192/October 3, 2014, http://www.cftc.gov/ucm/ 

groups/public/@lrfederalregister/documents/file/2014-22962a.pdf. 

speech by CFTC Chairman Timothy Massad, before the District of Columbia Bar 

Association.12

These non-cleared instruments are not necessarily more complex than cleared 

transactions, nor do they pose significantly more risk. Clearing houses typically consider the depth of the market, liquidity and availability of prices, among other factors, when deciding whether to clear a derivatives instrument—criteria also considered by regulators when deciding whether to apply a clearing mandate. Those products with non-standard terms that are used to meet specific end-user hedging needs 

may not meet those requirements. 

Nonetheless, these instruments are vital elements in the risk management strategies of corporates, insurance companies, pension funds, sovereigns, smaller financial 

institutions and others. Without them, these entities may experience greater earnings volatility due to an inability to qualify for hedge accounting, or be unable to 

offset the interest rate, inflation and longevity risks posed by long-dated pension or 

insurance liabilities. 

To give an example: a U.S. exporter has issued a U.S. dollar bond to grow its domestic business, but earns most of its revenue from exports to Europe. If the dollar 

strengthens against the euro, the company will face financial statement and 

cashflow volatility. It will therefore need to allocate a larger amount of its euro 

cashflow to service its dollar-denominated debt. To hedge this risk, the firm could 

swap the loan into euros using a cross-currency swap, allowing it to match the currency in which revenues are received and interest expense is paid. Cross-currency 

swaps are currently not cleared. 

While clearly recognizing the need for a robust and competitive non-cleared derivatives market, the Dodd-Frank Act requires regulators to set margin requirements for non-cleared derivatives—in other words, requiring collateral to be posted 

against those trades to mitigate counterparty risk. 

These rules are now close to finalization. The Basel Committee and IOSCO published a final global margining framework in September 2013, which calls for eligible counterparties to post initial and variation margin on non-cleared derivatives 

trades. U.S. Prudential Regulators 13 and the CFTC 14 published separate nationallevel proposals building on this framework in September and October 2014, and 

final rules are expected to be released in the third quarter of this year. 

The implementation of this regime on a global basis will require significant work, 

particularly as many derivatives users have not posted initial margin on their noncleared swaps before. For some non-bank users, it will also be the first time they’ve 

had to post variation margin. 

ISDA has worked very hard to develop the infrastructure, processes and documentation necessary for the new margining regime. The Association is also working 

to develop the ISDA Standard Initial Margin Model (ISDA SIMM), a common calculation methodology for computing initial margin amounts, which will be available 

to all market participants. 

Use of a standard methodology provides a number of benefits. For one thing, it 

provides regulators with a consistent, transparent model to enhance market oversight. Second, by creating a model that everyone can use, it reduces the potential 

for disputes between counterparties over the initial margin amounts that need to 

be exchanged. 

In addition to the ISDA SIMM, ISDA is working on a number of other initiatives. 

Existing ISDA Credit Support Annexes (CSAs) and other collateral documentation 

will need to be replaced or revised in order to comply with the new non-cleared margin rules. A number of key terms in the CSA will need to be modified, including 

collateral eligibility, collateral haircuts, calculation and collection timing, dispute 

resolution, and the procedure for exchanging initial margin. In addition, derivatives 

users will need to set up new custodial agreements or make changes to existing arrangements to comply with initial margin segregation requirements. Given the 

changes, new or updated netting opinions may be needed for some jurisdictions. 

Given this workload, it is important that national-level margin rules are finalized 

as soon as possible. While significant progress has been made in ISDA’s implementation efforts, certainty in the final rules in each jurisdiction is required in order 

18 

15 ISDA’s response to U.S. Prudential Regulators’ proposal for the margining of non-cleared 

derivatives, November 2014: http://www2.isda.org/attachment/NzExOA==/ISDA_- 

_PR_Proposed_Margin_Rules_Letter%20112414.pdf. 

to progress these initiatives. It is also important that enough time is given to development and testing between finalization of the national rules and implementation, 

to ensure these rules can be introduced safely with minimum disruption to markets. 

Achieving global consistency in the rule sets is also imperative. The initial proposals from U.S. regulators contained a number of divergences from the Basel Committee and IOSCO framework.15 There were also discrepancies between the national 

rules proposed by Europe and Japan. 

Proposals from U.S. Prudential Regulators, for example, would subject transactions between affiliates of the same financial group to margin requirements. This 

does not appear in European and Japanese proposals, potentially putting financial 

institutions operating in the U.S. at a competitive disadvantage internationally and 

reducing choice for U.S. end-users domestically. 

Analysis conducted by ISDA members shows that the inter-affiliate margining requirement would result in double the amount of initial margin being posted, relative 

to rules that only require initial margin to be posted to external parties. We welcome the recent bipartisan letter from Chairman Conaway and Ranking Member 

Peterson that highlighted this issue, and agree with their concerns that the cost of 

funding this initial margin would likely be passed on to end-users. 

It would also run counter to the objective of reducing systemic risk. These internal 

risk management trades enable firms to consolidate their swaps within a single entity, resulting in substantial risk management and operational benefits. Inter-affiliate margin requirements could discourage this behavior. This could deter firms 

from offering products in certain markets that can only be accessed through an affiliate, as the cost of posting inter-affiliate margin would make these products uneconomic. 

Attention also needs to be paid to how these rules will be applied on a cross-border basis. Under recent proposals from the CFTC, U.S. covered swap entities would 

be able to rely on substituted compliance when trading with a non-U.S. entity (assuming the home rules of the non-U.S. entity are deemed equivalent), but this 

would only apply to initial margin posted. Initial margin collected would have to 

meet U.S. rules. 

In addition, non-U.S. entities whose obligations are not guaranteed by a U.S. person but whose financial statements are included in those of a U.S. ultimate parent 

entity would be subject to the U.S. regime. This goes further in extraterritorial 

reach than other U.S. rules. Unless U.S. rules are harmonized with those in Europe 

and Japan, it is conceivable that a trade between a U.S. and overseas counterparty 

will be required to comply with two sets of rules simultaneously. 

Finally, regulators need to make some accommodation for non-cleared derivatives 

conducted with counterparties in jurisdictions that haven’t applied the margin rules. 

For example, regulators should consider making a transitional equivalency determination, valid for 2 years, for jurisdictions that have yet to implement the Basel 

Committee/IOSCO framework for margin rules. 

ISDA recommends that: 

• Regulators harmonize the margin rule sets to avoid an unlevel playing field and 

the potential for fragmentation. 

• Final U.S. rules should be published as soon as possible so implementation efforts can be progressed. 

• These rules should provide sufficient time (at least 12 months between publication of the final rules and the implementation date) in order to give to market 

participants adequate time to develop and test the necessary models, documentation and infrastructure, and ensure all parties sign legal documentation 

compliant with the final rules. 

Capital Requirements 

Dodd-Frank also requires swap dealers to be subject to strict capital requirements 

to mitigate risk. A key driver has been a desire to incentivize clearing through higher capital requirements for non-cleared trades. Changes to the capital rules have 

been agreed at a global level through the Basel Committee, and are then implemented in each jurisdiction by national authorities. 

The capital reforms include increased bank capital requirements, higher quality 

capital, enhanced market risk rules, greater focus on counterparty credit risk, new 

liquidity requirements, a leverage ratio, a capital surcharge for systemically imporVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00022 Fmt 6633 Sfmt 6621 P:\DOCS\114-24\95813.TXT BRIAN
19 

16 Basel III: A Global Regulatory Framework for More Resilient Banks and Banking Systems, 

Basel Committee on Banking Supervision, December 2010, http://www.bis.org/publ/ 

bcbs189.pdf. 17 Consultative Document: Fundamental Review of the Trading Book: Outstanding Issues, 

Basel Committee on Banking Supervision, December 2014: http://www.bis.org/bcbs/publ/ 

d305.pdf. 18 Consultative Document: Review of the Credit Valuation Adjustment Risk Framework, Basel 

Committee on Banking Supervision, July 2015: http://www.bis.org/bcbs/publ/d325.pdf. 19 Capital Floors: The Design of a Framework Based on Standardised Approaches, Basel Committee on Banking Supervision, December 2014: http://www.bis.org/bcbs/publ/d306.pdf. 

tant banks and total loss-absorbing capital requirements. The Basel Committee has 

set a phase-in schedule from 2013 through to 2019.16

The full impact is unlikely to be known after 2019, when the full array of requirements is fully phased in. Following the finalization of Basel III in December 2010, 

banks have had to prepare for a succession of follow-up consultations and implementations, at the same time as complying with numerous other regulations relating to 

trading, reporting and clearing. The Basel Committee phase-in period for higher and 

better quality capital requirements began from January 2013, with the minimum 

common equity capital ratio and tier-one capital requirement rising to 4.5% and 6%, 

respectively, from this year. Other changes to capital—the introduction of new capital conservation and countercyclical buffers, along with a surcharge for systemically 

important banks—will be phased in from January 2016. 

The first stages of the new liquidity risk management regime have also been implemented. The liquidity coverage ratio is being incrementally rolled out from this 

year until 2019. The net stable funding ratio, meanwhile, is meant to ensure banks 

fund their activities with sufficiently stable sources of funding to avoid liquidity 

mismatches. Following an observation period, the requirements are scheduled to 

come into force from January 2018. ISDA’s own industry analysis suggests this will 

further significantly increase costs for the derivatives users. 

Other changes, such as for bank exposures to central counterparty default funds, 

have also been introduced. 

But plenty of other components have yet to emerge—and, in some cases, even to 

be finalized. The Fundamental Review of the Trading Book (FRTB) is a case in 

point.17 This initiative is meant to replace the current framework implemented 

through Basel 2.5 with a more coherent and consistent set of requirements and to 

reduce the variability in the capital numbers generated by banks. 

The rules are scheduled to be finalized at the end of this year, with implementation by 2018. But market participants say it’s too early to determine what the impact of these rules will be. That’s largely because the analysis conducted so far has 

been hampered by data-quality issues, which has made it difficult to assess the impact on individual business lines. Nonetheless, the rules as they stand are likely to 

lead to punitive capital increases in certain business lines, and will potentially 

cause some key markets, such as securitization and small- and medium-sized entity 

credit, to become uneconomic. This could lead to lower liquidity and increased financing costs for borrowers. End-users could also experience higher hedging costs 

and a reduction in the ability to hedge effectively as capital, liquidity and leverage 

charges are passed on by banks. 

On top of this, the Basel Committee recently issued a new consultation on credit 

valuation adjustment 18 to bring it into line with FRTB and address other perceived 

weaknesses, which is likely to further increase charges for counterparty risk. 

Other issues still to be finalized include the possible introduction of capital 

floors—essentially, a backstop to internal models, likely to be set at a percentage 

of the standard model output. A consultation paper was published last December,19

and final rules are likely sometime this year—although it is not clear when the requirements will be implemented. 

Other components of the Basel III package are finalized but not yet implemented, 

including the leverage ratio. Under the Basel III implementation schedule, banks 

had to begin public disclosure of their leverage ratio numbers from this year, with 

the rules subject to final calibration in 2017 and full implementation in 2018. 

However, these various rules may interact in countervailing ways. For instance, 

regulators globally have been working to ensure incentives are in place for the central clearing of standardized derivatives, but those incentives are being undermined 

by the leverage ratio. 

For the purposes of calculating derivatives exposures as part of the leverage ratio, 

segregated margin received from clients is not allowed to offset the potential future 

exposure associated with such off-balance sheet exposures. The policy rationale is 

that margin can increase the economic resources at the disposal of the bank, as the 

bank could use the collateral to increase leverage. However, margin that is segVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 P:\DOCS\114-24\95813.TXT BRIAN
20 

regated cannot be leveraged by a bank to fund its operations—it solely functions as 

a risk mitigant to reduce exposures with respect to a bank’s cleared derivatives. 

Failure to recognize the exposure-reducing effect of margin acts as a significant disincentive to central clearing, as margin will substantially increase a clearing firm’s 

total leverage exposure, leading to an increase in the amount of capital required to 

support client clearing activities. This will: 

• Lead to more clearing firms exiting the business, therefore concentrating risk 

among a smaller set of providers; 

• Result in a reduction of clearing-member capacity to clear for end-users, potentially forcing some participants to abandon use of derivatives; 

• Increase counterparty risk for clearing members, as many will be discouraged 

from collecting excess margin; and 

• Increase costs to end-users that use non-cleared derivatives, as their counterparties face increase costs to hedge their risks in the cleared swap markets. 

The leverage ratio should therefore be amended to recognize the exposure-reducing effect of segregated margin. 

How each of these elements will interact is not entirely clear. While each rule 

may make sense in isolation, the cumulative impact is unknown, and individual requirements may duplicate or even contradict the intention of other rules. 

ISDA and its members are trying to understand the interplay between the capital, 

leverage and liquidity rules as a result. This could lead to lower liquidity and increased financing costs for borrowers. End-users could also experience higher hedging costs as capital, liquidity and leverage charges are passed on by banks. 

ISDA recommends that: 

• The impact of the capital rules, and how each component interacts with other 

regulatory requirements, is comprehensively assessed before progressing further. 

• Congress should engage with global regulatory bodies to better understand the 

overall goals and objectives, as well as the potential impact on liquidity, borrowing costs and economic activity as a whole. 

Clearing 

ISDA and its members have been in the vanguard of clearing even before the financial crisis and the enactment of the Dodd-Frank Act. ISDA documentation and 

industry implementation groups were crucial to transforming mandatory clearing 

from an idea into reality in the U.S. and Japan. ISDA is playing the same role in 

Europe ahead of the first clearing mandates in Europe in 2016. 

ISDA believes clearing mitigates risk. However, as a proponent of safe, efficient 

markets, ISDA has observed the ever increasing volume of trades passing through 

CCPs due to mandatory clearing, and believes these entities have become a systemically important part of the derivatives market infrastructure. 

Supervisors and regulators are conscious of this fact, and have collectively taken 

action. International standard-setting bodies have established CCP risk management principles, as well as provided guidance on CCP recovery and resolution plans. 

In many respects, CCPs are held to higher standards now than ever before. 

But further work is required. It has been 3 years since supervisors and regulators 

issued CCP risk management principles. Now is the time to re-examine these principles, as well as ascertain whether and to what extent the G20 jurisdictions have 

implemented them. 

Given the increasing systemic importance of CCPs, all supervisors, regulators and 

market participants have an interest in CCP resiliency. ISDA has actively supported 

supervisory and regulatory initiatives in this area. Most recently, ISDA circulated 

a letter on CCP stress testing, which sets out specific best practices. In the letter, 

ISDA notes that consistent application of these best practices across G20 jurisdictions would minimize the risk of CCP failure, and may form a path forward for the 

U.S., the European Union and other G20 jurisdictions towards CCP equivalence. 

ISDA looks forward to further coordinating and cooperating with supervisors and 

regulators on other aspects of CCP resiliency. 

More regulatory input and detail is also needed on acceptable CCP recovery mechanisms, as well as on the circumstances and processes for CCP resolution to ensure 

that the failure of any clearing service can be managed in an orderly way with the 

least possible disruption to financial stability. No recovery and resolution action 

should involve the use of public money. Given the large clearing houses have global 

operations, close cooperation and coordination between national authorities across 

borders is paramount. 

21 

20 CFTC Letter No. 14–15, February 12, 2014, http://www.cftc.gov/ucm/groups/public/ 

@lrlettergeneral/documents/letter/14-15.pdf. 21 ISDA’s Path Forward for Centralized Execution of Swaps, April 2015: http:// 

www2.isda.org/attachment/NzM1Ng==/Path%20Forward%20for%20Centralized%20Execution 

%20of%20Swaps%20FINAL.pdf. 

In addition, legislative action is needed to make clear that end-users that hedge 

through centralized Treasury units (CTUs) in order to net and consolidate their 

hedging activities are eligible for the clearing exemption. Many CTUs classify as financial entities under Dodd-Frank, subjecting them to clearing requirements. While 

the CFTC has issued no-action relief, legislation clarifying that end-users using 

these efficient structures are exempt would provide much-needed certainty. 

Trade Execution 

ISDA has proposed a series of targeted fixes to U.S. SEF rules to encourage more 

trading on these venues and facilitate cross-border harmonization. 

Specifically, ISDA believes allowing for greater flexibility in execution mechanisms will foster further growth of centralized trading venues. While the DoddFrank Act allows derivatives to be traded by ‘‘any means of interstate commerce’’, 

the CFTC’s SEF rules restrict the execution of mandated products to order-book or 

request-for-quote-to-three mechanisms. These execution methods may not be appropriate for certain, less liquid instruments, discouraging trading on SEFs. The 

CFTC’s restrictive interpretation of Dodd-Frank also differs from the more flexible 

approach taken by European regulators in their trade execution proposals, which 

could impede future attempts to obtain equivalence or substituted compliance determinations. 

The CFTC attempted to find a solution to the fracturing of liquidity last year, 

issuing two conditional no-action letters on February 12, 2014 (CFTC No-Action Letter 14–15 20 and 14–16) that allowed U.S. entities to continue trading on European 

multilateral trading facilities (MTFs), without the need for those platforms to register with the CFTC as SEFs. However, those European venues were required to 

report all swap transactions to a CFTC-registered SDR as if they were SEFs, submit 

monthly reports to the CFTC summarizing levels of participation and volume by 

U.S. persons, and meet other SEF requirements as well as their own home regulations. Not surprisingly, no MTF applied within the time frame for this so-called 

QMTF status. 

This validates my belief that it is better for the CFTC to conduct a review of its 

rules now, rather than reach a point where divergent trading rules are in place elsewhere, forcing cross-border counterparties to try and comply with two different sets 

of requirements. 

ISDA has published a set of principles 21 aimed at promoting consistency in the 

development and application of centralized trading rules for derivatives. They include: 

• The trading liquidity of a derivatives contract (and consequently the regulatory 

obligations to which the contract is subject) should be determined by reference 

to specific objective criteria. The process should be based on concrete, transparent and objective standards so that market participants have a clear understanding of when swaps will be required to move from the bilateral market to 

centralized trading venues. 

• Derivatives contracts that are subject to the trading obligation should be able 

to trade on a number of different types of centralized venues. It is important 

for regulators to achieve a flexible trade execution regime that would allow contracts to be traded across jurisdictions, and not be subject to costly duplicative 

compliance obligations and regulatory arbitrage. 

• Trading venues must offer flexible execution mechanisms that take into account 

the trading liquidity and unique characteristics of a particular category of swap. 

We believe that regulators will encourage centralized trading by permitting parties to communicate and execute trades freely, so long as the parties comply 

with the requirement to execute trades on a centralized venue. 

* * * * * 

Conclusion 

US legislators moved quickly to draw up and finalize the Dodd-Frank Act in response to the financial crisis. Five years on from its enactment, the vast majority 

of the key requirements on derivatives have been implemented. The first U.S. clearing mandates, for example, were introduced in 2013. All swaps transactions involvVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00025 Fmt 6633 Sfmt 6621 P:\DOCS\114-24\95813.TXT BRIAN
22 

ing a U.S. person are now required by the CFTC to be reported to SDRs, and SEF 

trading volumes increased rapidly following the first trade mandates in 2014. 

But this first-mover status has also created problems. The speed with which the 

legislation was drawn up meant little time was given to coordination and cooperation with non-U.S. legislators. Differences in implementation schedules and in the 

substance of the regulation in different jurisdictions have emerged as a result. 

With other jurisdictions now developing or implementing comparable rules, there 

is now an opportunity to harmonize the various regulations to facilitate cross-border 

trading. Critical to this initiative is an effective and transparent substituted compliance framework. Efforts to achieve equivalence between jurisdictions have floundered on several occasions because regulators have conducted a granular, rule-byrule comparison of the requirements. Substituted compliance determinations based 

on broad outcomes would maximize the potential for cross-border harmonization, 

and would align the regulatory framework more closely with the G20 commitments. 

The CHAIRMAN. Thank you, Mr. O’Malia. Mr. Edmonds. 

STATEMENT OF CHRISTOPHER S. EDMONDS, SENIOR 

VICE PRESIDENT, FINANCIAL MARKETS, 

INTERCONTINENTALEXCHANGE, INC. CHICAGO, IL 

Mr. EDMONDS. Chairman Conaway, Ranking Member Peterson, 

Members of the Committee, thank you for the opportunity to appear before you today. Since launching an electronic over-thecounter energy marketplace in 2000, ICE has expanded both in the 

U.S. and internationally. Over the past 15 years we have acquired 

or founded derivatives exchanges in clearing houses in the U.S., 

Europe, Singapore, and Canada. As such, we are uniquely impacted 

by global financial reform efforts. 

Looking at the derivatives markets now, 5 years into financial reform, it is more transparent, and risk management is more robust. 

Many more products are centrally cleared today, including the important interest rate and credit default swap markets. Also importantly, market participants have invested greatly in compliance 

systems and staff, which in turn have resulted in safer and more 

resilient derivatives markets. However, while we are in the later 

stages of Dodd-Frank implementation, other jurisdictions have chosen to develop at a much slower schedule, which has caused uncertainty. The goal of global regulatory cooperation and protection 

from regulatory arbitrage must be paramount, going forward. 

With this in mind, I have two recommendations for what we 

could have done better in financial reform, which I hope are helpful 

for policymakers, going forward. At the time of passage, regulators 

and Congress were very concerned about the ability of market participants to exploit loopholes. Therefore, Dodd-Frank was very prescriptive, and in turn the regulators have implemented very prescriptive rules. In some ways a prescriptive rule is helpful to market participants, as it provides clarity. However, prescriptive rules 

can also have a negative impact on a dynamic market, like the derivatives markets. 

We should review financial reforms put in place and eliminate 

the ones that do not account for technological advances, or which 

constrain competition. We should then replace those rules with a 

more flexible regulatory principle that are able to best meet the 

evolving nature of markets and technology, while making certain 

all of the rules in place are making markets safer. 

In the early days of financial reform efforts the G20 nations 

agreed to harmonize financial reform legislation. In derivatives, 

23 

this is vitally important, as the markets are global, and the U.S. 

economy has benefited greatly as the home to the international derivative markets. Unfortunately, the past 5 years have demonstrated that harmonization has yet to be achieved. Going forward, I believe that future financial reform efforts should take 

great care to harmonize major rules both domestically and internationally before the rules are issued. While this would inevitably 

slow down the process, coordination would save considerable time 

and unnecessary expense for both regulators and market participants. 

ICE has always been, and continues to be, a strong proponent of 

open and competitive markets, and supports robust regulatory 

oversight of these markets. We look forward to working with Congress and regulators in the U.S. and abroad to address the evolving 

regulatory changes. Mr. Chairman, thank you for the opportunity 

to share our views with you. I would be happy to answer any questions you or the Committee may have. 

[The prepared statement of Mr. Edmonds follows:] 

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

FINANCIAL MARKETS, INTERCONTINENTALEXCHANGE, INC. CHICAGO, IL 

Chairman Conaway, Ranking Member Peterson, I am Chris Edmonds, Senior Vice 

President of Intercontinental Exchange (ICE). I appreciate the opportunity to appear before you today to testify on the fifth anniversary of the Dodd-Frank Wall 

Street Reform and Consumer Protection Act. 

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 fifteen 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 or clearing houses are directly regulated by the UK Financial Conduct Authority (FCA), the U.S. Commodity 

Futures Trading Commission (CFTC), the Securities and Exchange Commission 

(SEC) and the Manitoba Securities Commission, among others. As such, ICE is 

uniquely impacted by financial reform efforts in the U.S. and abroad. 

Five Years of Financial Reform 

ICE continues to support global financial reform efforts. When Dodd-Frank was 

passed, ICE already had been leading in the development of electronic trading and 

clearing of OTC derivatives, two primary goals of global financial reform efforts. As 

such, ICE believes that increased transparency of electronic trading and proper risk 

and capital management of clearing are central to efficient and transparent markets. However, as we stated at the time, we believe derivatives clearing and trading 

would ideally evolve naturally as opposed to top down mandates. 

Looking at the derivatives market now, 5 years into financial reform, it is more 

transparent and risk management is more robust. Many more products are centrally 

cleared today, including the important interest rate and credit default swap markets. Also importantly, market participants have invested greatly in compliance systems and staff, which in turn have resulted in safer and more resilient derivatives 

markets. However, now that we have come to the later stages of Dodd-Frank implementation our larger questions are related to global regulation and harmonization. 

Other jurisdictions have chosen to develop on a much slower schedule, which has 

caused uncertainty in the market. Frankly, we are not globally harmonized as the 

market demands. The goal of global regulatory cooperation and protection from regulatory arbitrage was the original goal of the G20 and must be paramount going 

forward. It is only through such efforts that we can prevent fragmented liquidity 

pools and divergent regulatory structures. Both outcomes would be detrimental to 

market participants and ultimately, the public. With this in mind, I have two recommendations for what we could have done better in financial reform, which I hope 

are helpful for policy makers, going forward. 

24 

Reliance on Prescriptive Rules 

At the time of passage, regulators and Congress were very concerned about the 

ability of market participants to exploit loopholes. Therefore, Dodd-Frank was very 

prescriptive, and in turn, the regulators have implemented very prescriptive rules. 

In some ways, a prescriptive rule is helpful to market participants as it provides 

clarity. However, prescriptive rules can also have a negative impact on a dynamic 

market like the derivatives market and in some cases make the market less safe. 

As an example of how prescriptive rules can go awry, in the late 1800s, the British Government passed rules mandating that passenger liners over 10,000 metric 

tons have 16 lifeboats. The Titanic’s shipbuilders over-complied with the regulations—they had 20 lifeboats. What the rule did not contemplate is that the technology of shipbuilding would change dramatically over the next few years. Thus 

complying with that prescriptive rule in part lead to the tragedy in 1912. In retrospect, a better rule would have been a flexible one that required enough lifeboats 

for all passengers—whether that was 10, 16, or 30. 

We should review the financial reforms put in place for these types of prescriptive 

rules and eliminate the ones that do not account for technological advances or which 

constrain competition. We should then replace those rules with more flexible regulatory principles that are able to best meet the evolving nature of markets and technology, while making certain all of the rules in place are making markets safer. 

Conflicts in Financial Reform Efforts 

In the early days of financial reform efforts, the G20 nations agreed in Pittsburgh 

to harmonize financial reform legislation. In derivatives, this is vitally important as 

the markets are global and the U.S. economy has benefited greatly as the home to 

international derivatives markets. Unfortunately, the past 5 years have demonstrated the clearly stated goal of harmonization has not been achieved internationally or domestically. 

At the outset, the broad mandate of Dodd-Frank created great uncertainty for 

international transactions. The sole recognition of applicability of Dodd-Frank to 

international transactions is in Section 722 of the Act which states ‘‘[t]he provisions 

of this Act relating to swaps that were enacted by the Wall Street Transparency and 

Accountability Act of 2010 . . . 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 to prevent the evasion of any provision of this Act . . .’’ 

This broad provision led the United States to export many of its regulations globally. The impulse to regulate global markets is understandable as the United States 

issued its financial reform rules faster than most other jurisdictions. However now, 

as other jurisdictions, particularly Europe, finalize their financial reform laws, we 

are seeing major differences across borders. These differences are compounded as 

each jurisdiction’s rules are prescriptive and thus harder to harmonize. This continued development of compounding regulatory standards is leading to fragmented derivatives markets, in turn impairing the ability of end-users to access efficient and 

liquid markets to manage their risk. 

Domestically, we have also seen regulations working at cross purposes. For example, the prudential banking regulators, through the Basel III process, have instituted a Supplemental Leverage Ratio (SLR) on cleared transactions. The SLR, in 

effect, penalizes banks for collecting margin from customers, even though the bank 

acts only as an agent between the customer and clearing house. The rule directly 

conflicts with the clearing goals of Dodd-Frank as the SLR will make access to clearing more difficult and expensive for customers. In addition, the rule could add to 

systemic risk as clearing firms leave the market, leaving risk concentrated in the 

remaining firms. 

Going forward, I believe that future financial reform efforts should take great care 

to harmonize major rules, both domestically and internationally, before the rules are 

issued. While this would inevitably slow down the process, coordination would save 

considerable time and expense for both regulators and market participants in the 

overall. 

Conclusion 

ICE has always been and continues to be a strong proponent of open and competitive markets and supports robust regulatory oversight of those markets. As an operator of global futures and OTC markets, and as a publicly-held company, ICE understands the importance of ensuring the utmost confidence in its markets. We look 

25 

forward to working with Congress and regulators in the U.S. and abroad to address 

the evolving regulatory challenges presented by derivatives markets. 

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

be happy to answer any questions you may have. 

The CHAIRMAN. Thank you, Mr. Edmonds. Mr. Thompson. 

STATEMENT OF LARRY E. THOMPSON, VICE CHAIRMAN AND 

GENERAL COUNSEL, DEPOSITORY TRUST AND CLEARING 

CORPORATION, NEW YORK, NY 

Mr. THOMPSON. Thank you, Mr. Chairman, and Ranking Member 

Peterson. I am Larry Thompson, Vice Chairman and General 

Counsel of the Depository Trust and Clearing Corporation, or 

DTCC, the primary financial market infrastructure for U.S. and 

global markets. The G20 reform initiatives pushed financial market 

regulation into the 21st century. As a result, over the last several 

years, the global OTC derivatives marketplace has undergone a 

dramatic transformation. Progress has been steady, but slow. Just 

last Friday the Financial Stability Board issued its ninth progress 

report, indicating that there remained a range of implementation 

issues. To date the G20 goal of enhanced transparency remains 

only partially addressed. While regulators and market participants 

have made significant progress, identifying cross-border risks remains a challenge. The goal of global data transparency has not 

been achieved. 

I would like to focus on three points today. First, legal barriers 

to global trade reporting among regulators. Second, challenges to 

global coordination, and third, the need for consistent global data 

standards. Today there are significant legal barriers that are preventing cross-border data sharing. These issues, such as DoddFrank’s indemnification provisions, need to be removed before data 

can be aggregated and used for systemic risk oversight. They block 

regulators, both in the U.S. and globally, from utilizing the transparency offered by swap data repositories, and may hinder access 

to and sharing of data among U.S. authorities. Thanks to the leadership of this Committee, the House recently passed H.R. 1847, a 

bill introduced by Mr. Crawford and Mr. Maloney, which would resolve this issue. DTCC urges the Senate to quickly pass this technical, non-controversial fix. 

Second, there is a lack of global coordination among jurisdictions. 

While trade repositories are recognized as essential tools for systemic risk management, the emergence of reporting regimes with 

regional, rather than global, focus has limited their effectiveness to 

date. Although this has significantly improved market transparency at the local level, it has fragmented the global reporting 

landscape. This approach impacts U.S. regulators, who, due to the 

data fragmentation, will not see the full picture of risk developing 

across the system. Achieving the G20 goals of transparency requires harmonized reporting across jurisdictions. 

And that leads me to my third and final point, about the critical 

need to adapt global data standards. Jurisdictions have made significant progress in implementing derivatives reporting rules, and 

data is now being reported to trade repositories on an unprecedented scale. However, data collection alone is not sufficient. Common standards must be adopted to improve the quality of the data. 

26 

1See DTCC White Paper, ‘‘Shortening the Settlement Cycle: The Move to T+2’’ (June 18, 

2015), available at http://www.dtcc.com/news/2015/june/18/the-move-to-t2.aspx. 2See Press Release, Leading Global Banks, Service Providers and Market Infrastructures Create New Hub for End-to-End Margin Processing (July 7, 2015), available at http:// 

www.dtcc.com/news/2015/july/07/service-providers-and-market-infrastructures-create-newhub.aspx. 

Policymakers need to focus on two priorities. First, trade reporting 

must be conducted using globally adopted data standards, and, second, the aggregated data sets that combine information from multiple jurisdictions must be available. Standardized formats are necessary to transform reported data into usable information, which 

can be more efficiently aggregated to monitor market risks. 

Efforts to identify systemic risk, including by U.S. regulators, 

will be frustrated if they can only obtain a partial picture of the 

global activity. Collaboration between the industry and regulators 

is critical, and an increased sense of urgency is needed. But market 

infrastructure, such as DTCC, stand ready to address these challenges. The best place for the dialogue to be advanced is among the 

global regulator bodies, such as CPMI/IOSCO. These organizations 

must move quickly to enact global data standards and develop appropriate governance frameworks to enable cross-border access to 

timely, accurate data. The U.S., along with its partners in Europe 

and in Asia, should continue to play a leadership role in these efforts. 

Mr. Chairman, tremendous progress has been made since the 

2009 G20 summit, but as you have heard today, there remains significant work to ensure our markets remain competitive, transparent, and resilient. Thank you for the opportunity to participate 

in today’s hearing. I look forward to your questions. 

[The prepared statement of Mr. Thompson follows:] 

PREPARED STATEMENT OF LARRY E. THOMPSON, VICE CHAIRMAN AND GENERAL

COUNSEL, DEPOSITORY TRUST AND CLEARING CORPORATION, NEW YORK, NY 

Introduction 

Chairman Conaway, Ranking Member Peterson, and Members of the Committee, 

thank you for holding today’s hearing. 

I am Larry Thompson, Vice Chairman and General Counsel of The Depository 

Trust & Clearing Corporation (‘‘DTCC’’). DTCC has more than 40 years of experience serving as the primary financial market infrastructure serving the global markets, enabling thousands of institutions worldwide to issue securities and raise capital to build businesses and support the global economy. 

Through our subsidiaries and affiliates, DTCC provides clearing, settlement and 

information services for virtually all U.S. transactions in equities, corporate and municipal bonds, U.S. Government securities, mortgage-backed securities and money 

market instruments, and mutual funds and annuities. In 2014, our subsidiaries 

processed securities transactions valued at approximately U.S.$1.6 quadrillion. 

DTCC processes the equivalent of the U.S. annual gross domestic product every 2 

days. Underscoring the critical role market infrastructures play in protecting the 

capital markets, DTCC’s U.S. clearing and depository subsidiaries were designated 

as Systemically Important Financial Market Utilities (‘‘SIFMUs’’) by the Financial 

Stability Oversight Council (‘‘FSOC’’) in 2012 pursuant to Title VIII of the DoddFrank Wall Street Reform and Consumer Protection Act (‘‘Dodd-Frank’’). 

As a critical infrastructure provider, DTCC is not only focused on reducing systemic risk in derivatives markets, but we are hard at work on a number of initiatives designed to make markets safer, more transparent, and more resilient. These 

include operating a CFTC provisionally registered swap data repository (‘‘SDR’’) and 

through DTCC’s Global Trade Repository, supporting regulatory regimes around the 

world. DTCC is also actively involved in efforts to: shorten the U.S. settlement cycle 

for equities, corporate and municipal bonds and unit investment trust trades; 1 facilitate compliance with new margin regulations for non-cleared derivatives; 2 create 

27 

3See DTCC Global Markets Entity Identifier Utility Overview, http://www.dtcc.com/dataand-repository-services/reference-data/gmei.aspx. 4See Press Release, Soltra Launches Soltra Edge, The First Industry-Driven Threat Intelligence Sharing Platform Designed to Enable Community-Driven Cyber Defenses (Nov. 4, 2014), 

available at https://soltra.com/pdf/FINAL%20Soltra%20Edge%20press%20release _11.4.14FINALWEB%20(1).pdf. 5See DTCC White Paper, ‘‘CCP Resiliency and Resources’’ (June 2015), available at http:// 

www.dtcc.com/news/2015/june/01/ccp-resiliency-and-resources.aspx. 6DTCC has also discussed the G20’s global derivatives transparency mandate. See DTCC 

White Paper, ‘‘G20’s Global Derivatives Transparency Mandate’’ (Feb. 2, 2015), available at 

http://www.dtcc.com/news/2015/february/02/gtr-white-paper.aspx. 7See G20 Leaders’ Statement at the Pittsburgh Summit (Sept. 2009), available at http:// 

www.treasury.gov/resource-center/international/g7-g20/Documents/pittsburgh_summit_ 

leaders_statement_250909.pdf. 8See id. 

and assign globally-accepted legal entity identifiers (‘‘LEIs’’); 3 standardize and automate cyber threat intelligence distribution; 4 and work carefully towards addressing 

issues related to central counterparty resiliency.5

My testimony today, however, will focus on the progress of global financial reform, 

particularly with regard to new regulatory requirements for the over-the-counter 

(‘‘OTC’’) derivatives markets. DTCC provides services for a significant portion of the 

global OTC derivatives market and has extensive experience operating repositories 

to support derivatives trade reporting and enhance market transparency. Through 

regulated subsidiaries, DTCC supports regulatory reporting regimes in the U.S., Europe, Japan, Australia, Singapore, Hong Kong and Canada. 

As described below, the 2009 Group of 20 (‘‘G20’’) initiatives for global financial 

markets pushed financial market regulation into the 21st century. The G20 Pittsburgh Summit introduced new trade reporting rules and spurred the advent of centralized clearing and new capital requirements. As a result, the OTC derivatives 

market has undergone a dramatic transformation over the past several years and 

continues to evolve rapidly as market participants meet new mandates, including 

new regulatory requirements stemming from Dodd-Frank. 

Today, I would like to identify several key obstacles that frustrate global regulatory efforts to achieve the goals set forth by policymakers in the aftermath of the 

2008 financial crisis. I will also highlight several solutions that policymakers should 

consider as implementation of the G20 commitments move forward, such as continued efforts to aggregate and standardize data, as well as ensure it can be freely and 

appropriately shared across jurisdictions. 

Progress on global derivatives reform is at a critical juncture as the G20 goal of 

enhanced transparency remains only partly addressed. While regulators and the industry have made significant strides in addressing the data gap that existed in 

2008, cross-border identification of risk remains difficult for macro-prudential authorities. I applaud you for holding this hearing at such a critical time for global 

financial market reform.6

Importance of G20 Commitments for Global Financial Markets 

The global financial crisis of 2008 shook the foundations of the financial system 

to the core. This period was followed by a commitment, at a global level, led by the 

G20 to take a number of measures to enhance transparency in the derivatives market and improve the global response to systemic risk stemming from cross-border 

derivatives trading activities. 

More specifically: 

• The G20 agreed that ‘‘all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared 

through central counterparties. OTC derivative contracts should be reported to 

trade repositories. Non-centrally cleared contracts should be subject to higher 

capital requirements.’’ 7

• The G20 leaders further called on the Financial Stability Board (‘‘FSB’’) and its 

relevant members to ‘‘assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic 

risk, and protect against market abuse.’’ 8

This commitment was followed by the adoption, in November 2009, of the 20 recommendations put forward by the FSB in their report, ‘‘The Financial Crisis and 

Information Gaps.’’ The report identified four areas in which data gaps would need 

to be addressed, namely to better capture the build-up of risk in the financial sector, 

to improve data on international financial network connection, to monitor the vulVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00031 Fmt 6633 Sfmt 6621 P:\DOCS\114-24\95813.TXT BRIAN
28 

nerability of domestic economies to shocks, and to enable communications of official 

statistics. 

According to FSB’s Eighth Progress Report on Implementation of OTC Derivatives 

Market Reforms: 

As of November 2014 the majority (16) of FSB member jurisdictions have 

trade reporting requirements in effect for one or more product and participant 

types, though specific reporting requirements currently vary across jurisdictions. 

By end-2015, all but one jurisdiction are expected to have trade reporting requirements in effect for at least some product classes. As of end-October 2014, 

13 FSB member jurisdictions have [trade repositories (‘‘TRs’’)] that are permitted 

to receive transaction reports for at least some asset classes. Globally, there are 

23 TRs currently operational, spanning all asset classes. 

Since then, significant steps within jurisdictions have been taken towards developing a framework to address the goals outlined in the FSB report. Trade reporting 

regimes are now in place in major derivatives jurisdictions around the world and 

regulators have access to more derivatives data than ever before. 

Despite these steps, the G20 goals remain only partly addressed. Data is being 

collected as prescribed by each jurisdiction’s legislation and local regulators are able 

to review data. However, more work remains to fully achieve the FSB goals outlined 

in the 20 recommendations. Of most importance, the goal of global data transparency—one of the major factors that led to the 2008 financial crisis and a critical 

element in understanding systemic risks and interconnectedness—has not yet been 

achieved. In my testimony, I will address the following points as to what work remains to fully achieve this important goal: 

1. Lack of global coordination resulting from the localized or jurisdictional approach to trade reporting regimes; 

2. Lack of global data standards; and 

3. Legal barriers to global data sharing among regulators. 

DTCC’s Trade Repository and Global Markets Entity Identifier Help Regulators Identify and Mitigate Global Financial Market Risk 

DTCC has extensive experience collaborating with regulatory bodies and market 

participants to support new regulatory reporting mandates globally, including DoddFrank in the U.S., the European Market Infrastructure Regulation (‘‘EMIR’’) and 

the Markets in Financial Instruments Directive (‘‘MiFID’’) in Europe, as well as new 

reporting requirements for trade repositories throughout the Asia-Pacific region. 

Global Trade Repository 

DTCC’s Global Trade Repository (‘‘GTR’’) supports reporting across all five major 

derivatives asset classes—credit, interest rate, equity, foreign exchange and commodity—in nine jurisdictions across 33 countries. Despite differences in local reporting requirements across regions, DTCC has built a robust and flexible infrastructure 

with a global trio of fully replicated GTR data centers. 

GTR has more than 5,000 clients in all regions of the world, including the top 

30 global banks. In fact, GTR reports data for more than 100,000 entities globally 

and holds up to 40 million open derivatives trades. We also process more than one 

billion customer messages each month. 

DTCC is a strong proponent of efforts to increase transparency in the OTC derivatives markets. In line with global reporting commitments, Dodd-Frank requires that 

all derivatives transactions, whether cleared or uncleared, must be reported to 

newly created SDRs. Based on our experience providing regulated trade repository 

services globally, DTCC is pleased significant progress has been made in implementing this mandate. 

To support Dodd-Frank reporting requirements, the DTCC Data Repository (U.S.) 

LLC (‘‘DDR’’) applied for and received provisional registration from the Commodity 

Futures Trading Commission (‘‘CFTC’’) to operate a multi-asset class SDR for OTC 

credit, equity, interest rate, foreign exchange and commodity derivatives in the U.S. 

DDR is the only repository to offer reporting across all asset classes, a major milestone in meeting regulatory calls for robust trade reporting and risk mitigation in 

the global OTC derivatives market. Currently, DDR holds approximately ten million 

CFTC-reported open derivatives trades. 

DDR began accepting trade data from its clients on October 12, 2012—the first 

day that financial institutions began trade reporting under Dodd-Frank. Furthermore, on December 31, 2012, DDR was the first and only registered SDR to publish 

real-time price information. DTCC—through its Trade Information Warehouse—has 

provided public aggregate information for the credit default swap market on a weekVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00032 Fmt 6633 Sfmt 6621 P:\DOCS\114-24\95813.TXT BRIAN
29 

9Michael C. Bodson, CEO, DTCC, ‘‘New Infrastructures for a Sounder Financial System,’’ Financial Stability Review, Banque de France (April 2013). 

ly basis, including both open positions and turnover data, since January 2009. This 

information is available, free of charge, on www.dtcc.com. 

1. Global Coordination 

While financial market infrastructures like DTCC have become fundamental in 

enabling G20 reforms, challenges remain regarding the introduction of new regulatory mandates, and the potential unintended consequences of various regulations. 

There remain significant concerns regarding the harmonization of new regulatory 

requirements and the cross-border impact of new rules throughout the marketplace. 

While trade repositories are heralded as an essential pillar of systemic risk management, the global derivatives reporting regime that emerged following the 2008 

crisis was developed along national or regional lines. Due to this fragmented regulatory landscape, trade repositories have not been able to reach their full potential 

as tools for systemic risk oversight. 

Since the 2008 crisis, major derivatives jurisdictions around the world have developed frameworks to mandate reporting of derivative trades to trade repositories. 

Regulators have also devised local rules and designated authorized trade repositories to operate within their domains. Although transparency has been created 

through national reporting regimes, this localized approach has resulted in 

divergences among jurisdictions. 

While local authorities were developing the mandated reporting frameworks, in 

2010 DTCC implemented a voluntary reporting framework under OTC Derivatives 

Regulators Forum (‘‘ODRF’’) guidelines to data access. This framework leveraged 

DTCC’s Trade Information Warehouse post-trade processing service, which contains 

virtually all credit derivative trades transacted globally. A portal was established 

that made this data available to more than 40 regulators globally. The portal allows 

for regulators to access data within their jurisdiction and data provided is consistent 

with ODRF data-sharing guidelines. The portal assists regulators in their supervisory capacities in scenarios such as sovereign debt crises, corporate failures, credit 

downgrades and significant losses by financial institutions. 

Despite these voluntary efforts, the mandated regulations that emerged throughout each jurisdiction have created a fragmented and inconsistent set of reporting requirements. This frustrates the ability to perform aggregation and data access provisions such as those previously established via this portal. 

In 2013, DTCC stated that achieving the G20 goals of transparency required an 

optimal trade reporting framework which consisted of harmonized reporting requirements across jurisdictions and advocated for one repository to collect data as a public good.9 However, the current trade reporting reality is quite different and reporting is now fragmented across jurisdictions as well as across multiple repositories. 

Given this current state, it is imperative that we focus on creating the necessary 

conditions for the reporting function to fulfill the G20 mandate. 

2. Global Standards as Means to Improve Data Quality 

While progress has been made to improve standards globally, additional work remains before the G20 transparency mandate can be achieved. Standards are necessary as they provide a means to transforming data into information that can be 

used to help identify and mitigate systemic risk. Through the global adoption and 

use of identifiers and consistent standards, the quality of data will improve and 

data can be effectively aggregated. 

Legal Entity Identifier 

DTCC is actively engaged in the global effort regarding LEIs, which allow for the 

unique identification of legally distinct entities that are counterparties on financial 

transactions. Global use of LEIs would serve as a valuable building block to increasing transparency and risk mitigation in the financial markets. 

Following the 2008 financial crisis, the importance and benefit of a universal LEI 

became clear. The inability of regulators to quickly and consistently identify parties 

to transactions across markets, products, and regions hindered their ability to evaluate systemic risk, identify trends and emerging risks, and take appropriate corrective steps. Recognizing the critical data gap in regulatory oversight as a result of 

the lack of an international standard for an LEI, authorities around the world have 

taken incremental steps to develop a global LEI system. 

Through a competitive process, DTCC was chosen to build and operate an LEI 

utility for the industry and was designated by the CFTC to provide LEIs to swap 

market participants as required by CFTC record-keeping and reporting rules. This 

30 

10See Swap Data record-keeping and Reporting Requirements, 77 FED. REG. 2136 (Jan. 13, 

2012). 11 Regulation SBSR—Reporting and Dissemination of Security-Based Swap Information, 80 

FED. REG. 14564 (Mar. 19, 2015). 

utility, which was developed and operates in conjunction with SWIFT, is the Global 

Markets Entity Identifier (‘‘GMEI’’). To date, the GMEI utility has assigned LEIs 

to and maintains reference data corresponding to more than 185,000 legal entities 

across more than 140 jurisdictions, representing approximately 50 percent of all 

global LEIs that have been assigned. I am pleased to announce that last week the 

CFTC extended the GMEI utility’s designation as the provider of LEIs in support 

of the CFTC’s swap data record-keeping and reporting rules. 

To ensure adoption of LEI both domestically and globally, it is essential that new 

registration, record-keeping and reporting rules include an LEI mandate. DTCC is 

pleased there is widespread regulatory support for the LEI to serve as the international standard. Among U.S. regulators, the CFTC 10 was the first to mandate use 

of the LEI and the Securities and Exchange Commission (‘‘SEC’’) 11 is advancing 

rules with LEI mandates. Additionally, several authorities—including the European 

Securities and Markets Authority, the Monetary Authority of Singapore, the Hong 

Kong Monetary Authority, the Australian Securities and Investment Committee, 

and the Ontario Securities Commission—have promulgated record-keeping and reporting rules for OTC derivatives transactions that require counterparties to be 

identified by LEIs. Given the progress by the public and private sectors working together to implement the Global LEI System, DTCC anticipates LEI mandates in 

rulemaking in the U.S. to greatly accelerate, thus enabling a significant improvement in systemic risk management. 

Global LEI adoption would serve as a significant step in the process to increase 

transparency and mitigate risk. However, additional standards need to be addressed 

at a global level to support the trade reporting regime. For example, currently there 

is a lack of global agreement regarding the appropriate standard for a trade identifier or product identifier. In addition, more client information must be standardized 

such as the branch locations for each Global LEI and the hierarchy structure for 

company (referred to as parent LEIs to enable aggregation by grouping all legal entities to one parent). These standards are necessary requirements in creating an effective regulatory reporting framework. 

Making Data Useful: Aggregation and Standardization 

Notwithstanding divergent reporting requirements, jurisdictions have made significant progress in implementing derivatives reporting rules and a massive amount 

of data is being reported to trade repositories. However, data collection alone is not 

sufficient to address the G20 transparency goal. The ability to aggregate this data, 

convert it into information, and use it to monitor the build-up of risk in the system 

is absolutely essential. 

Understanding the challenges associated with data aggregation requires distinguishing between the requirements of micro-prudential regulators, who are responsible for local market surveillance, and macro-prudential regulators, who are focused 

on monitoring risk in the financial system. While national reporting regimes have 

been mostly effective at providing transparency into local markets, the same is not 

true at the macro-prudential level due to the fragmented nature of jurisdictional reporting rules, which has led to the absence of harmonized global data standards 

across jurisdictions and trade repository providers. By lacking a common vocabulary 

with which to communicate, trade repositories are unable to share and aggregate 

data on a global scale. 

To address this situation, regulators must come to agreement on the specific data 

set required for systemic risk identification and adopt consistent reporting standards across jurisdictions in order to fully capitalize on the benefits of the data being 

collected. 

Data standardization requires a collaborative effort by the industry, trade repositories and regulators globally. As operator of the largest global trade repository, 

DTCC strongly supports efforts to create a common data vocabulary, such as those 

spearheaded by the Committee on Payments and Market Infrastructures (‘‘CPMI’’) 

and International Organization of Securities Commissions (‘‘IOSCO’’) Harmonization 

Working Group. Active dialogue between the industry and its supervisors is vital 

to resolving this fundamental issue. 

In June 2015, DTCC provided recommendations to CPMI/IOSCO, detailing a proposed path towards global data harmonization with credit derivatives identified as 

31 

12See Press Release, DTCC Proposal to CPMI IOSCO on Global Data Harmonization (June 

18, 2015), available at http://www.dtcc.com/news/2015/june/18/dtcc-proposal-to-harmonization-working-group.aspx. 13Such regulatory authorities include U.S. Prudential Regulators, the Financial Stability 

Oversight Council, the Department of Justice, foreign financial supervisors (including foreign futures authorities), foreign central banks, and foreign ministries. 14See CPSS–IOSCO Report, ‘‘Authorities’ Access to Trade Repository Data’’ (Aug. 2013). 15For example, Chairman Massad stated that if legislation ‘‘did remove [the indemnification] 

provision, then it would facilitate . . . the sharing of information.’’ See 2015 Agenda for CFTC: 

Hearing Before the H. Comm. On Agric., 114th Cong. (2015) (colloquy between Chairman 

Massad and Congressman Eric Crawford). 16See Testimony of CFTC Commissioner J. Christopher Giancarlo Before the H. Comm. on 

Agric., Subcomm. on Commodity Exchanges, Energy, and Credit (April 14, 2015), available at 

http://agriculture.house.gov/sites/republicans.agriculture.house.gov/files/images/ 

Giancarlo%20Testimony.pdf; see also Testimony of Mark Wetjen, Commissioner, CFTC, Before 

the H. Comm. on Agric., Subcomm. on Commodity Exchanges, Energy, and Credit (April 14, 

2015), available at http://agriculture.house.gov/sites/republicans.agriculture.house.gov/files/ 

images/Wetjen%20Testimony.pdf. 17 Commissioner Michael Piwowar, Secs. and Exch. Comm’n, Remarks at the Int’l Swaps and 

Derivatives Ass’n 30th Annual General Meeting (Apr. 22, 2015). 

the first step.12 The approach involves harmonizing approximately 30 data fields 

across global trade repository providers, essentially creating a global data dictionary. These fields are viewed as critical to financial stability and systemic risk 

analysis. 

3. Remove Barriers to Global Data Sharing 

While data standardization is essential, it will have limited impact if barriers that 

hinder cross-border data sharing are not also concurrently addressed. Significant 

legal barriers need to be removed before data can be aggregated at a cross-border 

level and used by relevant supervisory authorities. 

For example, the Dodd-Frank Act requires swap data repositories to obtain indemnification agreements before sharing information with regulatory authorities.13

The indemnification requirements in Section 21(d) of the Commodity Exchange Act 

and Section 13(n)(5)(H) of the Securities Exchange Act of 1934, as amended by 

Dodd-Frank, require—prior to sharing information with various regulatory authorities—that (i) registered SDRs receive a written agreement from each entity stating 

that the entity shall abide by certain confidentiality requirements relating to the information on swap transactions that is provided, and (ii) each entity must agree to 

indemnify the SDR and the CFTC or SEC, respectively, for any expenses arising 

from litigation relating to the information provided. 

In practice, these provisions have proven to be unworkable and run counter to 

policies and procedures adopted by regulatory bodies globally to safeguard and share 

information. In addition, these provisions pose a significant barrier to the ability of 

regulators globally and within the U.S. to effectively utilize the transparency offered 

by SDRs, and may have the effect of precluding U.S. regulators from seeing data 

housed at non-U.S. repositories. These provisions also limit access to and sharing 

of data among U.S. authorities such as the CFTC, SEC, the Federal Reserve Board, 

and the Office of Financial Research. 

Concerns regarding global information sharing have been echoed by regulatory officials and policymakers globally. In an August 2013 report, the Committee on Payment and Settlement Systems and the Board of IOSCO highlighted that legal obstacles may preclude trade repositories from providing critical market data and encouraged the removal of legal obstacles or restrictions to enable effective and practical 

access to data.14

During a February hearing this year before this Committee, CFTC Chairman 

Timothy Massad stated that removal of the indemnification provisions would facilitate the sharing of information and collaboration among regulators to monitor 

risk.15 CFTC Commissioner J. Christopher Giancarlo and Commissioner Mark 

Wetjen also identified indemnification as a priority issue and expressed support for 

a legislative fix during an April hearing before the Subcommittee on Commodity Exchanges, Energy, and Credit.16 In addition, SEC Commissioner Michael Piwowar 

has voiced concern and called for removal of the indemnification provisions.17

DTCC strongly supports legislation that would resolve issues surrounding the indemnification provisions. DTCC is pleased that removing the indemnification provisions from Dodd-Frank remains a bipartisan, bicameral priority for the current Congress. Indemnification correction amendments have recently been considered by the 

House Financial Services, House Agriculture, House Appropriations, Senate Banking and Senate Agriculture Committees. 

32 

On July 14, the House passed the Swap Data Repository and Clearinghouse Indemnification Correction Act of 2015 (H.R. 1847). DTCC applauds House passage of 

H.R. 1847, which would help ensure regulators obtain a consolidated and accurate 

view of the global OTC derivatives marketplace. We urge the Senate to move swiftly 

to support this non-controversial, technical fix. 

There is precedent for global information sharing. As mentioned previously, 

DTCC’s Trade Information Warehouse, established in 2006, provided authorities access to data pursuant to guidance issued by the ODRF, a group of regulators from 

across the globe that were able to define the parameters of what information could 

be disclosed based on parties to the transaction and the underlying reference entity 

to whom credit protection was being bought or sold. The credit derivatives data provided was standardized, aggregated and shared across jurisdictions. The ODRF 

serves as an example of a well-functioning governance model, demonstrating the potential of what can be achieved with consistent data standards, data aggregation 

and clear access rules. 

Looking Forward: Global Regulatory Coordination and Market Guidance 

Following the removal of legal barriers, market infrastructures such as DTCC will 

be able to play an important role in supporting data quality efforts to ensure that 

data can be turned into useful information. A key step is the establishment of a governance framework to set the conditions upon which regulators could access each 

other’s data once legislative hurdles such as Dodd-Frank’s indemnification provisions are removed. 

A global college of regulators—for example, CPMI IOSCO—is best positioned to 

provide the industry with specific guidelines outlining clear data access rules based 

on the individual regulator’s authority. Such an undertaking requires defined crossborder guidance that each jurisdiction adopts and adheres to. While removing legal 

barriers and establishing a governance model for data sharing will take time, these 

are necessary elements to achieve the G20 goal of increased transparency and systemic risk mitigation. 

To continue progress on global derivatives reform, a critical next step is the analysis of data and use of tools to transform data into information which can be used 

to identify systemic risk. That is the value provided by reporting data—to provide 

regulators with transparency into the marketplace to assist with potential risk identification and mitigation. 

DTCC encourages CPMI, U.S. policymakers and regulatory bodies globally to take 

a leadership role in the governance process and address global standards. Collaboration among the industry and regulators is paramount and an increased sense of urgency is needed to address current challenges. 

Conclusion 

Mr. Chairman, Ranking Member, thank you for inviting me to speak today on this 

important topic. As you can see, a great deal of progress has been made in modernizing the global derivatives market, but there is much work yet to be done. I will 

be happy to answer any questions you may have and look forward to a continued 

dialogue on these issues with you and your staffs. 

ATTACHMENT

G20’s Global Derivatives Transparency Mandate 

January 2015 

About DTCC 

With over 40 years of experience, DTCC is the premier post-trade market infrastructure for the global financial services industry. From operating facilities, data 

centers and offices in 15 countries, DTCC, through its subsidiaries, automates, centralizes, and standardizes the post-trade processing of financial transactions, mitigating risk, increasing transparency and driving efficiency for thousands of broker/ 

dealers, custodian banks and asset managers worldwide. User owned and industry 

governed, the firm simplifies the complexities of clearing, settlement, asset servicing, data management and information services across asset classes, bringing increased security and soundness to the financial markets. In 2013, DTCC’s subsidiaries processed securities transactions valued at approximately U.S.$1.6 quadrillion. 

Its depository provides custody and asset servicing for securities issues from 139 

countries and territories valued at U.S.$43 trillion. DTCC’s global trade repository 

processes tens of millions of submissions per week. 

To learn more, please visit www.dtcc.com or follow us on Twitter @The—DTCC. 

33 

Table of Contents 

Abstract 

Executive Summary 

Introduction 

1. Has the G20 policy response brought about the required transparency? 

2. Can existing data collection satisfy the G20 mandate? 

3. What legislative hurdles need to be overcome to ensure that data can be 

shared globally? 

4. What are the practical challenges to improving data quality and converting 

data into information? 

5. What are the possible governance models for cross-border data sharing? 

Conclusion 

Abstract 

Progress on global derivatives reform is at a critical juncture. The lack of transparency, identified during the 2008 crisis as critical to the supervision of the financial system, remains only partly addressed. 

As a result, the cross-border identification of systemic risk remains beyond the 

reach of macro-prudential authorities. Trade repositories, heralded as essential to 

achieving greater transparency in the global derivatives markets, have not been 

able to reach their full potential as tools for systemic risk oversight. 

It is imperative that a plan of action, together with a concrete timetable, is agreed 

upon to remove the remaining barriers, practical and legal, that would turn the aspiration of global derivatives market transparency, and the identification and management of global systemic risk, into a reality. 

Executive Summary 

The global financial crisis of 2008 shook the foundations of the financial system 

to the core. This period was followed by a commitment, at a global level, led by the 

Group of 20 (G20) to take a number of measures which would enhance the transparency in the derivatives market and improve the global response to systemic risk 

stemming from cross-border derivatives trading activities. 

The policy response which followed the G20 commitments was, however, developed along national or regional lines, thus focusing on the identification of risk originating at a local level and posing risk to the stability of the respective local jurisdictions. This approach, which was driven by micro-prudential regulatory requirements, has resulted in a fragmented regulatory landscape that is unable to respond 

to the original G20 goal of preserving the integrity of the global financial system 

as a whole. 

The fact that this policy response has not been tested to date does not mean that 

the risks that the financial system faced in 2008 are less real. Derivatives markets 

remain as global and as interconnected as ever. Whilst achieving transparency, albeit at a local level, has been a significant accomplishment for both the regulatory 

community and the industry, we should not confuse this level of transparency with 

the ability to monitor and identify systemic risk and thereby protect and preserve 

global financial stability. 

As the dust settles on the first phase of the reforms which immediately followed 

the financial crisis, it is imperative that we take a step back to assess the progress 

made to date against the G20 commitments and agree a plan of action to enable 

macro-prudential regulators to address the original G20 mandate. 

This paper provides an analysis of current status against the G20 goal of increasing global derivatives market transparency, and identifies what is still required to 

ensure that the G20 aspirations are turned into a reality. 

We call on the global regulatory community for a harmonised global plan 

of action with an appropriate timetable to: 

• Reach agreement on the global data set required to identify systemic risk. 

• Revise existing laws which prevent cross-border data sharing. 

• Agree consistent data standards to be adopted across jurisdictions, leveraging 

existing standards where possible. 

• Agree a governance model enabling cross-border data sharing. This could leverage proven governance models such as that defined by the OTC Derivatives 

Regulators’ Forum (ODRF) around the credit derivatives Trade Information 

Warehouse (TIW), the forerunner of the modern trade repository. 

34 

1G20 Leaders statement: The Pittsburgh Summit, 24–25 September 2009 http:// 

www.g20.utoronto.ca/2009/2009communique0925.html. 2Declaration on strengthening the financial system—London Summit, 2 April 2009 http:// 

www.g20.utoronto.ca/2009/2009ifi.html. 3The Financial Crisis and Information Gaps: Report to the G20 Finance Ministers and Central Bank Governors http://www.financialstabilityboard.org/publications/r_091029.pdf. 

Introduction 

Over 5 years ago, G20 finance ministers and central bankers, in response to the 

most severe financial crisis since the Great Depression, made a commitment to 

‘‘adopt a set of policies, regulations and reforms to meet the needs of the 21st century global economy.’’ 1

Among these was the commitment to make the global over-the-counter (OTC) derivatives markets safer and more transparent, and to create powerful tools for the 

supervision of global participants. 

More specifically: 

• The G20 agreed that ‘‘all standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared 

through central counterparties. OTC derivative contracts should be reported to 

trade repositories. Non-centrally cleared contracts should be subject to higher 

capital requirements.’’ 

• The G20 leaders further called on the Financial Stability Board (FSB) and its 

relevant members to ‘‘assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic 

risk, and protect against market abuse.’’ 

That the G20 aim was to promote global financial stability was already evident 

at its earlier London summit, in April 2009, where it committed to: 

• Strengthening financial supervision and regulation by ‘‘establishing much greater consistency and systematic cooperation between countries, and the framework of internationally agreed high standards that a global financial system requires.’’ 

• ‘‘Amend our regulatory systems to ensure authorities are able to identify and 

take account of macro-prudential risks across the financial system . . . to limit 

the build-up of systemic risk.’’ 

It further added that: 

• ‘‘We will ensure that our national regulators possess the powers for gathering 

relevant information on all material financial institutions, markets, and instruments in order to assess the potential for their failure or severe stress to contribute to systemic risk. This will be done in close coordination at international 

level in order to achieve as much consistency as possible across jurisdictions.’’ 2

This commitment was followed by the adoption, in November 2009, of the 20 recommendations put forward by the International Monetary Fund (IMF) and the FSB 

in their report ‘‘The Financial Crisis and Information Gaps’’. The report identified 

four areas in which data gaps would need to be addressed, namely to better capture 

the build-up of risk in the financial sector, to improve data on international financial network connection, to monitor the vulnerability of domestic economies to 

shocks, and to enable communications of official statistics.3

Since then, important steps have been taken towards developing a framework to 

address these goals for the global derivatives market. Trade reporting regimes are 

now in place in major derivatives jurisdictions around the world and national regulators have access to more derivatives trading data than ever before. 

In its 2009 Pittsburgh statement, the G20 said that a ‘‘sense of normalcy should 

not lead to complacency’’. This statement is more relevant today than ever before 

as we put increasing time and distance between the current signs of global recovery 

and the almost catastrophic crisis of 2008. 

It is against this backdrop that this paper aims to address five fundamental questions: 

• Has the G20 policy response brought about the required transparency? 

• Can existing data collection satisfy the G20 mandate? 

• What are the practical challenges to improving data quality and converting data 

into information? 

• What legislative hurdles need to be overcome to ensure that data can be shared 

globally? 

35 

4 ‘‘New infrastructures for a sounder financial system’’, Michael C. Bodson, CEO, DTCC, Financial Stability Review, Banque de France, April 2013. 

• What are the possible governance models for cross-border data sharing? 

1. Has the G20 policy response brought about the required transparency? 

Although much transparency has been created through national reporting regimes, the answer must be a resounding ‘no’ if we measure success against the original G20 goal of creating the transparency which would help identify and mitigate 

global systemic risk. 

Major derivatives jurisdictions around the world have developed legislative frameworks to mandate reporting of derivative trades to trade repositories and have devised detailed local rules and designated authorised trade repositories to operate 

within their domains. But far from achieving the global consistency implicitly aspired to by the G20, this localised approach has resulted in divergences between reporting regimes which can be grouped into three categories: 

• Scope of Regulations: For example, jurisdictions across Asia-Pacific, the U.S. 

and Canada mandate reporting of OTC derivatives trades only, while in the EU 

reporting of exchange-traded derivatives also forms part of the scope; 

• Reporting Obligations: Single versus dual sided reporting is mandated inconsistently between EU, U.S., and Asia-Pacific; and 

• Reportable Data: Regional variations exist in the data fields that are reportable, although there is some consistency in a core set of data fields. 

In a paper published in April 2013,4 DTCC argued that to achieve the G20 goals 

of transparency required an optimal trade reporting framework which consisted of 

harmonised reporting requirements across jurisdictions and one single repository 

collecting data as a public good. 

Fig. 1. DTCC’s Original Vision for the Global Trade Repository Model 


11424026.eps
36 

However, what we have today is exactly the opposite, a derivatives reporting environment, fragmented across jurisdictions as well as across multiple repositories. It 

is clearly impractical to wind back the clock on these developments, it is imperative 

that we focus on creating the necessary conditions for the reporting function to fulfil 

the G20 mandate. 

Fig. 2. The Current Trade Reporting Reality 

2. Can existing data collection satisfy the G20 mandate? 

Notwithstanding divergent reporting requirements which exist across major derivatives jurisdictions, data is being collected and on the whole compliance has been 

good. However, data collection itself is not sufficient to address the transparency 

goal. What is needed is the ability to aggregate this data, convert it into information 

and then use it to monitor the build-up of risk in the system. 

To understand the challenge of aggregating the data and converting it into information requires a distinction between the requirements of micro-prudential regulators for the purposes of local market surveillance, and the requirements of macroprudential regulators for the purposes of monitoring the build-up of risk. 

To ensure that both regulatory functions can be performed, any efforts to address 

the derivatives aggregation challenge should therefore be preceded by a clear distinction between two tier data sets—both a national or regional data set for the purposes of market surveillance together with a smaller global data subset for systemic 

risk oversight. 

• The first dimension of the data set required for micro-prudential supervision is 

well served by the current national reporting regimes. This data set includes 

numerous data fields which national regulators require to be able to perform 

their own analysis on a number of issues related to local market surveillance. 

In jurisdictions with multiple trade repositories, given that all relevant local 

market data is housed in locally authorised trade repositories, the challenge of 

aggregating that data and converting it into useable information is predominantly an issue of having common local standards and appropriate analytical 

tools—an important challenge, but certainly not insurmountable. 


11424027.eps
37 

5OTC Derivatives Regulators’ Group—Barriers to Reporting to Trade Repositories, August 

2014, http://www.esma.europa.eu/system/files/letter_to_fsb_08122014.pdf. 

• The second dimension of a derivatives data set—the global data set required for 

systemic risk surveillance—is more challenging to implement. Namely, it requires: 

» Cross-border agreement on a specific set of data needed for systemic risk 

identification; 

» Adoption of consistent reporting standards across jurisdictions for those specific data fields; 

» Definition of the population required to report; 

» Removal of legal barriers to data sharing; 

» Agreement on a governance model for data sharing. 

In the following chapters, we explore the actions required to overcome 

these practical and legal hurdles. 

3. What legislative hurdles need to be overcome to ensure that data can be shared 

globally? 

Before data can be aggregated at a cross-border level and used by the relevant 

supervisory authorities, significant legal barriers need to be removed. Failure to address these legal barriers would make all other efforts to address derivatives transparency futile. Removing legal barriers to data sharing—some of which predate derivatives reform such as data protection laws, blocking statutes, state secrecy laws 

and bank secrecy laws—requires international regulatory cooperation for the greater 

public good. 

Today, regulatory cooperation happens on many levels. Currently unique among 

them is the bilateral Memorandum of Understanding signed between the Australian 

Securities and Investments Commission (ASIC) and the Monetary Authority of 

Singapore (MAS) allowing trade repositories licensed in one jurisdiction to provide 

relevant data to the authority in the other jurisdiction. This agreement, together 

with ASIC’s alternative trade reporting arrangements which allow firms already reporting to a recognised trade repository in another jurisdiction, to discharge their 

reporting obligation in the ASIC jurisdiction, is a step towards fostering greater cooperation between international regulators which will be essential for successful 

cross-border oversight. We applaud the initiative of these two authorities and hope 

it sets an important global precedent. 

Bilateral agreements are useful steps towards building the case for greater cooperation as they make eventual data sharing easier at a multi-lateral level. However, multi-lateral agreements are a quicker way to achieving the ultimate goal of 

global transparency mandated by the G20. 

For agreements at a multi-lateral level to work, revision of some legislative provisions which prohibit data from being shared need to be undertaken. For example, 

the Dodd-Frank Act in the U.S. incorporates an ‘indemnification clause’ requiring 

non-U.S. regulators to indemnify U.S. regulators and trade repositories from possible data misuse before access is granted. This creates a financial cost as well as 

a legal impediment for non-U.S. regulators, and effectively prevents them from 

viewing data relevant to their jurisdictions collected and held by trade repositories 

located in the U.S. and operating under the Dodd-Frank Act. Revision of legislation 

is the only way to ensure privacy laws and other legislative hurdles do not compromise the efforts towards data aggregation which are needed to ensure the regulators have a complete and timely picture of risk in the system. However, bringing 

legislative change remains extremely challenging. 

The need for such change was further stressed in a recent letter from the OTC 

Derivatives Regulators’ Group (ODRG) to the FSB Chairman, Mark Carney.5 The 

ODRG called for urgent changes, including legislative changes where required, to 

remove provisions that prevent the identification of counterparties under reporting 

obligations to trade repositories. The ODRG further makes the case for setting a 

deadline for the unmasking of counterparty information, and recommends the FSB 

seek the G20 leaders’ agreement to ensure the removal of those barriers. 

The agreement on the global data set that is required for systemic risk oversight 

should make regulatory cooperation and removal of legislative hurdles easier as it 

will focus attention on a specific data set needed for systemic risk oversight, rather 

than numerous fields which are required for market surveillance. The information 

should be sufficiently high level (e.g., LEI counterparty level information) to allow 

the relevant authority to address any legislative limitations on sharing those specific fields. 

38 

6See boxout on ODRF. 

4. What are the practical challenges to improving data quality and converting data 

into information? 

Following the removal of legal barriers, market infrastructures can play an important role in supporting data quality efforts to ensure that data can be turned into 

globally useful information. We believe these efforts should focus on the following 

areas: 

Global Data Set 

Global regulators must agree on the set of data fields which, at a global level, can 

be used to identify the impact of market activity outside their jurisdiction on their 

jurisdiction, and vice versa. 

To understand why this data set would differ from the current national reporting 

requirements, consider this scenario. During the collapse of Lehman Brothers, if two 

parties outside the U.S. were trading on an underlying Lehman Brothers asset, data 

collected under U.S. rules, which allow for the supervision of U.S. persons only, 

would have misrepresented the scale of the problem. 

Advancing systemic risk oversight, therefore, requires an agreement on the global 

data set to be aggregated which mitigates the interconnectedness of the financial 

system. 

And before you say ‘not possible!’, the credit derivatives markets provide an important precedent of how such a global data set can deliver the transparency that 

global regulators require to monitor risk in the system.6

Once an agreement on this global data set has been reached, the focus on improving data quality by advancing consistent standards can begin. 

Much has been said about the importance of adopting consistent data 

standards across jurisdictions, and the focus of the debate has often centred 

around three particular standards which relate to information on the product, taxonomy, and the counterparties to a trade. While these standards are 

important, our view is that their use, whilst helpful, does not address the 

lack of standards across a number of other fields. For aggregation at a global level to work, data standards for all fields required for aggregation must 

be agreed upon. 

The Legal Entity Identifier (LEI) is the standard that is most evolved in 

that regard. We have a situation where a global standard is being adopted, 

but more work is required to enforce its usage. 

The Unique Product Identifier (UPI) does not exist in any meaningful 

way; different regulations allow for products to be expressed in different 

ways and the product taxonomy is not granular enough. For UPIs to work, 

a global standard must be adopted and enforced. 

The case of the Unique Trade Identifier (UTI) is slightly different from 

the above in that the difficulty is not in adopting a consistent standard for 

generating a unique code, but in establishing an infrastructure which is 

needed to exchange the identifier between trading counterparties in time 

for reporting cycles. 

Data Standards 

At a local level, the issue of data standardisation stems from the fact that local 

rules in place today are frequently not granular enough to recommend specific data 

standards. Data standardisation remains a highly desirable outcome and must continue to be improved through a concerted effort by both the industry and the repositories, in collaboration with local market regulators. However, this will take time. 

To accelerate the development of appropriate systemic risk oversight and ensure 

that the quality of data is fit for purpose, we recommend that work to standardise 

fields within the global data set which are subject to the aggregation mandate must 

begin immediately. 

The principles for Financial Market Infrastructures (FMIs) which have been published by the International Organisation of Securities Commissions (IOSCO) and are 

being monitored by the Committee on Payments and Market Infrastructures (CPMI) 

provide a useful foundation upon which to further build towards agreeing common 

international standards for reporting of derivatives trades. 

The principles for FMIs could be extended in scope to include data requirements 

and standards which may have some commonality with existing requirements in juVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00042 Fmt 6633 Sfmt 6621 P:\DOCS\114-24\95813.TXT BRIAN

11424028.eps
39 

7See boxout on the OTC Derivatives Regulators’ Forum (ODRF) which governs data sharing 

in the credit default swaps market, and Bank of International Settlements International Banking Hub which has been developed by the FSB to improve the collection and sharing of information linkages between global systemically important financial institutions and their exposure to 

different sectors and markets. 8ODRF: Framework for information sharing and cooperation among OTC derivatives regulators, 22 September 2009 http://www.otcdrf.org/documents/framework_sept2009.pdf. 

risdictions which have mandated trade reporting, but resulting in an outcome which 

provides harmonisation of the requirements and standardisation of data at a global 

level. 

Ideally, a single standard setting authority should be responsible for monitoring 

the adoption of standards in national rulemaking, monitoring compliance with those 

rules as well as outcomes. This is a proven three level process which has been successfully adopted by the Basel Committee and the CPMI on monitoring the principles for FMIs, and could be extended in scope to create the necessary conditions 

for aggregating the derivatives data for the purposes of monitoring systemic risk. 

5. What are the possible governance models for cross-border data sharing? 

Once the global data set has been identified, it is natural to turn attention to the 

question of what governance framework is required for data sharing. 

A governance model would set the conditions upon which regulators could access 

each other’s data, e.g., on the basis of entitlements, based upon a jurisdiction’s market share in the global derivatives markets. 

Important precedents exist at a multi-lateral level which show that regulatory cooperation can make cross-border data sharing possible. It would be impossible to 

imagine the response to any global issue—from air traffic control, nuclear safety, 

global health, terrorism—without a framework for global data sharing. What these 

numerous examples tell us is that, while they may not be perfect, they are certainly 

achievable. The derivatives market is no exception.7

The governance model can be founded upon an entitlement scheme, such as the 

one adopted by the ODRF for credit derivatives, based on the regulator type. What 

this means in practice is that the entity should be provided with a set of guidelines 

on how information needs to be presented in terms of aggregation, the underlying 

detail, and allow access based on the individual regulator’s authority. Establishing 

the criteria for this will require agreeing what is the nature of the trade which leads 

that trade to be available to another regulator. At the high level, this can come 

down to either the domicile of the counterparty or the domicile of the underlying 

reference entity that was being traded in the credit derivatives world. 

What the ODRF example shows us in particular is that existing infrastructures 

can be leveraged to perform the aggregation of OTC derivatives data, provided the 

relevant supervisory authorities agree on a governance layer. For aggregation to 

work, as demonstrated in the credit derivatives markets, you need to have consistent data with very clear access rules. 

The OTC Derivatives Regulators’ Forum 

The OTC Derivatives Regulators’ Forum (ODRF) is comprised of international financial regulators including central banks, banking supervisors, 

and market regulators, and other governmental authorities that have direct 

authority over OTC derivatives market infrastructure providers or major 

OTC derivatives market participants, or consider OTC derivatives market 

matters more broadly. It was formed in 2009 to provide regulators with a 

means to cooperate, exchange views and share information related to OTC 

derivatives CCPs and trade repositories.8

ODRF began coordinating the voluntary sharing of credit derivatives data 

held by trade repositories, across jurisdictions and in accordance with governance and clear access guidelines. DTCC, having established its Trade Information Warehouse (TIW), a trade repository and post-trade processing 

infrastructure for OTC credit derivatives in 2006, used the guidelines provided by the ODRF to provide global regulators access to detailed transaction data on virtually all credit derivatives trades executed worldwide in 

which they have a material interest to monitor systemic risk. 

The success of this initiative was due to the fact that data was 

standardised and aggregated in the TIW, supported by a data sharing 

agreement which meant that data could be accessed and interpreted by regulators globally in accordance with the ODRF guidelines. While the ODRF 

did not facilitate an agreement on the adoption of consistent standards, it 

remains a useful example of a well-functioning governance model, demonstrating the potential of what can be achieved if you have: 

40 

• consistent data standards; 

• data aggregated in one place; 

• clear access rules. 

Financial Stability Board Data Gaps Project 

As part of the G20 initiatives aimed at promoting financial stability, the 

Financial Stability Board (FSB) has developed an ‘‘international framework 

that supports improved collection and sharing of information on linkages 

between global systemically important financial institutions and their exposures to different sectors and markets. The objective is to provide authorities with a clearer view of global financial networks and assist them in 

their supervisory and macro-prudential responsibilities.’’ 

The governance of this initiative includes harmonised collection of data, 

which consists of common data templates for global systemically important 

banks to ensure consistency in the information collected. The data is then 

hosted in a central international data hub hosted by the Bank of International Settlements (BIS). 

Data collection and sharing through the hub is made possible through a 

multilateral Memorandum of Understanding which establishes the arrangements for the collection and sharing of information through the BIS hub. 

A governance group consisting of participating authorities oversees the 

pooling and sharing of information and monitors compliance with the multilateral framework. Data is collected by home authorities and then passed 

on to the data hub. Reports are then prepared and distributed to participating authorities, who can require additional information from the data 

hub, which fulfils the request after obtaining written consent from data providers. 

Conclusion 

Trade repositories have the potential to become powerful tools in identifying systemic risk, but they are currently unable to perform this role because there are 

practical and legal impediments which make transparency unattainable. 

Urgent action is required to remove these barriers and any efforts should focus 

on five key areas: 

• First, there needs to be an agreement on the global data set required to identify 

systemic risk. 

• Second, existing laws which prevent cross-border data sharing must be reviewed. 

• Third, consistent standards which apply to this data set must be adopted across 

jurisdictions, leveraging existing standards where possible. This will require appointing a standards authority which would monitor and enforce their adoption. 

• Fourth, a governance model which enables data sharing among regulators must 

be agreed upon. This should leverage where possible proven governance models 

such as the one adopted by the ODRF. 

• Fifth, a timetable for action should be agreed upon, supported by the G20, providing a framework for the completion of the work which began in 2009. 

Only when these steps have been taken, we can finally put real distance between 

us and the 2008 financial crisis, confident that the lack of transparency which nearly brought the financial system to collapse has truly been addressed. 

For Further Information about your derivatives reporting requirements, please 

visit www.dtcc.com/gtr. 

This document is for information purposes only, and does not constitute legal advice. 

Readers should consult their legal advisors for legal advice in connection with the 

matters covered in this document. The services described are governed by applicable 

rules, procedures, and service guides for relevant DTCC subsidiaries, which contain 

the full terms, conditions, and limitations applicable to the services. 

If at any time you wish to be removed from our distribution list, please send an 

e-mail to PrivacyOffice@dtcc.com. 

To learn about career opportunities at DTCC, please go to dtcc.com/careers. 

10882_PS122014 

The CHAIRMAN. Thank you, Mr. Thompson. Dr. Parsons. 

41 

STATEMENT OF JOHN E. PARSONS, PH.D., SENIOR LECTURER, 

SLOAN SCHOOL OF MANAGEMENT, MASSACHUSETTS 

INSTITUTE OF TECHNOLOGY, CAMBRIDGE, MA 

Dr. PARSONS. Good morning, Chairman Conaway, Ranking Member Peterson, and Members of the Committee. Thank you for the 

opportunity to be here. A healthy, well regulated derivatives market can be a valuable contributor to a vibrant and productive economy. The U.S. futures and options markets demonstrated that 

throughout the 20th century. Unfortunately, late in the 20th century, the U.S. and other countries took a gamble on an unregulated 

swaps market, with lax risk management practices, high leverage 

on transactions, organized in the shadows, outside of supervision, 

sunlight, and competition. 

The result was a disaster for the U.S. economy. More than ten 

million Americans lost their jobs. Countless others suffered economic hardships of many kinds. Businesses suffered. The DoddFrank Act was written to return us to healthy financial markets 

that are a source of stability and economic progress. In resolutely 

implementing this financial reform, the U.S. is once again showing 

leadership. The U.S. has a long tradition of healthy financial regulation that has made our financial markets among the best in the 

world. The Dodd-Frank Act is another example of that leadership. 

The U.S. has made significant progress in implementing the derivative reforms of Title VII. The prepared testimony I submitted 

discusses that in more detail, and other witnesses have spoken 

about it here. In the short time that I have now, I want to focus 

your attention on one specific problem discussed in my testimony, 

which I hope I can communicate to the Committee about that will 

give you a richer sense of the work that is still undone, and the 

obstacles that remain. 

One of the key goals of the reform is transparency. Swap trades 

should be reported somewhere so that regulators and the larger 

public will know important facts about the size and structure of the 

market. This is one of the least contentious goals of the reform, and 

one of the most critical if we are to avoid or manage a future crisis. 

So I want to ask the question how are we doing, and I want to answer that with a little personal experience of my own with the data 

that I think is easy for everybody here to grasp. 

In November 2013 the CFTC released its first weekly swaps report, which is a compendium of some of the information from that 

trade reporting made available to the public. Since I am a follower 

of the market, this first report was something I was keen to take 

a look at. It contains information on many things, but since my 

work with businesses revolves largely around commodity derivatives, I turned to that table first. 

The table shows the gross notional outstanding, it is a common index of size of the market, and the figure it showed was $1.7 trillion. I want you to keep that figure in mind. It is going to be key 

here. That is a start at the kind of information we badly need. It 

is just a summary figure compiled out of the more detailed information in the new databases where trades are reported. The table 

also contains a list of categories of specific commodity derivatives, 

like those for agriculture, energy, and metals, but there were no 

figures in those individual line items, just the notation N/A, which 

42 

the footnote explains is not available. I was a little disappointed, 

but not entirely surprised. This was just the first report, and just 

the beginning. It takes great time and effort to put these things together. 

Each week the CFTC releases a new report, and each week I 

take a look. Each week I notice that the size of the commodity 

swaps market is exactly $1.7 trillion. It is never $1.6 trillion or 

$1.8 trillion, it is always $1.7 trillion. That seems odd. Then I noticed the footnote that explains this figure is not really a total 

based directly on reported trades, but actually just an estimate. It 

didn’t explain how the estimate was made. I followed the CFTC’s 

weekly reports for more than 90 weeks over a year and a half. In 

my prepared testimony I gave you a screenshot of this table from 

the website of the CFTC. The size of the commodity swaps market 

is still being reported at exactly $1.7 trillion, the same number 

week after week for 90+ weeks, a year and a half. 

Now, I have colleagues who are very sophisticated with statistics, 

and can analyze complicated data sets that are beyond me, that 

look like a blur to me. This is the first time that I can say I can 

analyze a data set and tell you something is wrong here. That is 

not an estimate. That is a plug. It would be more honest to report 

N/A, not available. I don’t really understand why we are still putting out data that doesn’t tell you anything, but we are, and it is 

an indication of the deep problems. It is an indication that everybody on this Committee can see. You can go to the website and look 

at it yourself. And it is an indication that, while we have made 

great progress, there is still a long way to go. Thank you very 

much. 

[The prepared statement of Dr. Parsons follows:] 

PREPARED STATEMENT OF JOHN E. PARSONS, PH.D., SENIOR LECTURER, SLOAN

SCHOOL OF MANAGEMENT, MASSACHUSETTS INSTITUTE OF TECHNOLOGY, 

CAMBRIDGE, MA 

Progress and Problems in Reforming the Swaps Marketplace 

My name is John E. Parsons. I am a Senior Lecturer in the Finance Group at 

the MIT Sloan School of Management and the Head of the MBA Finance Track. I 

a Research Affiliate of the MIT Center for Energy and Environmental Policy Research where I was previously the Executive Director. I have a Ph.D. in Economics 

from Northwestern University. At MIT I teach a course on risk management for 

non-financial companies, the so-called end-users or commercial hedgers. I have published research on theoretical and applied problems in hedging and risk management, and I have been a consultant to many non-financial companies on hedging 

problems of various kinds, as well as on other financial issues. I have participated 

in a number of Roundtables at the CFTC regarding the reform of the derivatives 

markets, and I represent BetterMarkets on the CFTC’s Global Markets Advisory 

Committee. I have testified several times to the House Financial Services Committee and its subcommittees on derivatives market reform. I recently completed a 

term as a Visiting Scholar at the Federal Energy Regulatory Committee studying 

financial trading in electricity markets. 

Introduction 

Unregulated derivatives played a major role in the 2008 financial crisis. All the 

devils at play elsewhere in the financial system were also at play in the derivatives 

markets, but two points deserve highlighting. Derivatives served as a trigger for key 

events in the crisis and as a vector for contagion, helping to spread the crisis 

throughout the system. Both points were manifested in the collapse of insurance 

giant American International Group (AIG), among the most notorious episodes of 

the crisis. The company’s London subsidiary, AIG Financial Products, had long profited on the sale of credit default swaps. The deregulation of the OTC derivatives 

43 

market allowed these to be sold without any up-front capital or margin. The state 

insurance commissioners who supervised AIG’s other insurance businesses had no 

authority vis-a`-vis these derivatives, despite the fact that these swaps were marketed to serve a role comparable to insurance. AIG’s financial regulator, the Office 

of Thrift Supervision, was ill equipped and completely ineffective at supervising the 

company’s derivative operation. As losses on these credit default swaps accumulated 

and AIG’s financial position deteriorated, the firm suffered the effects of a classic 

bank run, losing access to short-term financing such as commercial paper and repo. 

The U.S. Government stepped in and committed more than $180 billion to AIG’s 

rescue, including a loan from the Federal Reserve as well as Treasury funding 

under the Troubled Asset Relief Program (TARP). 

More than any other single event, it is the case of AIG that provided the political 

clarity behind the need to regulate the derivatives market. In Senate testimony in 

2009, Federal Reserve Chairman Ben Bernanke said, ‘‘If there is a single episode 

in this entire 18 months that has made me more angry, I can’t think of one, other 

than AIG. . . . AIG exploited a huge gap in the regulatory system. There was no 

oversight of the Financial Products division. This was a hedge fund, basically, that 

was attached to a large and stable insurance company, made huge numbers of irresponsible bets—took huge losses.’’ For the public and for President Obama, the case 

of AIG is especially notorious because even after the company had taken taxpayer 

bailout funds, its Financial Products division proceeded to pay top managers enormous bonuses. 

The case also provides intellectual clarity on the necessary shape of reform. In the 

midst of the crisis, regulators found themselves ill equipped to respond. U.S. law 

had exempted AIG’s derivative transactions from oversight, and so no government 

authority had knowledge about the company’s trades, nor did any authority have 

substantive knowledge about the larger market in which those trades took place. 

Lacking this information, no government authority could have acted in advance of 

the crisis. Moreover, once we found ourselves in the midst of the crisis, the authorities stumbled about without critical information. This case made clear that reform 

must provide regulators with information about any and all corners of the derivatives market and the authority to act on that information. 

A second lesson was that risk management deficiencies involving derivatives at 

one institution like AIG could threaten other central parts of the system. As the 

news of AIG’s financial woes became known, concern immediately arose about major 

banks, both American and European, with large exposure to AIG through the web 

of derivative contracts between the banks and AIG. Any reform of the derivatives 

market should help reduce the transmission of problems between institutions. This 

should be integrated with the larger reform of the financial system. 

The other crisis events in which derivatives played a role are less widely known, 

but equally important in guiding the design of reform. In particular, derivatives 

played a supporting role in the troubles at several other financial institutions in 

2008, increasing the fragility of the system. For example, both Bear Stearns and 

Lehman Brothers were large investment banks with major businesses dealing derivatives. In both cases, losses on mortgage-related investments began to cast 

doubts on the solvency of the banks. These suspicions led various sources of shortterm financing to dry up, creating liquidity crises. Both banks’ positions as derivatives dealers played vital roles in their liquidity crises, when derivative counterparties began to reassign contracts away from them and refused new transactions, 

which drained cash from the firms. 

Before 2008, economists discussed bank runs using the archetypal example of the 

traditional commercial bank that takes deposits. The crisis forced economists to incorporate into their discussion other components of the financial system that are 

also susceptible to runs—notably money market funds, but extending as well to investment bank lines of business such as prime brokerage and derivative dealerships. 

Any reform of the derivatives market should here, too, be integrated with the larger 

reform of the financial system designed to protect against bank runs. 

At the September 2009 Summit of the G20 Leaders in Pittsburgh, it was agreed 

that the OTC derivatives market should be reformed: 

All standardized OTC derivative contracts should be traded on exchanges or 

electronic trading platforms, where appropriate, and cleared through central 

counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to 

higher capital requirements. 

The reform has four main elements: 

44 

• Universal supervision. There can be no carve out for OTC derivatives that 

makes them exempt from supervision. Universal supervision represents a reversal of the explicitly deregulatory mandate of the United States’ Commodity Futures Modernization Act of 2000. 

• Transparency. All transactions must be reported to public data repositories. 

• Exchange trading. Where possible, trading should move onto exchanges or comparable electronic platforms. Together with trade reporting this helps shine 

light onto the markets, for the benefit of the regulator as well as for competition 

and the wider public advantages that stem from transparency. Meanwhile, price 

transparency makes the market work better for all participates, while also giving regulators a crucial tool in examining systemic risk. 

• Clearing. The mandate to clearing through central counterparties is designed 

to reduce the amount of credit risk accumulating in the system overall and also 

to locate credit risk where it is best supervised by regulatory authorities. Requiring capital for non-centrally cleared contracts is both a tool to encourage 

central clearing and a component of sound banking practice. 

The principles defining the G20 Pittsburgh consensus on derivatives reform already governed the regulation of the U.S. futures markets. All trade in the futures 

and options markets had long been subject to regulatory oversight. Indeed, the existence of the unregulated OTC derivatives market is due to an exemption from the 

pre-established principle of universal supervision of all futures and options trading. 

The futures and options markets are mostly transparent, dominated by exchange 

trading, with data feeds easily accessed by the regulatory authorities and important 

data available to the public. As well, all contracts are cleared by a central 

counterparty. As a specific example, look at the oil futures market, which is the 

largest among the commodity derivative markets. It is registered with the U.S. 

Commodity Futures Trading Commission (CFTC), largely exchange traded, with rigorous reporting and publicly accessible data feeds, and entirely cleared. 

So, the principles behind the reform are tried and true. Indeed, the customs and 

regulations embodying those principles evolved over more than a century. For example, the clearing mandate in the futures industry arose out of a debate that took 

place at the end of the 1800s and the first 3 decades of the 1900s. Central 

counterparty clearing was introduced to the U.S. in 1896 by the Minneapolis Grain 

Exchange, home to futures trading in grains. This innovation helped to reduce the 

aggregate amount of risk in the system and therefore lowered the amount of capital 

required to manage futures markets. This in turn lowered the cost charged to nonfinancial companies hedging with futures. Central counterparty clearing also improved access to the futures market, keeping the market competitive and growing. 

Established futures exchanges in other cities gradually recognized these advantages 

of central counterparty clearing and copied the innovation. As new futures exchanges were established, central counterparty clearing was often the chosen structure right from the start. This was the case at the Chicago Mercantile Exchange, 

established in 1919 for trade in butter, eggs, and other products. In 1925, the Chicago Board of Trade, which was the largest futures exchange at the time, switched 

to central counterparty clearing. From that date forward, central counterparty clearing reigned as the standard practice for futures trading in the U.S., and remained 

so for the next 50 years. Looking back, it is clear that the innovation of central 

counterparty clearing was a boon to the growth of U.S. futures markets throughout 

the 20th century. 

The Progress of Reform 

The United States has shown tremendous leadership in the reform of its derivative markets. Title VII of the Dodd-Frank Act provided the legislative authority to 

implement all of the Pittsburgh principles. The main responsibility for the implementing Dodd-Frank in this area falls to the Commodity Futures Trading Commission (CFTC), which is responsible for more than 90% of the U.S. derivatives marketplace. The Securities and Exchanges Commission (SEC) is responsible for the remainder, and some important elements of the reform also involve the banking supervisors as well as the Financial Stability Oversight Council. 

The CFTC moved swiftly to write the regulations Congress tasked it with. The 

SEC has moved more slowly, but is also making progress. While the CFTC still has 

a few rules yet to complete, its focus is shifting to implementation of its rules, which 

includes consideration of revisions needed. Attention is shifting to see how change 

is showing itself in the marketplace, and to fine-tuning the regulations in response. 

45 

1The CFTC’s list of registered dealers is here: http://www.cftc.gov/LawRegulation/ 

DoddFrankAct/registerswapdealer. It’s list of registered major swap participants is here: http:// 

www.cftc.gov/LawRegulation/DoddFrankAct/registermajorswappart. 2Testimony of Chairman Timothy G. Massad before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry, Washington, D.C., May 14, 2015. http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-22. 3 Commissioner Bowen Speech before the Managed Funds Association, 2015 Compliance Conference, May 5, 2015. http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-4. 4Financial Stability Board, OTC Derivatives Market Reforms, Ninth Progress Report on Implementation, 24 July 2015. http://www.financialstabilityboard.org/2014/11/fsb-publishesprogress-report-on-implementation-of-otc-derivatives-market-reforms/. 

Swap dealers and major swap participants now register with the CFTC.1 The 

agency’s rules establish standards for business practices covering a wide range of 

issues. Not all of the work in this area is complete: some governance rules remain. 

But the principle of supervision is being implemented. 

A large fraction of U.S. swaps are now centrally cleared. For interest rate swaps, 

which is the largest category, it is estimated that over 80% of the market is now 

cleared. Another large category is credit derivatives which have also begun central 

clearing. However, progress is limited in the remainder of the market. In aggregate, 

the portion of swaps that are cleared is about 75% according to CFTC Chairman 

Massad’s recent testimony to the Senate Agriculture Committee.2 This is a major 

accomplishment, and hopefully the CFTC will follow through on the other sectors 

of the market where clearing is appropriate. 

Trading of swaps has also begun to be moved onto exchanges and electronic platforms—the so-called Swap Execution Facilities or SEFs. Some of this shift looks like 

little more than moving the old bilateral brokering from telephones onto new electronic communications systems. However, even that shift entails important improvements in transparency, oversight and competition. Still, the development of fully 

competitive exchange trading is only in its infancy in the swaps market. 

Trade reporting is the area where progress looks the greatest on paper, but is 

most problematic in practice. In the U.S., all swap trades must be reported to a 

swap data repository or SDR. This is supposed to be a main tool for giving the regulators the insight about the market that was sorely missing in 2008. Although the 

statement that all trades must be reported is accurate, it disguises important deficiencies that should trouble this Committee and to which I will turn shortly. 

Beyond the implementation of the G20 principles and the specific provisions of 

Title VII of Dodd-Frank, other changes are also required. Commissioner Sharon 

Bowen has spoken about the need for improving the culture in finance, and we are 

well served by the prominence she has given the issue.3 While the country as a 

whole made a clear decision to reform the OTC derivatives market and to change 

the bad practices that had accumulated over so many years, many in the industry 

have not yet made that change. 

Problems in Trade Reporting 

The principle that all trades be reported is, on its face, the simplest reform. There 

was virtually no objection to writing this into the Dodd-Frank Act, and no disputes 

in principle in writing the regulations. Nevertheless, implementation has proven 

more difficult. It is equally difficult to assess progress in this area. One obstacle is 

that a simple reading of regulator reports on trade reporting does not give an accurate picture of the situation. For example, the Financial Stability Board (FSB)—an 

international body responsible for monitoring progress in implementing the derivatives reform—issued last week its Ninth Progress Report and wrote that 4

At end-June 2015, the majority of FSB member jurisdictions (14) have trade 

reporting requirements in force covering over 90% of OTC derivatives transactions in their jurisdictions. 

That sounds good. Later, the same report turns to the problems in trade reporting 

and writes that: 

Several authorities continue to note challenges in ensuring the efficacy of trade 

reporting.16 These have been discussed in some detail in prior progress reports, 

and include: 

• difficulties with TR data quality, such as the accuracy of information being 

received and processed by TRs, particularly associated with the absence of 

Unique Transaction Identifiers (UTI) and Unique Product Identifiers (UPI); 

• challenges in aggregating data across TRs (both domestically and cross-border); 

46 

5Testimony of Chairman Timothy G. Massad before the U.S. Senate Committee on Agriculture, Nutrition, and Forestry, Washington, D.C., May 14, 2015. http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad-22. 6http://www.cftc.gov/MarketReports/SwapsReports/L2CommGrossExp. 

• the existence in some circumstances of legal barriers to reporting complete 

data into a TR (‘‘input barriers’’) (e.g., counterparty identity or other identifying data); and 

• legal barriers to authorities’ access to TR-held data (‘‘output barriers’’). 

This language is far too anodyne to convey to outsiders the true state of the problem. What, for example, is really meant by ‘‘difficulties with TR data quality’’ and 

‘‘the accuracy of information being received’’? 

What they mean is that a lot of the data is simply gobbledygook. Former CFTC 

Commissioner Scott O’Malia called attention to this a couple of years ago when he 

recounted the difficulty regulators had in making use of the data feeds coming from 

the U.S. trade repository, the Depository Trust & Clearing Corporation (DTCC). He 

said, ‘‘The problem is so bad that staff have indicated that they currently cannot 

find [JP Morgan’s now famous] London Whale in the current data files.’’ 

Unfortunately, not all assessments are as blunt about the problems. In his recent 

testimony to the Senate Agriculture Committee, Chairman Massad proudly cited the 

Weekly Swaps Report as evidence of the good progress being made, saying: 5

You can now go to public websites and see the price and volume for individual 

swap transactions. And the CFTC publishes the Weekly Swaps Report that 

gives the public a snapshot of the swaps market. 

I found that an odd citation because my experience with that report is that it is 

evidence for the problems as much as for the progress. 

What quality of information do you really get from the CFTC’s Weekly Swaps Report? Printed below is a screenshot I took earlier this week of some of the data in 

that Report.6

47 

The table shows the Gross Notional Outstanding of swaps on Commodities measured in Millions of U.S. Dollars. Gross Notional Outstanding is a common measure 

of the total size of segments of the swaps market. The table shows a Total amount 

for each of the most recent weeks, June 12 through July 10. The total shown is 

1,700,000, which is $1.7 trillion. Below that total, there is a breakdown by category 

of commodity swaps, including Agriculture, Index, Energy, Metals and Other, but 

each of there is no number for any items in this breakdown. Instead, the entry is 

‘‘N/A’’ which the footnote says ‘‘indicates that data are not currently available.’’ 

The footnote above that explains that the total figures ‘‘are estimates.’’ Notice that the total value recorded in each week is the same $1.7 trillion. Actually, if we go 

back to the very first of these weekly reports which was posted in November 2013, 

we see that the total value of commodity derivatives reported even then was also 

exactly $1.7 trillion. It has been the exact same figure for 92 weeks in a row. No 

matter how the volume of other derivatives goes up and down, the estimate for the 

commodity derivatives outstanding remains constant. 

That’s not an estimate. It’s a plug. It would be more honest to report ‘‘N/A’’, not available. Back in November 2013, when I first read the $1.7 trillion figure and the 

accompanying footnote, I imagined that the estimate had a foundation. Now, after 

having seen it stay constant for so long, I know that it can’t have any reasonable 

foundation. Why pretend? Let’s be honest with the American people and say that 

we still don’t know, and we’re working on it. Claiming to have a number when we 

don’t provides an illusion that we are farther along on the reform than we really 

are. Not all of the data being reported is as worthless as this item. There is real information in those reports that regulators now have that they did not have before the 

reform. The problem is that there is so much junk mixed in with the good stuff. 

Why are there so many data problems? There are a number of reasons and excuses. It was always going to be difficult to take an industry that had evolved over 

decades without any oversight and reshape it to provide meaningful reports accessible to regulators and the public. Broad mandates like the call for transparency 


11424001.eps
48 

7http://bettingthebusiness.com/2014/02/11/never-give-information-to-the-enemy/. 

issued at the G20 Pittsburgh meeting are simply stated, but implementation is a 

challenge. The staff at the CFTC have been working hard to write and rewrite their 

regulations to fit the particular structures of the swaps market. The CFTC is cooperating with the Office of Financial Research on an important project to improve 

data definitions and data structures to make the reporting meaningful and useful. 

But the problem is not just a technical and rulemaking challenge. It is also an 

enforcement challenge. Sometimes what companies report is just a Swiss cheese of 

information, riddled with missing data fields. And often the missing information is 

clearly standard stuff that no trader has an excuse to leave out. I wrote last year 

about a problem with reporting in electricity swaps on ICE’s data repository, Trade 

Vault, quoting from a critique provided to the CFTC.7 As a rule, we have been very 

indulgent of this poor behavior, and the implementation of quality reporting has 

therefore lagged. 

It is worthwhile to note that the U.S. futures and options markets do not have 

any of the same problems with trade reporting. The swaps industry is fond of making a distinction between swaps and futures—every swap is its own special snowflake, and this is what makes implementing the trade reporting and other mandates 

so difficult. While there is some truth to this distinction for a small volume of 

swaps, for the vast majority it is nonsense. For example, large portions of the interest rate swap market are economically the same as futures, and trade reporting 

should be no more difficult for these than for futures. The industry, therefore, needs 

to share responsibility for organizing itself to structure its trades and trading in a 

fashion that is transparent and monitorable. Otherwise, it represents and ongoing 

threat to the financial stability of the country. 

Conclusion 

In the 5 years that have passed since passage of the Dodd-Frank Act, much 

progress has been made. Regulators have begun to gain oversight of the market, 

credit risk has declined substantially and the framework for transparent and competitive trading is in place. Implementation has only recently begun, and progress 

has been uneven and marked with important problems. Therefore, much work remains. Some of this is work for the regulators, but much of it is work for the swaps 

industry. Leadership from the industry is required to shape the swaps market so 

that it is a vital and vibrant source of financial strength and stability to the U.S. 

economy. 

The CHAIRMAN. I thank the gentleman. The chair would remind 

Members that they will recognized for questioning in the order of 

seniority for Members who were here at the start of the hearing. 

After that, Members will be recognized in the order of arrival. I appreciate Members’s understanding of that, and I will recognize myself for 5 minutes. And, again, I want to thank our witnesses for 

being here today. 

Mr. O’Malia, February 2015 the G20 finance managers and the 

central bank governors reaffirmed the importance of cross-border 

cooperation in overcoming global regulatory fragmentation. In your 

opinion, does CFTC’s current cross-border guidance help or hinder 

efforts to reach that goal, and how? 

Mr. O’MALIA. Thank you, Mr. Chairman. Obviously, as all the 

witnesses have indicated, a lot of work has been done and achieved 

by the CFTC to implement these rules. All the rules are—we have 

reporting, exchange trading, and clearing, and we are quickly moving on to the OTC margining. With regard to the international harmonization, Europe and some jurisdictions in Asia are following 

along, and they are making headway, but we have significant 

progress, as all the witnesses here have testified, in terms of the 

cross-border application. 

The CFTC, in my opinion, has overreached in their application 

of the cross-border rule and taken the statute well beyond its logical meaning. The statute, in 2(i), provides for a limitation on the 

49 

CFTC’s authority to extend its territorial reach to those activities 

that have a direct and significant impact on the U.S. economy. 

That test has never been validated or used, and the CFTC has instead applied a location test to these things. 

One of the best ways to figure out if it is having an impact or 

not, and if we have harmonization, is if you look at the trading activity. And since the implementation of the trade execution requirements of the United States, and the combination of the cross-border application, you have seen a bifurcated market between the 

U.S. rates market and the European markets in Sterling and 

Euros. And it is an indication that people are avoiding trading with 

U.S. participants, and we are beginning to develop fractured markets. 

If we don’t recognize CCPs, for example, we will have fractured 

markets. If we do not harmonize our OTC margin requirements, we 

will see fractured markets. This makes it much more difficult to 

manage risk on a global basis, as these are global markets, and it 

frustrates end-users who try to access liquidity in the various markets as well. 

So, to your specific question, have they done enough, have they 

overreached? Yes, they have overreached. No, they have not done 

enough to embody the words they put in the cross-border guidance 

to say that there is a a compliance regime, because it has not yet 

occurred. 

The CHAIRMAN. Thank you. Mr. Edmonds, you call for replacing 

overly prescriptive Dodd-Frank rules that do not account for technological advances or constrain competition with flexible regulatory 

principles. Could you give us some specific examples of that? 

Mr. EDMONDS. Well, Mr. O’Malia just made reference to some. 

We have the principles that were laid out by the G20. Those principles, and the goals that we were attempting to achieve with the 

legislation that was passed, all go in the right direction. And in Mr. 

Duffy’s testimony, he laid out the idea that when you look at these 

rules, and how they are applied, it is the application of that prescription, and there is no way to achieve a harmony between those 

two. 

Put the regulators in a box, and when you have one group that 

is so far ahead, or one regulator that is so far ahead in the implementation phase, and you have others who are trying to catch up, 

if you look at the totality of those rules, and you look at those who 

followed us, if you will, and the implementation of financial reform, 

everyone has to have their little stamp. When you start with a very 

prescriptive rule base, and that next stamp comes along, the totality of all of those rules put together put us in the position that we 

are today, where people are looking for certainty around that. 

If you look at the history of the CFTC, it was a principles-based 

organization, and you had a lot of control around adhering to those 

principles. Now those principles aren’t the rule, it is step and rule 

that you are going to follow, and it gives you very little opportunity 

to span across multiple jurisdictions, even in this country, between 

things that are in Title VII, between the SEC and the CFTC. You 

can’t co-exist because as soon as you turn right in one, you are upsetting a regulator on the other side, and it puts you in a very compromised position. 

50 

The CHAIRMAN. In the time left, did any of the other witnesses 

care to comment on CFTC’s guidance? Dr. Parsons? 

Dr. PARSONS. Well, I would just say that Chairman Massad has 

outlined a pretty clear set of principles for how to do this, and part 

of what he is looking to do is look back to the past. We have had 

derivatives exchanges operating, and clearing houses operating, for 

many years where we have been able to have business operate 

across boundaries, even under the older regime for futures and options markets. And that, in principle, should not be an obstacle, 

going forward. I think that is a kind of policy that will be viable 

in negotiations, going forward. 

Mr. O’MALIA. Mr. Chairman, if I may, what Dr. Parsons could be 

referring to is the very workable solutions we have had in the 

CFTC rules under Part 30, recognizing foreign regulatory regimes. 

That has worked, and it has worked for years. What we are finding 

ourselves in is an inability to go back to that workable regime, and 

to recognize foreign jurisdictions, and that is a real frustration. So 

we have the template, as you have correctly pointed out. It is the 

Part 30 rules, recognizing foreign DCOs. But that is not what is 

happening today. 

The CHAIRMAN. I thank the gentleman. The Ranking Member, 5 

minutes. 

Mr. PETERSON. Thank you, Mr. Chairman. Mr. Duffy, this enduser thing, you say that they are paying up to five times as much 

to clear trades, and the ag products are two times more expensive 

than credit default swaps. Can you explain to me why the ag products are more expensive than credit default swaps? Because, the 

credit default swaps are much more risky than ag products. How 

is that possible? 

Mr. DUFFY. Well, they are much more risky, but, because of the 

way some of the rules are written, they fall outside of the scope of 

the law, so—— 

Mr. PETERSON. Now, who wrote those rules? 

Mr. DUFFY. The CFTC wrote those rules. 

Mr. PETERSON. But in Title VII we told them that they were not 

to put this on end-users. What is going on? 

Mr. DUFFY. Well, again, we are saying that, potentially, credit 

default swaps can be cheaper, with a higher risk profile than agricultural futures, just the way the margin is structured today. And 

we don’t believe it makes any sense whatsoever because of some of 

the loopholes that are potentially in this rule. 

Mr. PETERSON. But, as I understand it, these requirements are 

being put on by the banks, by the FDIC, not by CFTC, and I—— 

Mr. DUFFY. Yes. 

Mr. PETERSON.—as I understand it, CFTC doesn’t necessarily 

agree with this. 

Mr. DUFFY. When I mentioned earlier about the leverage ratio 

issue, where the banks have to account for so much margin, where 

they can’t even have access to that margin, so in return the credit 

default swaps would be cheaper because they have to account for 

the ag products, not for the credit default swaps. 

Mr. PETERSON. Right. But that is being done by the Prudential 

Regulators. It is not being done by the CFTC, right? 

Mr. DUFFY. Right. I am sorry, you are correct. 

51 

Mr. PETERSON. Yes. So my question is, what I have been asking 

for the last 6 months, is why doesn’t this get fixed? This is not our 

jurisdiction. This is another Committee’s jurisdiction. We have 

known about this for some time. Why doesn’t anybody fix this, 

other than just complain about it? 

Mr. DUFFY. We have worked with the Administration, the Federal Reserve, and others, and the Basel Committee, to make certain that this leverage ratio issue gets resolved so we don’t put ourselves into a situation where higher risk products are actually 

cheaper than agricultural commodities. 

Mr. PETERSON. So how is this getting resolved? Can somebody 

explain this to me? 

Mr. DUFFY. Well, as we start to walk through it with the regulators, and show them that the margin on deposit should not count 

against the balance sheet, people are starting to realize that this 

is not, but it is also multiple countries that have this. The United 

States has agreed with the Basel Committee on this. So we are not 

only dealing with the U.S., we are dealing with multiple other jurisdictions. 

Mr. PETERSON. So does this require legislation, or can this be 

fixed with—— 

Mr. DUFFY. This can be fixed at the Basel Committee and the 

Federal Reserve. 

Mr. PETERSON. Yes. So they are working on it? 

Mr. DUFFY. We are very hopeful that they will give the relief on 

the margin issue not to be counted—— 

Mr. PETERSON. I hope so too, because it has been dragging on too 

long. 

Mr. DUFFY. I agree. 

Mr. PETERSON. On the issue of the EU holding up an equivalence 

determination over initial margin, can you describe the difference 

between the EU and the U.S. on initial margin? 

Mr. DUFFY. Sure. On the client side in the United States it is 1 

day gross margin, and on the house side it is 1 day net margin. 

In the EU it is 2 day net for both house and client. The difference 

is that Chairman Massad has shown that 1 day gross has about 

$38 billion when collecting in the clearing house. So our margin regime, even though it is 1 day gross versus 2 day net, is much higher. So we had to convince them and show them of that. 

They have still not deemed us equivalent in the European Union 

yet because it has become a competitive issue, where people are 

trying to race to the lowest bottom of margin. It is critically important, from a risk management standpoint, to have the appropriate 

margin in place. That is why our government, our regulators, saw 

1 day gross as an appropriate weight for the client business. The 

client business is about 60 percent, the house business is about 30 

to 40 percent, somewhere in that neighborhood. So this is a big 

issue. 

So what they want us to do is to go to 2 days on our house business, and what they will do is say, ‘‘We will give our clients in the 

EU the optionality to elect either 1 day gross or 2 day net.’’ Well, 

we all know what they are going to elect, which is 2 day net, because it is $38 billion cheaper than 1 day gross. 

Mr. PETERSON. So—— 

52 

Mr. DUFFY. There are imbalances right there. 

Mr. PETERSON. Is this a legitimate issue, or is this a—— 

Mr. DUFFY. This is—— 

Mr. PETERSON. Or is this something that they are doing to get 

business. 

Mr. DUFFY. This is an issue—— 

Mr. PETERSON. The European Union. 

Mr. DUFFY. There is no question about it, this is a competitive 

issue. 

Mr. PETERSON. So does blaming the European Parliament, which 

never can get anything done. That is not necessarily the real problem here. 

Mr. DUFFY. Well, the problem is we need to be recognized in the 

European Union. You cannot recognize countries such as Singapore, Honk Kong, India like that, and not recognize the United 

States of America. I have said to this Committee many times before, this is the biggest slap in the face to the United States of 

America by not being recognized in the European Union. In my testimony I also said how business is being taken out of the United 

States and brought over to Europe because of these rules. 

Mr. PETERSON. So how does Chairman Massad—hasn’t he been 

on the ball on this, and—— 

Mr. DUFFY. Chairman Massad has done an outstanding job. He 

is dealing with a very difficult, to your point earlier, Parliament 

over in Europe right now. I think we are getting closer, but Mr. 

O’Malia said something very important about Part 30. Chairman 

Massad also has something he can use, which he could start pulling the foreign border trade designations for other clearing houses 

that want to do business in the United States if they will not deem 

us equivalent, which is exactly what should happen. 

Mr. PETERSON. All right. Thank you. Thank you, Mr. Chairman. 

The CHAIRMAN. The gentleman yields back. Mr. Gibbs, 5 minutes. 

Mr. GIBBS. Thank you, Mr. Chairman. The first two witnesses especially, I have heard a lot about lack of coordination, global framework hasn’t been implemented, fragmentation. And I guess my 

question is: I am an end-user, I have been. For the end-user, it is 

price discovery, price transparency, has it been enhanced, or has it 

been reduced because of the implementation of Dodd-Frank? And 

then part of that question is too, have U.S. firms been put at a 

competitive disadvantage with the implementation of Dodd-Frank? 

So I guess the overall theme I am hearing is that this hasn’t 

come together like it should. I know that Mr. O’Malia’s testimony 

talks about the Basel Committee on Banking Supervision, and 

International Organization of Securities Commission September 

2013 final national rules still haven’t been published. That is almost 2 years. So is it because the Dodd-Frank is too restrictive, 

and have we put ourselves at a disadvantage compared to our foreign counterparts? And then, second, how has this had an impact 

on our end-users for price discovery, price transparency? Anybody 

to the right—first two, probably. 

Mr. O’MALIA. Thank you for the question. Without a doubt DoddFrank has increased transparency, right? Talking about the basic 

data collection and oversight of the U.S., the work is improving. It 

53 

is still a long way to go, as Dr. Parsons pointed out. Trade execution is coming online. It too could be better, and right now it is 

overly restrictive, and ISDA has suggested ways to improve the 

flexibility for end-users and participants in the market to access 

trading a much easier fashion, with more flexibility. 

I fear that as we merge and move towards clearing and trading 

with the Europeans, we are going to see the same results in trading as we have in clearing because of the points made here, that 

they are overly prescriptive, and we are not going to be able to find 

a broad—— 

Mr. GIBBS. You mean that Dodd-Frank is overly—— 

Mr. O’MALIA. Dodd-Frank is overly—— 

Mr. GIBBS. Okay. 

Mr. O’MALIA.—prescriptive in trading. Have the costs increased, 

or have end-users been put at a disadvantage? I think the point 

that was made on the leverage ratio is precisely the point. A lot 

of these capital rules are beginning to come into play. We do not 

have a clear picture as to the individual costs of these rules, and 

the cumulative cost of the rules. And they are beginning to fall into 

place over the next 3 to 5 years, and they are going to have massive increases on the banks which will make a difference on how 

they provide risk and liquidity to these markets. 

It is a changing factor, without a doubt. It is part of the outcome 

of the financial reform, but end-users are going to have a different 

price to pay to access these markets, and to access liquidity. Congress can really play a role in doing some oversight over the capital 

rules. This is not something that CFTC directly has responsibility 

of, but it is an outcome of the comprehensive Dodd-Frank reform. 

And you should ask for the individual and quantitative costs of 

these capital rules. The leverage ratio is a final rule, and we need 

to go back and fix it. Inquiring with the Basel Committee and the 

Prudential Regulators here about the status of that would be an 

appropriate oversight role for Congress. 

Mr. GIBBS. Mr. Duffy, would you care to comment on how you 

see it affecting the CME? 

Mr. DUFFY. Well, I stated it earlier, but Mr. O’Malia said it correctly, this whole leverage ratio rule is an extremely burdensome 

rule that is going to hurt the end-users. As I said earlier, and I 

maybe didn’t answer the Ranking Member’s question as well as I 

should have, but because of the historical nature of agricultural 

products, that is one of the reasons why they are deemed to be 

higher risk than credit default swaps. It makes no sense whatsoever for that to happen. 

And that is the reason why what Mr. O’Malia said is true, we 

need to go back and re-visit this rule, especially on the leverage 

rule, because this money that is placed in the margin cannot be 

touched by a matter of law, so it should not count against the balance sheet and make other products more expensive for people that 

are using the markets. 

Mr. GIBBS. So this is a legislative fix, or can CFTC, in the 

rule—— 

Mr. DUFFY. This is a Basel/Federal Reserve fix, in my opinion. 

Mr. GIBBS. Federal Reserve? 

Mr. DUFFY. I believe they have the ability to do so. 

54 

Mr. GIBBS. Okay. All right. Thank you. I yield back. 

The CHAIRMAN. The gentleman yields back. Ms. Kuster, 5 minutes. 

Ms. KUSTER. Thank you, Mr. Chairman. Thank you to our panel 

for being with us. So my takeaway is that, 5 years in with DoddFrank, we are more transparent, more resilient, and we have minimized systemic risk caused by speculative derivative activity, but 

I also understand that we have further to go. The job is not complete, and you have talked today about some issues with regard to 

the international markets. 

My question is a little bit different. I have a concern, based upon 

a decision that was made by the majority in the Congress, about 

the CFTC re-authorization that recently passed, and my understanding is that this is going to woefully under-fund the CFTC, 

going forward, with the task that you have laid out. The funding 

level will limit the agency’s ability to effectively implement the requirements of the law, and, including this cross-border derivatives 

that you have talked about today. 

So I would like to ask if the panel could speak to the effect that 

the current CFTC funding levels will have on the agency, and in 

particular the ability to collect and implement data that will be 

needed to effectively regulate the market. And if we could start 

with Dr. Parsons? 

Dr. PARSONS. Yes. Well, the most important thing is just to appreciate how big the task is. So they have been tasked with a 

much, much larger market than they had ever had before, and it 

is a market that is only newly being regulated. So all of these 

issues in data reporting are issues where people are trying to grapple for the first time with how to organize this swapped data in a 

sensible fashion. That is an enormous task. 

I would emphasize that on top of the data reporting and the 

swaps exchanges, you have ongoing developments in technology. 

Now that we have electronic trading, we have seen the difficulties 

in electronic trading in a number of realms, and it certainly is impacting the futures and options market, and will impact the swap 

execution facilities. It is an enormous task for a regulator to have 

the technical capability to cope with the volume of data at hand. 

And then cybersecurity is another new challenge on top of trying 

to cope with and bring the swaps market into regulation. So I just 

think the burdens are very, very big, and need to be appreciated. 

Ms. KUSTER. Do you have a concern about the level of funding, 

given this fragmentation, and what we need to try to accomplish 

to make this work better at an international level? 

Dr. PARSONS. I do. I am not personally that involved in the details of the budget, but I know, for example, the $1.7 trillion figure 

that I was quoting to you, which is commodity markets, everybody 

likes to say at the beginning of their speeches, it is the municipal 

utility, it is the farmer, the rancher, it is the airline company. 

Those are the $1.7 trillion that we don’t have any good data on. 

Ms. KUSTER. Yes. 

Dr. PARSONS. But it is the interest rate swaps, and the credit default swaps which have been reported to you here are the ones 

where significant progress is being made, despite the preamble in 

the speeches. People think of those markets as small, and they 

55 

know that their resources are very limited, so those commodity derivative markets are being overlooked because of limited resources. 

Ms. KUSTER. So I just have 1 minute left. Anyone else on the 

panel have any comment on the funding? Sure, Mr. O’Malia. 

Mr. O’MALIA. It is a great question, thank you, and the 41⁄2 years 

I spent as a Commissioner at the CFTC, we always focused on the 

budget and the needs. Right here you have three technology companies, and technology is where these markets are heading, and the 

ability to oversee these markets are based in technology. And I 

couldn’t agree more with Dr. Parsons’s analysis, that we really 

ought to focus and solve the data issues immediately. 

The technology budget, however, has always come second to 

every other priority at the Commission, and it has suffered from 

a lack of kind of long term planning—— 

Ms. KUSTER. Yes. 

Mr. O’MALIA.—because it just hasn’t articulated a very consistent direction for the Commission, and it could be done in a 

much more cohesive fashion and specific fashion. Each year Congress presents a budget. Each year it is slightly different, or the 

Administration presents a budget to the Congress, and the priorities kind of bang around with new things. Sometimes it has been 

DSIO, sometimes it has been enforcement, and it has really lacked 

kind of a cohesion and vision that is necessary to really implement 

a strategic planning around technology, which is the only way that 

the Commission is going to be able to keep up with automated markets and these broad global markets. 

Ms. KUSTER. Mr. Duffy, I am sorry, you will have to ask the 

chair for his indulgence. My time is up. Thank you. 

Mr. DUFFY. Real quick, what is important to note here, Congresswoman, is that when people are asking for additional funding because of the Dodd-Frank Act, or are they under-funded, they use 

the notional figure of swaps that they are going to have to now regulate. The number back in 2000 and 2001, $761 trillion. That is on 

top of the $1.7 trillion that the Professor referred to as agriculture. 

The rest is about $700 trillion. Of those $700 trillion, there are 

2,000 to 3,000 transactions a day. 

In the world of listed derivative futures, between the Intercontinental Exchange and CME Group, we are talking about 20 million 

transactions a day, with a notional value of over a quadrillion dollars a year. And we functioned flawlessly for years under the same 

amount of budget. So you cannot measure your budget of an agency 

by the notional value of the trades that you are doing. So I appreciate that the CFTC is probably under-funded to some extent, but 

also you can’t base it on a notional value of trade. You have to base 

it on the amount of transactions, because there is no difference, 

and they are notional. 

The CHAIRMAN. The gentlelady’s time has expired. Mr. Scott, for 

5 minutes. 

Mr. AUSTIN SCOTT of Georgia. Thank you, Mr. Chairman, and 

forgive me, I am having a few flashbacks to when I was a small 

business owner, and had licenses in multiple states, and the Federal Government, and sometimes the rules were in direct conflict 

with each other, and it made it absolutely impossible to comply 

with all of them. As we go through the next several months on this, 

56 

and try to resolve these issues, I am looking forward to creating 

not only the transparency, but the consistency that we need to 

move forward. I have a couple of questions. 

Mr. Edmonds, in recent months the market events, the new research, the studies, and the current and former regulators have 

raised concerns about a deterioration in market liquidity, and the 

cumulative impact of the various new prudential and market regulations, and whether or not that is a contributing factor. Do you 

share these concerns, and the cumulative impact of the prudential 

and market regulations, is this causing the reduction in liquidity, 

and what is the price of the impact of that on people who are trying to hedge their risk? 

Mr. EDMONDS. I think in a lot of ways—and thank you for the 

question. I think in a lot of ways it is the uncertainty that the activity around those items are introducing into the market. Let us 

talk about liquidity in the form of what it takes. And my friend, 

Mr. Thompson, will know a lot about this in his role. We think 

about how collateral works within the system. One of the goals of 

Dodd-Frank at the end of the day was we were going to better 

collateralize the risk that the economy faced. 

And that was all criticism when we came out of 2008. Yet we 

now have rules in place, a lot of because of what is going on in 

Basel that Mr. Duffy and Mr. O’Malia has spoken to today, that 

don’t seem to be consistent with that. In a time of stress, a U.S. 

Treasury instrument, historically, goes up in value, because it is a 

flight to quality. Our international regulators have deemed U.S. 

Treasuries as a liquid instrument, but we haven’t. 

So what is that cost at the of the end of the day introducing into 

the system, where a small business person, like yourself in your 

previous life, would sit here, and you would walk in, and you would 

say, ‘‘I am going to do something to protect my business. I am 

going to take a very safe instrument, the U.S. Treasury, and I am 

going to introduce that as collateral into a clearing house, run by 

any one of us who are under the CFTC rule.’’ And someone says, 

‘‘Yes, but that is not good enough.’’ That is a problem. 

That is an uncertainty that we have in the system today that, 

because of what I defined in my testimony as prescriptive rules, we 

are trying to work our way through. It has a massive impact on 

the constituents of Mr. O’Malia in his role. 

Mr. AUSTIN SCOTT of Georgia. Yes. 

Mr. EDMONDS. So let us take that another place that—there is 

a call for an expanded list of collateral. The Europeans, in some 

cases, in the most recent legislation, they have eliminated the uses 

of letters of credit. There has been some thought here in the United 

States that we should not use letters of credit as acceptable forms 

of collateral. Whether we do or we don’t, we just can’t have a difference in rules, or we have to at least know what we are taking 

in the form of collateral. 

So as a small business user at that moment in time, you have 

to think very quickly if you are going to use these markets to protect the risk that you have on your books, and to make your ability 

to earn a living safer. How do you answer that question? I don’t 

know that any of us can give you a declarative answer on that. We 

are stunned by some of it in the same way. 

57 

Mr. DUFFY. What is really fascinating, and what he is bringing 

up right now, is other clearing houses around the world will take 

U.S. Treasuries as good collateral, where our own government 

won’t take them as good collateral. 

Mr. AUSTIN SCOTT of Georgia. Dr. Parsons, how dire do you believe that the need for standardization of the form and format of 

swap data being collected is? 

Dr. PARSONS. Well, it will be better if it gets standardized. We 

do want information to be crossing boundaries, but we need to understand that we don’t even have good information inside our own 

island, let alone cross-border comparisons. 

Mr. AUSTIN SCOTT of Georgia. Mr. Thompson, I have 30 seconds 

left, but could you provide an example of just how different the various reporting requirements can be in different jurisdictions? 

Mr. THOMPSON. Sure, Representative Scott. In Europe you have 

two-sided reporting, and here in the U.S. you have one-sided reporting. That is just one. You also have different definitions as to 

what needs to be reported. Now, I used a very simple example. You 

have a definition now of what is a date. And, of course, you can 

write a date in Europe a number of different ways. You can start 

with the date, you can start with the month. There is no clear definition there. 

If you are just using those as simple examples, you will get very 

different data information, and you will get breaks in the data, depending on which way the reporting party enters that data into it 

from the two-sided view that you are going to have. 

Mr. AUSTIN SCOTT of Georgia. Thank you. And, gentlemen, thank 

you for being here. 

The CHAIRMAN. The gentleman’s time has expired. Ms. Adams, 

for 5 minutes. 

Ms. ADAMS. Thank you, Mr. Chairman. Thank you, Ranking 

Member Peterson, and thank you gentlemen for your testimony. 

My district has more than 37,000 financial service employees, along 

with a host of end-users, many of which are directly impacted by 

Dodd-Frank. This law was a much needed conduit in bringing our 

nation’s financial markets under greater, more supervised regulations. And while banks and non-banking firms play an important 

and necessary role in our economy, it is imperative that we have 

mechanisms to provide the checks and balances. 

And having said that, Dr. Parsons, if Dodd-Frank had been 

passed prior to the financial crisis of 2008, what do you think 

might have played out differently? 

Dr. PARSONS. Well, Dodd-Frank is a big law. Let me focus just 

on the derivatives piece. One of the most shocking experiences in 

the crisis was the experience with the insurance company AIG, and 

the credit default swaps it had sold. That accumulation of non-margined risk was a huge problem, which Dodd-Frank no longer makes 

possible. 

But it was also a problem because the regulators were suddenly 

confronted with this big issue, and did not have information about 

the larger market, and AIG’s place in it, to give them the ability 

to respond sensibly. So, like in other situations during the crisis, 

the regulators and the government authorities were presented with 

58 

a disaster that needed resolution now, and foreclosed sensible solutions. 

So the Dodd-Frank Act, in providing information and supervision, gives regulators and committees such as yours more ability 

to take control and respond to the situations in a sensible fashion. 

Ms. ADAMS. Thank you, sir. Moving more specifically to the expanded role of CFTC oversight, particularly with regards to the 

swaps derivative market, Mr. O’Malia, what is your assessment of 

the handling of the swaps market, and what resources can Congress provide to help CFTC provide better oversight of this market? 

Mr. O’MALIA. Thank you. We have recommended in our testimony, and my testimony, that the regulators engage with the industry to quickly adopt industry convention standards around data 

reporting. I think many of the firms at the table can provide solutions around specific data sets, and use, and symbology and terminology, and taxonomy is probably the appropriate term, but to utilize those that are already in the market today to get a globally 

consistent standard for data reporting. This could help move the 

needle quite fast, in terms of global standards. 

We need endorsement from the regulators. Right now we don’t 

know what the pathway is. We are ready to respond as called, but 

we think that, by having a seat at the table and engaging with the 

regulators, we can provide a very useful data set very quickly that 

have rapid uptake, because we will be more familiar with an industry standard that a separately developed standard. And, working 

through IOSCO and CPMI would be the appropriate venue further. 

These are the international coordinating bodies. 

Ms. ADAMS. Thank you. Mr. O’Malia, how have costs for endusers of swaps, including small banks that use swaps to hedge interest rate risk changed as new requirements for swap transactions 

have come into effect? 

Mr. O’MALIA. Well, the adjustments are subtle, but beginning to 

manifest themselves, and we are beginning to see some real significant changes. Many of the capital rules have not yet been put in 

place, and we are just now discovering kind of the cumulative impact these capital rules have. As Mr. Duffy talked about, the leverage ratio rule is very problematic, as it poorly characterizes the 

protection that SEC provides, and treats it as leverage, and that 

is inappropriate. 

We are ready to talk and do the analysis around data to support 

the review that regulators can do, and to get into the data, and try 

to understand the ramifications of the increase in cost associated 

with the capital charges. 

Ms. ADAMS. Thank you very much. 

The CHAIRMAN. The gentlelady’s yields back. Mr. Davis, 5 minutes. 

Mr. DAVIS. Mr. Chairman, thank you, and thank you to the witnesses. The problem with going so late in the hearing is that the 

questions I initially had on clearing, and reporting, and others 

have really been asked. And I don’t like to be redundant, and I do 

want to comment on my friend Mr. Duffy. I am glad you are here 

again, Terry. I joked with you earlier we are going to name that 

end of the witness table the Terry Duffy wing. 

59 

But it does show your willingness to talk about issues that are 

very important, and very intricate issues for many of us, as policymakers, to have to try and address. So all of your willingness to 

be here, even on a regular basis, is very helpful, and it shows the 

desire for more transparency within the swaps markets, within the 

issues, the derivatives that all of you are addressing today. 

So let me focus instead today on some coordination issues. And 

I want to ask Mr. Duffy, Commissioner Giancarlo recently criticized the FSOC as an unmitigated disaster at its role at implementing hundreds of new rules and regulations mandated under 

Dodd-Frank. Do you share Commissioner Giancarlo’s views on the 

work of FSOC, and if FSOC’s not prepared to coordinate U.S. financial rulemakings, is there another body that should do so? 

Mr. DUFFY. I don’t know if I will say it is an unmitigated disaster. I will say that there are always issues when it comes to 

these type of things, Congressman. I am not quite sure that when 

the Commissioner’s referring to all the different rules, if he has 

problems with certain ones, or he is just characterizing the whole 

thing as a disaster, is there another body that could be more helpful in doing this? I am not so certain that is true or not true. You 

would have to see what that body is, and I would not be the expert 

to say where it should go. So maybe somebody else on the panel 

could better answer that question for you. 

Mr. DAVIS. Mr. O’Malia? 

Mr. O’MALIA. FSOC could serve the public better if it was more 

transparent, and it had a more diversified participant base. As you 

may know, it is only the Chairmen of the various Commissions. It 

could probably be broadened. The CFTC, the SEC are a balanced 

Commission of three to two in favor of the President’s party, and 

those work very well. They bring bipartisan solutions. I think the 

FSOC could benefit by that, and additional transparency. 

We are obviously coordinating important rules that have gone 

through some APA reviews, and those are the appropriate steps, 

cost-benefit analysis, APA, notice and comment are essential to 

making good rules, and FSOC could benefit by pulling that page 

out of the playbook. 

Mr. DAVIS. I see. Anybody else on the panel want to address this 

issues? 

Mr. EDMONDS. I am going to echo Mr. O’Malia’s comments about 

the transparency. Mr. Thompson, myself, Mr. Duffy, we all have organizations that have been deemed systemically important until 

Title VIII of Dodd-Frank. That designation in and of itself puts you 

right square in the FSOC world. I don’t know that any of us can 

tell you exactly what that means at any moment in time on any 

given issue. 

For us to better educate, impact that process for the betterment 

of the community as a whole is very difficult at the end of the day. 

That is not saying they are not doing very important, very hard 

work, but I couldn’t tell you that the level of communication is 

something that you would find consistently acceptable. 

Mr. DAVIS. Thank you. Mr. Thompson? 

Mr. THOMPSON. Yes. I would say FSOC is a relatively young organization, and like other parts of Dodd-Frank that we have spoken about, it is probably a work in progress that can only get betVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00063 Fmt 6633 Sfmt 6601 P:\DOCS\114-24\95813.TXT BRIAN
60 

ter. We at DTCC, well before we were designated as systemically 

important, knew our importance to the U.S. economy, and to the 

global economy. So we always viewed ourselves as systemically important, took that very seriously, as I am sure the other organizations did too, in terms of our risk management and resiliency efforts. 

So we try to work very hard with the FSOC. Again, as I said, 

I think very much so it is a work in progress that needs to be continued. 

Mr. DAVIS. Great. Dr. Parsons, I have about 30 seconds. 

Dr. PARSONS. Yes. I would just like to give you one quick example. Securities and Exchange Commission found it very difficult to 

confront the systemic risk in mutual funds—money market funds, 

excuse me, and the FSOC gave them a kick in the pants, and that 

was very helpful, and we should appreciate that kind of thing. 

Mr. DAVIS. Great. You did it in 20. Thank you. Thanks to the 

witnesses. I yield back. 

The CHAIRMAN. The gentleman yields back. Mr. Abraham, for 5 

minutes. 

Mr. ABRAHAM. Thank you, Mr. Chairman, and thanks for the 

witnesses for being here. It has been, for me, very informative. I 

will address my first question to Mr. Duffy, and any of the panel 

can surely weigh in. I have heard that certain countries allow U.S. 

Treasuries for collateral, we don’t. I have learned that some countries base security on 1 day’s net compared to 2 days’ gross. It 

seems like the rules are just all over the place. I don’t see how anybody plays in this arena. 

So take me back up to the 30,000′ view, so to speak. Why haven’t 

countries in the G20 conformed to a common data standard? Is it 

a money issue? Some people have an advantage if they don’t conform? Is it a technology issue, or is it just an attitude issue that, 

‘‘Hey, we are not going to play because we don’t have to play.’’ Why 

doesn’t everybody conform to these rules? 

Mr. DUFFY. You would think in a global market that people 

would conform. 

Mr. ABRAHAM. I do. I would. 

Mr. DUFFY. And when we are talking about margin collections, 

there should never be a race to the bottom for margin. If you want 

to introduce more risk into the system, just have a race to the bottom on margin. 

Mr. ABRAHAM. Right. 

Mr. DUFFY. So when we show that 1 day gross is $38 billion 

higher in our clearing house than any clearing house in the EU 

under 2 day net, they should say, ‘‘Okay, from a risk standpoint, 

we think that is a better proposal, even though they tried to say 

that 2 day net was more.’’ So you cannot draw any other conclusion, sir, other than there are competitive issues, there are lobbying issues going on through European clients to bring business 

to their different institutions that have a lower margin, because 

cost of capital is very intense. 

Mr. ABRAHAM. So, as a lot of answers in life, it is all about the 

money, then? 

Mr. DUFFY. It is all about the money. And as I said earlier in 

my testimony, sir, when I was sitting in front of this Committee 

61 

testifying about Dodd-Frank, I did say multiple times, we are going 

to be the country that institutes a 2,300 page document before the 

rest of the world even decides what they are going to do. There is 

nothing wrong with being a good leader, but, at the same time, if 

you don’t have coordination in a global market regulatory framework, you are going to have the problems that we have all outlined 

in our testimonies today. 

Mr. ABRAHAM. Yes, well, our job in Congress is to herd the cats 

for you guys, and try to bring them in line. Go ahead. Yes, sir. 

Mr. EDMONDS. I was taken back up to the 30,000′ level that you 

were talking about. The ultimate outcome, and Mr. Duffy and I are 

not going to argue on the math of it, we have all seen the same 

stuff, but it can’t be different. 

Mr. ABRAHAM. I agree. 

Mr. EDMONDS. That is the issue. If you want to give someone advice and counsel, in order to increase the certainty in the market, 

it has to be the same. Otherwise, the goal from Pittsburgh about 

not creating regulatory arbitrage is no longer a goal. 

Mr. ABRAHAM. Mr. O’Malia? 

Mr. DUFFY. Can I jump in there? 

Mr. ABRAHAM. Sure. 

Mr. DUFFY. Because, what is important here is we have offered 

to the European Union, of which, Mr. Edmonds, is regulated in 

London, parts of it, we said, ‘‘We will tell you what we will do, we 

will take the higher of. Whatever you guys want to do, we will do 

the higher of, but it has to be the same for everybody.’’ They absolutely threw that out the window. It goes to show you it is a competitive issue, sir. 

Mr. ABRAHAM. Right. 

Mr. O’MALIA. I would urge Congress to pay attention to the development of the OTC margin rules coming forward. The good news 

is this has been done from a global perspective. I first voted on 

these rules back in 2011. Since then there has been a global effort 

to harmonize the OTC margin rules, which are expected out this 

summer. 

There are some differences between jurisdictions. One of them 

deals with inter-affiliate trades. The U.S. would have to apply initial margin on inter-affiliate trades. In Japan and in Europe, that 

is not the case. This puts U.S. firms at—it is a difference, right? 

It is a significant difference. There are other differences. European 

rules have hair cutting on collateral and foreign exchange. 

This is a globally developed rule, right? This has been harmonized at the international level. If they can’t come to agreement 

on this rule, where can they come to agreement on. 

Mr. ABRAHAM. All right. Thank you. Dr. Parsons, real quick, I 

don’t have a degree in quantitative analysis, but if I saw the $1.7 

trillion figure 90 weeks in a row, I too would be suspect of its accuracy. You said something in your testimony about a swap trade, a 

central area to report it. Where, in your opinion, would be best to 

centrify this type of data so that everybody could access it at the 

same time, and it would be equalized? 

Dr. PARSONS. So the data is being reported to data repositories 

that everybody can access. The problem is a lot of the data is true. 

It is not reported correctly. 

62 

Mr. ABRAHAM. How do you get rid of that difference? 

Dr. PARSONS. Well, there are two ways. The regulators are making an effort to be more prescriptive, but it is also true that businesses are sometimes not being sensible in the way they report, 

and sometimes businesses choose to purposefully game the system, 

and not share all the information that they want. 

They are asking for prescriptive direction as an excuse, when we 

should be holding them to a standard to be reporting the normal 

way, and the normal degree of refinement. 

Mr. ABRAHAM. Thank you. I am out of time, Mr. Thompson. I will 

yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman’s time has expired. Mr. Kelly, for 

5 minutes. 

Mr. KELLY. Thank you, Mr. Chairman, and thank you to the witnesses for being here. Mr. Thompson, and I will try to phrase this 

question in a way that you can understand, speaking to the crossborder application and risk, what practices can we, as Congress, do 

either to emplace or remove things to facilitate the reduction or 

mitigation of cross-border risk, or to increase transparency? 

Mr. THOMPSON. I am glad you asked that question. First, as we 

have said in our testimony, both written and oral, we think having 

very clear standards and data sets would be extraordinarily helpful. The key thing there would be to encourage the regulator not 

to be prescriptive in that fashion, but to work with the industry. 

We have been working with ISDA and with CPMI/IOSCO coming 

up with a common data set, for instance, for systemic risks across 

all of it. And we have actually done that for credit default swaps. 

We are not looking forward to doing that with interest rate swaps, 

and we will go through each one of the asset classes. And we have 

been working with Scott’s organization to do that very effectively. 

The other thing that we need to do, though, is to make certain 

that we don’t get that far head of all of the other regulators. One 

of the issues with Dodd-Frank was we, in fact, were trying to lead 

the rest of the world. Well, the rest of the world didn’t want our 

leadership. What they wanted was our cooperation. And so what 

we want to try to do is make certain that we are cooperating with 

the rest of the world in a group that you can actually sit down and 

have discussions with. We think that is CPMI/IOSCO. We think 

that is the right place where you can have a discussion about what 

these issues are, come up with common standards, and then drive 

that process forward on the local levels as you go back to each jurisdiction. Thank you. 

Mr. KELLY. Thank you for your response. And if any other member at the table would like to respond to that, I would also be interested to hear your views. 

Mr. O’MALIA. On the data question, I have kind of an interesting 

anecdote, the Europeans are developing their method to review. 

This is their Dodd-Frank implementation, and they were developing a liquidity test, and they were using European data. And the 

data they put forward was completely different than the data we 

have seen about U.S. markets in the U.S. data. 

And we had to develop our comment letter on the European data 

rules—or on the trading rules—liquidity rules using U.S. data because we don’t have access to European data. And they 

63 

mischaracterized the differences between the U.S. dollar market 

significantly, two to three times larger than what it actually was. 

Without having solid data, and accurate data, you are going to 

continue to find and develop rules based on misinformation, and 

that is kind of what we are facing right now. And you are going 

to come up with some radically different rules between the U.S. 

and Europe if you can’t reconcile that data. 

Mr. KELLY. And just very briefly, Dr. Parsons, how significant is the reporting of the $1.7 trillion commodity markets being the 

same over that period of time, and who or what body, or can this 

body, as the United States Congress, who can fix that? 

Dr. PARSONS. Well, I purposefully chose it—first of all, that it is, 

as I said, something that I stumbled upon, so it is just very directly 

how I felt the problem. But I also thought it was just something 

that is so transparently clear that there is a problem. I think this 

whole conversation about data can be very confusing to many people. The fact that we are—I don’t even understand why we are trying to report a number that we know is not right. That just seems 

really wrong. It really tells us the state of the situation, and helps 

to draw people in to what is not being done. 

You have heard from many of us here. There is a common appreciation that the data has a lot of problems, and needs some attention. 

Mr. KELLY. And this is more—I am about out of time, but this 

is more in comment, as opposed to a question. But data is very important, but what is important is turning data into information 

that this body can use. So just in the future, maybe in writing, you 

can tell us how can the CFTC turn data into information that both 

you and this body, this Congress, this nation can use. And with 

that I yield back, Mr. Chairman. 

The CHAIRMAN. The gentleman yields back. Thank you. Mr. 

Allen, for 5 minutes. 

Mr. ALLEN. Yes, sir. Thank you, Mr. Chairman, and I have been 

very interested in what we are talking about today. And just to 

clear up just a few things, of course, as a small business owner, It 

has been quite a disconnect between the business community and 

the government on how to regulate. 

Is that a problem here in what we are trying to accomplish with 

this? Are we getting feedback from our business community on, 

okay, this is the way to do that, and are the regulatory people listening to you about how to fix these issues? 

Mr. EDMONDS. I will take a shot at that. The way I would want 

to answer that question is what has happened is that conversation 

has created uncertainty, because there are so many different moving parts around the globe that impact what the final outcome of 

any one of these implementations might be. For anyone to give a 

declarative answer that is going to be held as sacrosanct, that you 

have the certainty of how to operate your small business, it is a 

bit dangerous. Because we may be coming back to you in a few 

months, and we know we told you it was ‘‘X’’ 3 months ago—— 

Mr. ALLEN. Yes. 

Mr. EDMONDS.—but now, because of the implementation of this 

next phase of this global regulatory reform, it is really going to be 

‘‘X’’ plus some variable that we don’t know. That uncertainty does 

64 

find its way into the business community. They want to come ask 

questions. They ask questions of all of our different respective 

groups represented here. They ask questions of the regulators. 

Sometimes they get different answers, sometime we get different 

answers. 

I said in my oral testimony we spend a lot of time around unnecessary cost, both the time of the regulators of the business community, and those of us who operate infrastructure within that marketplace. So it is never going to be perfect. We live in a world 

where there is always going to be some level of missed information, 

but we have a stated goal. And if we are all talking about the stated goal, let us figure out a way to—— 

Mr. ALLEN. But it is good if we understand each other. Mr. 

Duffy? 

Mr. DUFFY. Can I just give you a quick example, sir—— 

Mr. ALLEN. Yes, sir. 

Mr. DUFFY.—of how the government is bumping heads with some 

of the business community? This is the Agriculture Committee. 

This is a critically important marketplace to this country because 

of the food that we supply to not only our country, but to the rest 

of world. 

There is a rule at the CFTC where, on the hedge exemptions for 

bona fide users, such as the biggest producers of food in this country, whether it is Cargill, ADM, Bungie, any one of the big producers that you want to talk about, they could—they need to get 

anticipatory hedge exemptions. They should get anticipatory hedge 

exemptions so they can do the needs of the risk management so we 

can all afford the food that they are producing, with the ebbs and 

flows of it. 

These are little rules that agribusinesses are bumping against, 

and every Member of Congress has some agribusiness in their district. They should be very focused on this particular hedge exemption role for the users. This is not a speculator issue. This is a bona 

fide agribusiness issue. 

Mr. ALLEN. Yes? 

Mr. O’MALIA. Mr. Allen, the testimony we have submitted is the 

cumulative work of the industry and users, banks and buy side, 

working together, trying to articulate specific solutions and recommendations, going forward. We appreciate the opportunity to 

come here and testify today to present kind of the compendium of 

recommendations. It is imperative, and our frustration is we are 

making good headway. We are clearing trades, we are on exchanges, we are supplying data. We are moving towards a harmonized OTC rule. We are working very hard to implement all of 

these, and quite successfully we have done so. 

But there is some uncertainly, both have pointed out, that the 

Commission won’t give us answers. The no action relief that is uncertain. What is the status of the cross-border rule? When does it 

end? When we have staffs that have been temporarily registered 

for almost 2 years. Trade data repositories 3 years. When do they 

get their final registration? We are tired of waiting. 

Mr. ALLEN. Yes. 

Mr. O’MALIA. We know that reforms need to be made. And we 

brought this to you, and hopefully you can, through your oversight 

65 

responsibilities, ask the same questions of the regulators, and ask 

for specific results, time tables, and action. 

Mr. ALLEN. Good. Well, as I learned in business, just let us know 

what the rules are, and give us certainty, and we will figure out 

how to get it done. And I hear what you are saying, and agree with 

you wholeheartedly. 

I do want to ask one—I am about out of time, but, during the 

crisis we had an intense focus on market liquidity. Do you believe 

that those liquidity concerns still pose a real risk for our economy 

today? 

Mr. DUFFY. I will take a shot at it. Liquidity has been a big 

issue, especially as it relates to the U.S. Treasury debt. As you 

know, one of the biggest participants in the marketplace is now at 

Janus, Bill Gross, and he has said that the liquidity has been at 

its all-time worst in the Treasury fixed income market today. So 

that is not a good sign, but that is a function of the macro events 

that we are looking at today. We have basically rates sitting at 

zero. Nobody is playing into the game. Nobody believes they need 

to hedge that up anymore. 

So those are different types of issues where the liquidity has become a problem. I am concerned that this could affect our government and our country dramatically if those rates rise from zero to 

three or four percent overnight. And I am not saying they will, but 

that is where you can really affect this country. And then we will 

have too much liquidity, and a big problem. 

Mr. EDMONDS. And just to add on that, the one place you could 

look at it from your seat and see where if you look at their repo 

market that is there. And I am sure Mr. O’Malia has some 

thoughts on that, given his constituency and things of that nature, 

Mr. Duffy, and I am certain we do. I won’t take any more time. You 

can look at that—— 

Mr. ALLEN. Yes, well—— 

Mr. EDMONDS.—and see that impact—— 

Mr. ALLEN.—please get that information to us, so we can deal 

with it. Thank you. Mr. Chairman, sorry about the time. 

[The information referred to is located on p. 67.] 

The CHAIRMAN. The gentleman’s time has expired. I want to 

thank our witnesses for coming today, and thank the Members for 

being a part of this hearing. Mr. Duffy, I appreciate you pointing 

out that it is not really notion of value that is the issue, it is 

trades, and the number of trades, as we all try to properly resource 

the CFTC. They have gotten some pretty good increases recently, 

and one of the things we would like to be able to do is try to understand what they have done with those increases that they have gotten, and how that has been implemented, where the technology is 

or isn’t. We have some language in our bill that would help address 

the understanding on the technology side. 

Dodd-Frank is a law. It is not a covenant. It is not a relationship 

between us and God. It is a law, and it was written by people, 

many of whom had biases and agendas. Some of which could get 

worked out. Others had biases in the implementation of it, and we 

are struggling to make it better. I didn’t hear one witness, I didn’t 

hear one Member today talk about throwing it out, or repealing, or 

anything like that. Those days are behind us. We are now in the 

66 

coping phase, and trying to make it work phase. And to hold it sacrosanct, and to argue that any change at all somehow threatens 

the world is misplaced. Because there has never been a law, in my 

view, that has been written perfectly. Every one of them should be 

looked at periodically to see what is working and what is not working. 

Unfortunately, with this one, we are not all the way to what is 

working yet, because there are additional rules that have to get implemented, and proposed, and written, and I am hopeful that the 

CFTC, as they have learned with respect to the cross-border things 

that are going on with the rules that have been put in place, that, 

as we look at those new rules moving forward, that there is some 

accommodation given, or some appreciation given to the fact that 

these are global markets, and we intend them to be global markets. 

I am an American, and I am unapologetically American, but that 

doesn’t make us perfect, and that doesn’t make us the best at every 

single thing. There are some other folks in the world who might 

have good ideas from time to time, and we ought to have the 

strength of self-confidence to be able to look at other people’s ideas 

to say, what one might be just a little better than ours, or, at a 

minimum say, that is close enough to ours that we can live with 

it, and they can live with it moving forward. 

I appreciate our panel for helping point out some of those today. 

There are others that we couldn’t get in the testimony that—looking forward to working with you. But the things we can agree on 

is that we ought be to be trying to make it better, make it work 

better, protect the public the way it needs to get protected. But 

that transaction cost didn’t make sense, and continue to provide 

the services that are out there. 

One of the unintended consequences that we came across was 

that the Amish can no longer trade, because we have moved the 

swaps to the electronic market, and they can’t trade in electronic 

markets. So every time we do something we really think is good, 

there is always another side to the story as we move along. So I 

want to appreciate the panel. I suspect we will see some of you 

again in the future as we, again, have a common purpose of trying 

to create a functioning regulatory scheme that does, in fact, work 

for as many people as possible. 

The Ranking Member had something else he had to go do, he 

couldn’t stay until the end. 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 question posed by a Member. This hearing on the Committee of Agriculture is adjourned. 

[Whereupon, at 11:29 a.m., the Committee was adjourned.] 

[Material submitted for inclusion in the record follows:] 

67 

SUPPLEMENTARY MATERIAL SUBMITTED BY CHRISTOPHER S. EDMONDS, SENIOR VICE

PRESIDENT, FINANCIAL MARKETS, INTERCONTINENTALEXCHANGE, INC. 

Insert 

Mr. ALLEN. Good. Well, as I learned in business, just let us know what the 

rules are, and give us certainty, and we will figure out how to get it done. And 

I hear what you are saying, and agree with you wholeheartedly. 

I do want to ask one—I am about out of time, but, during the crisis we had 

an intense focus on market liquidity. Do you believe that those liquidity concerns still pose a real risk for our economy today? 

Mr. DUFFY. I will take a shot at it. Liquidity has been a big issue, especially 

as it relates to the U.S. Treasury debt. As you know, one of the biggest participants in the marketplace is now at Janus, Bill Gross, and he has said that the 

liquidity has been at its all-time worst in the Treasury fixed income market 

today. So that is not a good sign, but that is a function of the macro events 

that we are looking at today. We have basically rates sitting at zero. Nobody 

is playing into the game. Nobody believes they need to hedge that up anymore. 

So those are different types of issues where the liquidity has become a problem. I am concerned that this could affect our government and our country dramatically if those rates rise from zero to three or four percent overnight. And 

I am not saying they will, but that is where you can really affect this country. 

And then we will have too much liquidity, and a big problem. 

Mr. EDMONDS. And just to add on that, the one place you could look at it from 

your seat and see where if you look at their repo market that is there. And I 

am sure Mr. O’Malia has some thoughts on that, given his constituency and 

things of that nature, Mr. Duffy, and I am certain we do. I won’t take any more 

time. You can look at that—— 

Mr. ALLEN. Yes, well—— 

Mr. EDMONDS.—and see that impact—— 

Mr. ALLEN.—please get that information to us, so we can deal with it. Thank 

you. Mr. Chairman, sorry about the time. 

Barclays 

The Decline in Financial Market Liquidity 

JEFFREY MELI, +1 212 412 2127, jeff.meli@barclays.com 

BRIAN MONTELEONE, +1 212 412 5184, brian.monteleone@barclays.com 

ERIC GROSS, +1 212 412 7997, eric.gross@barclays.com 

CONOR PIGOTT, +1 212 412 3441, conor.pigott@barclays.com 

JOSEPH ABATE, +1 212 412 7459, joseph.abate@barclays.com 

• Banking regulation has intensified since the financial and sovereign 

crises in a global effort to improve the safety and stability of the financial system. Regulators have forced banks to change their capital structures and their business models to enhance the safety of the banking 

system and make future financial crises less likely. 

• These new regulations have materially improved the stability of the financial system. However, in an effort to reduce the risk of future firesales financed by short-term debt, they have also reduced the supply of 

safe, short-term, liquid assets such as repurchase agreements, causing 

them to trade at lower yields (and, by extension, higher prices). 

• The reduction in the supply of short-dated safe assets and associated 

fall in the liquidity of fixed income markets has created incentives for 

investors to look to non-traditional sources of liquidity, such as ETFs 

and mutual funds. In turn, this may result in a transfer of fire-sale risk 

into assets such as leveraged loans and investment grade and high 

yield bonds, as liquidity in the underlying investments of these funds 

deteriorates, exposing end-investors to run risk. 

A Changing Landscape 

Before the crisis that erupted in 2007, many banks operated with too little equity 

and were overly reliant on short-term wholesale financing, such as ‘‘repo’’, or repurchase agreements, to fund illiquid investments. When the crisis began, these banks 

did not have the capacity to absorb losses, given their limited capital base. Regulators have addressed this by forcing all banks to significantly increase their capital 

ratios, which are now higher than at any time since World War II. Excessive reliance on short-term financing exposed some banks to destabilizing runs when investors pulled their financing as the crisis began to mount, contributing to failures. 

More important from a systemic point of view, this precipitated the fire-sale of asVerDate Mar 15 2010 13:00 Sep 14, 2015 Jkt 041481 PO 00000 Frm 00071 Fmt 6621 Sfmt 6621 P:\DOCS\114-24\95813.TXT BRIAN
68 

1This argument is bolstered by the fact that banks arguably benefited from implicit government support (i.e., bail-outs in the event of a disruption) pre-crisis, causing their credit spreads 

to be artificially low. Subsequent changes to regulation have likely reduced or eliminated the 

extent to which banks will benefit from bail-outs in any future crisis, which would bias bank 

spreads wider absent the improvements in credit quality that we cite. 

sets financed by short-term debt, driving down the prices of specific assets. This contributed to system-wide funding issues, even for banks with relatively strong balance sheets. To reduce the risk of future fire-sales, several of the new initiatives 

have targeted repo and other short-term liabilities, resulting in a more than 50% 

reduction in repo balances relative to their peak. In particular, the Volcker Rule was 

introduced to address illiquid and riskier investments that had burgeoned in the 

banking sector before the crisis. 

The best evidence of the effect of new regulations probably comes from the 

credit market, where the spreads of bonds issued by the largest banks have 

narrowed significantly . . . 

Whether these steps will be sufficient to curb future crises remains an open question. But it is clear that the new regulatory environment has materially improved 

the stability of the system. The best evidence of the effect of new regulations on 

banks probably comes from the credit market, where the spreads of bonds issued 

by the largest banks have narrowed significantly and, in many cases, are now tighter than industrial spreads. In other words, bond investors believe bank safety has 

improved so much that they are once again willing to accept low spreads for bank 

risk.1

Less well understood are the broader effects of improved stability on investors and 

the economy. Last year, we wrote that decreased bank lending was one potential 

implication (see The cost of evolving bank regulation, (https://live.barcap.com/go/ 

publications/content?contentPubID=FC2008788) 13 February 2014). This year, we 

focus on the implications of two separate, but related, changes in financial markets. 

• The reduced size of the repo market. This large, but relatively esoteric, part 

of the financial market is used by hedge funds and banks to finance securities 

and by money market funds to invest cash. 

• The fall in liquidity in fixed income markets, demonstrated by a decrease in turnover and an increase in bid-offer spreads. This is related 

to the changes in repo, which is an important financing tool for banks’ marketmaking operations, but is also driven by other changes that have made banks 

less willing to warehouse risk on behalf of investors. 

These changes have important consequences for financial market participants, including hedge funds and insurance companies, which are having a harder time financing securities and positioning their portfolios and are paying higher transaction 

costs. Retail investors are also paying higher transaction costs in their mutual 

funds, and there is evidence that poor liquidity is affecting the behavior of active 

managers. However, these seem like relatively small prices to pay for a material decrease in the likelihood and magnitude of future financial crises. 

The decline in repo has reduced the supply of safe, short-term assets . . . 

We believe there are two broader implications that are more likely to be disruptive, particularly once (if) interest rates begin rising. First, the decline in repo has 

reduced the supply of safe, short-term assets. Relatively few assets fit this description: Treasury bills, bank deposits, and repo. The reduction in repo is happening as 

Treasury bill supply is shrinking and banks are less willing recipients of deposits, 

given lackluster loan demand. As overall supply of such assets declines, we believe 

investor demand for them is relatively inelastic and a function of financial wealth, 

which has been rising. We expect excess demand for short-dated safe assets to cause 

them to trade at lower yields (i.e., higher prices), even as and when interest rates 

begin to normalize. This applies to deposit rates, which we believe will lag any rate 

hikes, such as we expect in the U.S. later this year, as investors remain willing to 

accept low interest rates to maintain a base of liquid assets. Similarly, money market funds may need to accept lower rates to remain invested. 

. . . creating incentives for investors to look to nontraditional sources of 

liquidity . . . 

Second, reducing the supply of these safe, short-dated assets creates incentives for 

investors to look to non-traditional sources of liquidity. Migration to seemingly liquid alternatives has happened before: in the pre-crisis period, safe short-dated assets were in limited supply (relative to financial wealth) because of the tremendous 

69 

run-up in equity prices. The result was a massive spike in CP, repo on structured 

assets such as ABS and CDOs, and auction rate securities, all of which purported 

to offer the daily liquidity investors were seeking. But this liquidity dried up once 

the crisis began. 

For various reasons, the same alternatives will not be chosen this time around: 

the changes in regulations, investors’ collective experiences with those investments, 

and the simple fact that many of them no longer exist. However, there have been 

increased flows in other vehicles that offer daily liquidity, such as ETFs and mutual 

funds. The desire for liquidity may also be limiting demand for closed-end fixed income funds, which would seem a natural response to the decline in fixed income liquidity. 

The inflows into ETFs and mutual funds are happening just as liquidity in the 

underlying investments that these funds purchase is deteriorating. This has raised 

new concerns about ‘‘retail runs’’ and fire-sale risks in such assets as leveraged 

loans and investment grade and high yield bonds, where either liquidity has 

dropped most severely and/or where the funds offering daily liquidity have grown 

the most. Ironically, these new fire-sale risks have arisen in part because the risks 

of a repo-driven fire-sale have fallen. The well intentioned and arguably successful 

efforts to make the banking system more robust and less susceptible to runs have 

transferred fire-sale risk out of the banking system and into the hands of end-investors. 

Repo 101 

A repurchase transaction (repo) is effectively a collateralized short-term (often 

overnight) loan. For example, an investor looking to borrow money pledges a security (e.g., a Treasury) as collateral, and receives cash. The next day, the investor 

pays back the cash plus interest, and receives his or her collateral back in return. 

A ‘‘reverse repo’’ is the same transaction but viewed through the lens of the lender. 

Repurchase transactions have several important aspects. First, although much of 

the repo market is overnight, ‘‘term’’ repo, which can be measured in weeks or even 

months, is also possible. The structure is the same, but the collateral is not returned 

(and the loan paid off) until the end of the term. The second aspect is the interest 

rate of the transaction, which depends on the term and the specific collateral involved. For various reasons, some collateral may be specifically desirable to lenders 

and thus command lower interest rates. The final key dimension is the ‘‘haircut’’— 

which defines just how much cash the borrower gets for the collateral. This is 

quoted in terms of a percentage of market value. Higher-quality collateral, such as 

Treasuries or agency debt, typically requires the lowest haircuts, e.g., 2%. This 

means that it is possible to borrow $98 for every $100 of Treasuries that the borrower pledges as collateral. Lower-quality collateral (e.g., corporate bonds) typically 

requires higher haircuts. 

Banks engage in repo transactions for two related reasons. First, repos match 

cash-rich investors (such as money market funds) with investors (such as hedge 

funds) who own securities but need financing. This is done via a ‘‘matched book’’— 

banks engage in reverse repo transactions with hedge funds, lending them money 

collateralized by securities. Banks then borrow from money market funds via repo 

transactions, collateralized by the same securities. The banks effectively act as middlemen, with the cash flowing from the money funds to the hedge funds, and the 

collateral moving in the opposite direction. The second reason banks engage in repo 

is to finance their own portfolio of securities, essentially playing the role of the 

hedge funds in the matched book example above. 

Anatomy of a Repo Run 

Although the repo market is large (measured in trillions of dollars; more on this 

below), it also seems, at first, fairly innocuous. Short-dated, collateralized loans 

sound safe, particularly relative to equities or the highly structured assets that featured so prominently in the credit crisis. In fact, these are safe investments for lenders. The short-term nature of the transaction means that if any concerns arise, the 

lender need not sell or unwind the transaction—it is closed out the next day, in the 

case of overnight repo. In case of default, the lender can sell the collateral and recoup his or her money. It is precisely the safety of repo that makes it an attractive 

investment for money market funds. They invest in safe, highly liquid short-term 

assets because their end-investors use these funds as cash substitutes. 

The same features that make reverse repo a safe asset for money funds 

make repo a risky liability for leveraged investors and banks . . . 

However, the same features that make reverse repo a safe asset for money funds 

make repo a risky liability for leveraged investors and banks. At the slightest hint 

70 

2See ‘‘Market Liquidity and Funding Liquidity’’, M. Brunnermeier and L. Pedersen, National 

Bureau of Economic Research working paper, December 2008. 3See ‘‘Repo Runs: Evidence from the Tri-Party Market’’, A. Copeland, A. Martin, and M. 

Walker, Federal Reserve Bank of New York, July 2011. 

of trouble with either the collateral or the borrower, the funding can be withdrawn, 

which is as simple as not renewing an expiring contract. For example, if the collateral is downgraded, it may become harder to borrow against. Similarly, if the borrower (e.g., hedge fund or bank) deteriorates in some way such that money funds 

or other lenders question its credit quality, borrowers may have a harder time securing funds regardless of the quality of their collateral. Essentially, borrowers reliant on repo need to continually roll over their financing, and are exposed to the risk 

of a run as a result, similar in concept to a deposit run. 

This presents two concerns for regulators. First, banks finance significant securities portfolios via repo, and thus there is risk that an individual bank would need 

to liquidate assets in response to being locked out of the repo market—a pre-default 

fire-sale. This is problematic because the highest-quality assets are the easiest to 

sell—Treasuries, agencies, etc. A bank that was overly reliant on repo financing of 

lower quality securities and faced a repo run could be forced to sell assets quickly 

to raise liquidity, potentially driving down their market valuations and leading to 

asset write-downs that would impair capital, and increase the bank’s risk of default 

or downgrade. It might also need to sell assets or draw down on its cash holdings 

to meet increases in haircuts on the collateral it is pledging. 

Such a run could affect multiple (or even all) banks at once if bank credit quality 

deteriorated across the board, or if the entire repo market experienced a disruption. 

This could be caused by a systemic shock leading to a crisis of confidence in the 

broader financial system. In this scenario, with multiple borrowers trying to liquidate assets, the market could experience a fire-sale—the prices of certain assets 

could plummet because of a large number of forced sellers trying to liquidate at 

once. This could be exacerbated by money market funds, which are often legally prohibited from owning the types of collateral underpinning their repo trades and 

would be forced to sell quickly if their counterparty defaulted and the fund took possession of the collateral. The solvency of an individual bank could deteriorate much 

faster in this scenario because it would be forced to sell assets at a loss, thereby 

eroding its capital. In fact, solvency concerns could spread through the financial system. 

Academic studies have described this phenomenon as a ‘‘funding and liquidity spiral’’.2 Asset price shocks in a particular market create funding problems for cash 

borrowers who pledged the same or similar collateral. Borrowers reduce their positions by selling some of their holdings, while their ability to borrow against their 

remaining assets shrinks as haircuts increase and the value of these holdings falls 

in response to selling pressure. This exacerbates the funding problems and forces 

more de-leveraging and asset fire-sales—the process becomes self-reinforcing. 

Lessons from the Credit Crisis 

Concerns about repo runs are not theoretical. The failure of Lehman 

Brothers serves as a real world case study . . . 

Concerns about repo runs are not merely theoretical. Lehman Brothers’ failure in 

September 2008 serves as a real world case study. Lehman’s repo book accounted 

for 34% of total liabilities at 2Q08, a cursory measure of the firm’s dependence on 

short-term funding. During normal times, this was an effective strategy for 

leveraging returns, but as the firm’s crisis reached a climax, repo funding providers 

suddenly fled. Between September 9, 2008, and September 15, 2008 (the day of its 

bankruptcy filing), the number of tri-party counterparties providing Lehman Brothers with cash in exchange for securities fell from 63 to 16. Given that Lehman 

Brothers had used repo to fund a material volume of lower-quality, non-governmental securities—the prices of which had fallen sharply—the firm was left with 

assets it could no longer fund in overnight markets or sell without destroying capital, eventually contributing to the firm’s bankruptcy filing. 

Although the Lehman experience is an important, cautionary tale, it also delineates where the true ‘‘run risk’’ lies within the repo market. Interestingly, the financial crisis did not cause a waterfall of repo runs across the rest of the system. Instead, the deterioration in repo markets was more focused. 

• Higher-quality assets were still funded at modest haircuts: Repo haircuts 

did rise during the crisis across many asset classes; however, this was generally 

concentrated in funding for lower-quality ABS structures.3 Treasuries, agencies, 

and even investment grade corporate bonds showed modest—if any—increases 

71 

in margin requirements over this period. For example, a Federal Reserve staff 

report indicated that U.S. Treasuries and agencies continued to be funded in 

the repo market throughout this period at haircuts of only 3% or less (i.e., 97% 

loan to value). 

• Evaporation of repo funding was concentrated in lower-quality issuers: 

Evidence from the same Federal Reserve study suggests that the repo funding 

flight was highly idiosyncratic to Lehman Brothers. Certain investors chose to 

cease providing Lehman with repo funding but nonetheless continued to fund 

other financial market participants. 

Overall, this suggests to us that repo is less flight-prone than might be imagined. 

Funding terms were not markedly increased and were not in themselves the transmission mechanism for forced sales. Furthermore, the markets for higher-quality assets that typically serve as repo collateral were able to absorb the liquidation of 

Lehman’s large Treasury and agencies books, which had been funded by repo. This 

can be naturally linked to the strong performance of these safe haven assets during 

times of turbulence, minimizing the risk of needing to take a loss as positions are 

closed. 

However, we must be careful not to draw too much comfort from the experience 

of the crisis, given the unprecedented intervention in markets by the Federal Reserve and other central banks, which may have helped stem further contagion. The 

core issues around funding long-term, price-sensitive assets remain—entities using 

short-term funding (such as repo) need to mark their assets to market and obtain 

new funding every day. A temporary price decline has the potential to wipe out a 

firm’s margin and force it to sell its assets. This could in turn push asset prices 

lower, forcing other participants to sell and perpetuating the cycle. We believe that 

it is this risk—of a waterfall of forced sellers destabilizing the broader system—that 

regulators are attempting to address via repo-targeted reform. 

Regulators Have Responded With Significant Changes 

Global standards for bank balance sheet size were fairly lax prior to the financial 

crisis. Basel I and II capital standards were largely based on risk-weighted assets, 

as opposed to total assets. This facilitated inflated balance sheets and more active 

proprietary risk taking in trading businesses. Regulators have made a series of 

changes to the bank regulatory framework to address perceived balance sheet structure and business model risks. These include: 

• Volcker Rule. 

• The introduction of leverage ratios. 

• SIFI buffers. 

• Haircuts. 

Volcker Rule 

Banks’ trading operations historically served two main purposes: (1) providing liquidity to market participants wanting to buy or sell securities in exchange for a 

bid-ask spread; and (2) using the bank’s balance sheet to generate profit from price 

movements. Bank regulators grew concerned that proprietary trading positions created undue risks on banks’ balance sheets. In response, the Dodd-Frank Act created 

the Volcker Rule, which prohibits proprietary trading. Among other things, the rule 

limits banks’ ability to take trading positions—capped at demonstrated market demand. In a market where demand from clients, customers or counterparties is expected to diminish, this limits a bank’s ability to intermediate the market. Notably, 

regulators chose to exempt Treasury and municipal securities from these restrictions. 

Leverage Ratios 

Pre-crisis, the most important (and binding) regulatory capital ratios banks needed to meet were based on risk-weighted assets. Safe assets, such as repo, were assigned low risk weights, and thus banks were required to allocate very limited capital to those types of positions. As a result, there were few practical limitations on 

the size of bank balance sheets, which expand as banks increase the size of their 

matched-book repo positions. 

This has changed in both the U.S. and Europe. Regulators in the U.S. have adopted a 5% supplementary leverage ratio for the holding companies of the systemically 

72 

4Technically, the proposed higher supplementary leverage ratio requirement would apply to 

all banks in the U.S. with at least $700bn in assets and/or $10trn in assets under custody, 

which at present captures the eight U.S. G–SIBs: Bank of America, Bank of New York, 

Citigroup, Goldman Sachs, JP Morgan, Morgan Stanley, State Street, and Wells Fargo. 

important U.S. banks.4 This represents a materially stricter requirement than the 

old U.S. standard, as it raises the hurdle from 4% and expands the scope to capture 

some off-balance sheet assets. This rule complements existing risk-weighted capital 

measures by ensuring that even low-risk assets and certain off-balance-sheet exposures are backed by material equity capital if exposures are large enough (see Leverage ratio: An attack on repo? (https://live.barcap.com/go/publications/content?contentPubID=FC1953464)). 

Before the crisis, European banks were not subject to any restrictions on 

balance sheet; thus, they naturally gravitated toward lower risk-weighted assets—this has now changed . . . 

Prior to the crisis, European banks were not subject to any restrictions on balance 

sheet. Thus, they naturally gravitated toward lower risk-weighted assets (e.g., repo). 

This has now changed for two reasons. First, European regulators have adopted a 

3% leverage ratio and several are moving toward an even higher standard. Second, 

new regulations on U.S. subsidiaries of foreign banks will push these banks to manage the balance sheets of their U.S. operations more conservatively. Previously, foreign banks’ U.S. intermediate holding companies were not required to meet U.S. 

capital standards independently. However, beginning in July 2015, Section 165 of 

the Dodd-Frank Act will require foreign-domiciled banks to roll up all their U.S. 

broker/dealers and bank branches into a single intermediate holding company 

(IHC). The IHC will then need to meet risk-based capital requirements, maintain 

minimum liquidity buffers, and meet the minimum leverage ratio. The challenge of 

establishing an IHC is particularly acute for foreign banks that mainly conduct 

broker-dealer business in the U.S., with limited lending capabilities, because their 

balance sheets would be naturally skewed toward lower risk-weight business (Figure 

1). Based on recent data, these institutions will be under similar pressure as their 

U.S. peers to reduce size and/or increase equity. 

Figure 1 

Foreign banks account for a significant share of U.S. broker-dealer activity 

Assets of U.S. broker-dealers ($bn) 

Note: Data as of YE 2013. Source: Company reports, Barclays Research. 

SIFI Buffer for Short-Term Wholesale Funding Reliance 

In December 2014, the Federal Reserve released its notice of proposed rulemaking 

(NPR) outlining the U.S. implementation of additional capital buffers at systemically important banks. This highly anticipated release outlined the rules for determining how much more Tier 1 common capital the largest banks will hold above 

the Basel III minimums. 

Most elements of the rule were taken directly from the Basel/Financial Stability 

Board guidelines; however, the Fed also shifted critical elements. In one key change, 


11424002.eps
73 

the Federal Reserve decided to vary capital requirements based on the amount of 

short-term wholesale funding used by a given bank. Although we do not believe this 

change in itself generates higher capital requirements versus the FSB rules (based 

on current balance sheets), it does establish a link, for the first time, between capital requirements and wholesale funding structure. For a more detailed discussion 

of the proposal, see We’re Gonna Need a Bigger Buffer: Fed Proposes SIFI Capital 

Surcharge, (https://live.barcap.com/go/publications/content?contentPubID=FC209 

5719) 11 December 2014. 

Haircuts Up Next 

Though somewhat less certain, we expect further rulemaking to address haircuts 

for repo transactions. These would likely be designed to cap leverage within the repo 

market to levels appropriate for the quality of the underlying collateral, see Squeezing the leverage out, (https://live.barcap.com/go/publications/content?contentPubID=FC2080857) October 24, 2014. Federal Reserve Governor Daniel 

Tarullo has repeatedly expressed a desire to add regulation along these lines over 

the past year. Most recently, in a speech at an Office of Financial Research conference (excerpted below), he highlighted his intention that such rules also apply 

outside the traditional banking sector to mitigate the risk of non-banks building up 

repo leverage as banks pull back. 

Federal Reserve Governor Daniel Tarullo, January 30, 2015 

‘‘I have on past occasions described at some length my concerns with shortterm wholesale funding—especially, though not exclusively, funding associated 

with assets thought to be cash equivalents . . . . One policy response that the 

Federal Reserve has advocated and that has now been proposed by the Financial Stability Board (FSB), is for minimum margins to be required for certain 

forms of securities financing transactions (SFTs) that involve extensions of 

credit to parties that are not prudentially regulated financial institutions. This 

system of margins is intended to serve the macro-prudential aim of moderating 

the build-up of leverage in the use of these securities in less regulated parts of 

the financial system and to mitigate the risk of pro-cyclical margin calls by preventing their decline to unsustainable levels during credit booms.’’ 

These Changes Have Reduced Repo Volumes and Liquidity 

The Repo Market Has Shrunk 

Repo balances have fallen from a peak of more than $5trn pre-crisis to about 

$2.5trn currently. We believe this market will decline by an additional ∼20%, or 

roughly $500bn. The total amount of outstanding repo has contracted twice since 

2008 (Figure 2). During the first episode (March 2008–December 2009), total repo 

outstanding shrank by almost 47%, driven by asset price fears and bank and investor de-leveraging. Although repo against corporate bonds accounted for less than 

10% of overall collateral pledged in March 2008, this market had the biggest reduction in activity, with volumes plunging by more than 63% during the financial crisis. 

We interpret this decline as a response to the use of non-traditional collateral. 

The second repo contraction, which occurred between November 2012 and February 2014, has been focused on higher quality collateral, and in our view has been 

a result of new regulations. In this episode, overall repo volume fell by 22%, led by 

agency MBS collateral, which plunged by 43%—more than it fell during the financial crisis. 

This is clearly visible in the repo balances of the large U.S. banks, which have 

declined by 28% over the past 4 years (Figure 3). Notably, the only U.S. global systemically important bank (G–SIB) to grow its repo balances over the past few years 

has been Wells Fargo, which we estimate has a significant surplus to its required 

supplementary leverage ratio requirement. That is because Wells Fargo predominantly focuses on traditional banking businesses of taking deposits and making 

loans (higher RWA), with lower exposure to repo and trading (lower RWA). 

74 

Figure 2 

Aggregate Repo Volumes Have Contracted Sharply From Pre-Crisis Levels 

Repo outstanding ($trn) 

Source: Federal Reserve, Barclays Research. 

Figure 3 

Most Large U.S. Banks Have Responded to SLR Requirements by Reducing 

Repo Balances 

Repo borrowings ($bn) 

Source: Company reports, Barclays Research. 

Although the pace of the reaction to new rules has varied, all bank management 

teams that face balance sheet size pressure have taken steps to reduce their low 

RWA exposures. Most recently, Goldman Sachs CFO Harvey Schwartz highlighted 

the company’s focus on reducing its balance sheet in response to increased regulatory clarity. 


11424003.eps 11424004.eps
75 

Goldman Sachs CFO Harvey Schwartz, July 15, 2014 

‘‘Over the past few months, we have received greater clarity on the role of the 

balance sheet across a variety of regulatory requirements, most notably the 

Comprehensive Capital Analysis and Review (CCAR) and the supplementary leverage ratio. During the quarter, we undertook a comprehensive analysis of our 

balance sheet. We began the process by examining the return on asset characteristics associated with different businesses. Through that analysis, we identified opportunities to reduce balance sheet with a de minimis impact to our client franchise and earnings potential. As you would expect, the quarterly reduction largely impacted lower return asset activities within our matchbook and 

other secured financing transactions.’’ 

Liquidity in Fixed Income Markets Has Contracted 

The decline in liquidity in fixed income markets is another consequence of the 

changes in bank regulation for financial markets. For illustrative purposes, we focus 

on the U.S. credit market, for which we have accurate volume and transaction cost 

data, but we believe the results shown below are indicative of how trading patterns 

have evolved generally. 

Beginning with volume data (from the TRACE reporting system, which captures 

all corporate bond trades in the U.S.), we compute turnover metrics for both the 

U.S. investment grade and high yield bond markets. Turnover has clearly been on 

a declining trend—in both markets, it is at or close to the lowest levels on record 

(high yield experienced a small bounce in late 2014 as a result of the volatility of 

energy credits). In high yield, turnover has steadily made its way down from 177% 

in 2005 to 98% in 2014 (Figure 5). Notwithstanding a genuine spike in investment 

grade corporate turnover in 2009, as the market recovered from the credit crisis, 

volumes in that market have also failed to keep pace with growth in par outstanding, and turnover is down from 101% to 66% over the same period (Figure 4). 

Figure 4 

Volume, Market Size, and Turnover in High Grade Credit 

Source: MarketAxess, Barclays Research. 


11424005.eps
76 

5Liquidity Cost Scores for U.S. Credit Bonds, (https://live.barcap.com/go/publications/content?contentPubID=FC1484108) October 2009. 

Figure 5 

Volume, Market Size, and Turnover in High Yield Credit 

Source: MarketAxess, Barclays Research. 

Transaction costs have risen at the same time. Figure 6 contains pre- and postcrisis transaction costs in the IG and HY markets, estimated using our Liquidity 

Cost Score (LCS) methodology.5 Transaction costs have increased in both markets. 

Although the change in HY is notable, at more than 20%, the change in IG is more 

marked. We think this is the result of the substantial strength of pre-crisis liquidity 

in that market. Note that the change in LCS is more severe than that in bid-offer— 

this is driven by an increase in the average duration of the IG market over the past 

several years. The same average bid-offer spread corresponds to a higher transaction cost for a longer-duration bond. 

Figure 6 

Transaction Costs, Today Versus the Pre-Crisis Period 

1/31/2007 1/31/2015 Change 

LCS (%) Bid-Offer LCS Bid-Offer LCS Bid-Offer 

U.S. Credit Corporate 0.531 8.5 bp 0.951 13.2 bp +79% +55% 

U.S. High Yield Corporate 1.276 1.28 pts 1.550 1.56 pts +21% +21% 

Source: Barclays Research. 

Changes in the drivers of volumes and turnover at the individual bond 

level provide further evidence of the decline in liquidity . . . 

The changes in the drivers of volumes and turnover at the individual bond level 

provide further evidence of the decline in liquidity. In Figure 7, we present regressions of turnover in high yield bonds against size, age, and volatility in 2006 and 

2014. In 2006, the two main determinants of turnover were the age of a bond and 

its volatility. We interpret the relevance of age as a halo effect around new issue— 

bonds tend to trade in meaningful size in the months immediately after issuance. 

Turnover increases with volatility because price changes force investors to re-evaluate their holdings in a particular bond. Corporate actions, earnings, upgrades and 

downgrades are all possible sources of volatility that could lead credit investors to 

reposition their portfolios. 

By 2014, a few things had changed. First, the coefficients on age and volatility 

were both sharply lower. The ‘‘new issue effect’’ was much reduced, and it took 

much more volatility to drive the same level of turnover. More interesting, size became a much more important determinant of turnover. This suggests to us that investors ‘‘pooled’’ liquidity in the largest bonds, which became proxy trading vehicles 


11424006.eps
77 

6See ‘‘The Safe-Asset Share’’, G. Gorton, S. Lewellen, A. Metrick, NBER working paper, January 2012. 

for the market. This is exactly the type of reaction we would expect from investors 

struggling to position portfolios in a lower-liquidity environment—the little liquidity 

that does exist is concentrated in a smaller number of issues, rather than dispersed 

across the market. 

Figure 7 

Cross-Sectional Regressions of Annual Turnover on Size ($bn), Age (yrs), 

and Volatility (%) 

2014 (R2 18%) 2006 (R2 20%) 

Size Age Vol Alpha Size Age Vol Alpha 

Beta 0.15 ¥0.06 3.80 0.89 0.08 ¥0.17 11.40 1 .20 

Standard Error 0.03 0.01 0.11 0.02 0.04 0.01 0.34 0.04 

t-statistic 6.10 ¥9.13 35.62 38.36 1.82 ¥14.82 33.16 32.30 

Source: Barclays Research 

The Short-Term Safe Asset Conundrum 

Much repo funding is intra-sector—i.e., financial intermediaries lending to one another—but ultimately, a portion of this funding is indirectly provided by households 

and non-financial corporates through investments in money market funds. From the 

perspective of non-financial entities, repo is an asset and just one of a number of 

short-term, safe—even ‘‘cash-like’’—investment alternatives. Households and 

corporates have a natural need for these types of funds as a cash management vehicle and store of liquidity. 

This natural need for liquidity grows as financial wealth grows, which results in 

the share of safe, short-term assets remaining in a relatively tight range for households and corporates. To demonstrate, we create a measure of short-term assets, 

which includes currency, deposits, and money market fund shares. For corporates, 

we also include a de minimis amount of direct repo lending and commercial paper 

owned. Although the direct repo holdings of households and corporates are not significant, the funding that households and corporates provide to money market funds 

is then reinvested by these funds in repo. Similarly—but on a smaller scale—a proportion of individual and corporate deposits is also reinvested by the bank in repo. 

Households have consistently allocated 12–18% of financial assets into cash and 

short-term securities in every quarter since the early 1990s (Figure 8). Likewise, 

non-financial corporates’ allocation has remained at 10–14% (Figure 9). 

We think demand for short-term safe assets is even more stable than these ranges 

imply. Short-term assets as a percentage of total financial assets troughed three 

times: in 2000, 2007, and today—each period one of strong equity market performance inflating exposure to stocks (Figure 10). Similarly, relative exposure to shortterm assets peaked in 2001 and 2008, when sharp equity market declines reduced 

the value of stocks. In fact, absolute holdings of short-term assets have increased 

in 19 of the past 20 years, by an average of 6.2%. In other words, the pace of growth 

in short-term assets has steadily tracked the long-term growth rate of household 

and corporate accounts. Indeed, Gorton, et al., report that their ‘‘safe asset’’ share 

of all U.S. assets has remained steady at around 33% since 1952.6

78 

Figure 8 

Short-Term Assets Have Accounted for a Stable Proportion of Household 

Financial Assets 

Household Financial Assets 

Source: Federal Reserve Flow-of-Funds data, Barclays Research. 

Figure 9 

Non-Financial Corporates Have Also Maintained a Steady Proportion of Assets in Short-Term Funds 

Non-Financial Corporate Financial Assets 

Source: Federal Reserve Flow-of-Funds data, Barclays Research. 


11424007.eps 11424008.eps
79 

Figure 10 

Following Periods of Strong Equities Performance, Household Exposure to 

Equities Peaks and Short-Term Assets Reach a Local Low As a Percentage of Total Assets 

U.S. Household Exposure to Equities and Short-term Assets 

Source: Federal Reserve, Bloomberg. 

How will the demand for safe, short-term assets be met? 

Treasury bills, bank deposits, and the Federal Reserve’s new reverse repo 

program (RRP) all have their limitations as short-duration liquid assets . . . 

Faced with the prospect of shrinking bank-provided repo, what alternatives are 

available to investors seeking short-duration liquid assets? A survey of similar lowrisk, short-term options suggests investors may struggle to deploy their growing allocation to this category. The main low-risk alternatives—Treasury bills, bank deposits, and the Federal Reserve’s new reverse repo program (RRP)—all have their 

limitations. 

Bills Insufficient and Declining 

Short-dated Treasury debt is probably the closest substitute for repo—and probably the most plentiful alternative—with $1.5trn in bills and $1.5trn in coupon 

Treasuries under 400 days to maturity outstanding. Moreover, given the limitations 

on what some investors can own, short-dated Treasury debt is one of the easiest 

substitutes. In fact, when repo balances contracted during the financial crisis, there 

was a marked increase in money market funds’ Treasury bill holdings, supported 

by the increased bill supply in 2008 (Figure 11). 

However, as the budget deficit shrinks and the Treasury moves to lengthen the 

average maturity of the outstanding debt, it has steadily trimmed bill issuance. 

Since peaking in 2009, the outstanding bill supply has contracted by more than 20% 

(>$500bn) (Figure 12). Demand is so strong that at bill auctions—of any maturity— 

bids exceed the offering amount four-fold. And given the buy-and-hold nature of the 

investor base, once the paper is purchased into a portfolio it almost never returns 

to the market. Thus, even though $1.5trn in absolute terms is larger than the aggregate debt outstanding of some G7 countries, the Treasury bill market—even 

supplementing the supply with coupons out to 13 months—is probably too small to 

absorb demand diverted from the private sector repo market. 


11424009.eps
80 

Figure 11 

Upon the Contraction of the Repo Market in 2008, MMFs Redeployed Capital into Treasury Bills 

Source: Federal Reserve, SIFMA, Barclays Research. 

Figure 12 

However, Bill Volume Has Since Declined and Is Unlikely To Be Able To 

Absorb Incremental Demand from Declining Repo 

Source: Federal Reserve Flow-of-Funds, Barclays Research. 

Deposits Are a Natural Alternative, But Rates Could Lag if Demand Increases Out 

of Step With Lending Opportunities 

Deposits are clearly a safe, liquid asset and are one of the main areas where 

households and corporates deploy short-term funds. Uninsured bank deposits (above 

the $250k insurance maximum) do represent incremental credit risk versus government obligations; however, money market funds already deploy roughly 20% of their 

holdings into wholesale bank deposits, suggesting that deposits form a reasonable 

investment avenue for these entities. 

However, we do not see much demand from banks for this incremental funding. 

Banks are already awash in deposits, as demonstrated by an average loan-to-deposit 

ratio of roughly 70%. Although banks will continue to take deposits, away from 

pockets of demand for retail deposits driven by the new Liquidity Coverage Rule 

(LCR), we believe banks’ interest in further inflating their balance sheets is limited. 


11424010.eps 11424011.eps
81 

Their appetite is constrained both by the new SLR rule and limited lending opportunities. Thus, if money market funds boost the supply of deposits to banks, banks 

in turn may be less inclined to raise the interest paid on deposits. 

Figure 13 

Deposits Already Form the Core of Households’ Safe, Short-Term Assets 

and a Material Share of Money Market Holdings, Suggesting They Are 

a Likely Alternative Investment Avenue 

Mix of Household Financial Assets (% of Total) 

Source: Federal Reserve, Barclays Research. 

Federal Reserve’s RRP Capped, Limiting Capacity To Absorb Incremental Demand 

The RRP is a close substitute for shrinking private sector repo . . . 

The Fed’s reverse repo program (RRP) is a close substitute for shrinking private 

sector repo and is available to a wider range of counterparties, including large 

money market funds and the GSEs. For these investors, Treasury repo from the Fed 

supplements what is available to them from the private sector. Since program testing began in September 2013, average daily balances in the RRP have been roughly 

$125bn (and considerably higher at quarter-ends, when bank and dealer balance 

sheet scarcity increases and few private sector repo assets are available for money 

market funds to invest in). This has largely offset the decline in private sector repo 

volume in recent years (Figure 14). In turn, mutual fund repo holdings have remained relatively stable in aggregate (actually increasing as a % of total holdings) 

as they have redeployed funds into the RRP. 


11424012.eps
82 

Figure 14 

Fed RRP Has Offset Much of the Fall in Private-Sector Repo Volume, Helping MMFs Keep Total Repo Holdings Fairly Constant 

Source: Federal Reserve Flow-of-Funds, Barclays Research. 

However, the Fed’s stated concerns about the program have led it to put a hard 

cap of $300bn on the RRP; thus, we expect its capacity to replace shrinking private 

sector collateral supply to be limited. The Fed’s concern stems from its discomfort 

with directly funding money market funds and the fact that even with the $300bn 

cap, its market presence in the repo market is nearly as large as the top three dealers combined. Moreover, it worries about the potential for the program to dis-intermediate bank funding during a financial crisis. Notably, in the January FOMC minutes, most participants accepted that the Fed might have to temporarily increase 

the cap on the overnight RRP program to strengthen its control over the fed funds 

rate. Officials are concerned, however, that the market might attach more significance and permanence to the RRP program if the size was increased so it is far from 

certain the Fed will provide money funds with extra repo. 

Limited Supply of Alternatives Could Inhibit Higher Short-Term Rates 

We expect deposits to exhibit a lower beta to short-term rates once the Fed 

begins hiking rates . . . 

In aggregate, we expect demand for safe, short-term assets to grow steadily. However, the supply of these assets from the avenues listed above will likely be constrained. When we factor in an expected decline in repo, we project an increased 

imbalance between supply and demand. This imbalance—more investors looking to 

deploy cash in the short end than safe borrowers needing that cash—should lower 

the relevant interest rates paid. For example, the available data suggest that bank 

deposits have historically had a 60–80% beta to short-term interest rate changes. 

We expect deposits to exhibit a lower beta once the Federal Reserve begins hiking 

rates, as funds that short-term investors previously allocated to repo assets flow into 

bank deposits. Through this indirect mechanism, forced declines in repo volumes 

could keep the interest earned by deposits or government-focused money market 

funds closer to the zero bound, even as other rates rise. In fact, it is exactly the 

concern about substantial demand for short-dated assets that is leading the Fed to 

question whether the RRP program may need to be increased. Otherwise, the actual 

front-end rates used in the economy may not track Fed funds as closely, limiting 

Fed’s control of interest rates. 

Private-Sector Alternatives Add Incremental Risk 

Where investment avenues backed by the government, both directly (Federal Reserve RRP, Treasuries) and indirectly (government collateral repo, FDIC), are less 

available, we expect private sector alternatives to become more prominent. However, 

their degree of substitutability with repo is lower and could introduce new risks. 


11424013.eps
83 

Figure 15 

When Short-Term Assets Are Scarce, Non-Traditional Alternatives Step In 

To Fill the Void 

Y/Y Change in Deposits and Other Short-Term Assets (LHS) and Difference from 

Median Short-Term Asset Holdings % Total Assets (RHS) 

Note: Short-term assets and deposit assets for all entities. Median shortterm asset rate represents aggregate of household and non-financial corporate data. Source: Federal Reserve Flow-of-Funds data, Barclays Research. 

History Suggests Less Standard Alternatives Are Likely To Rise 

The Federal Reserve’s Flow of Funds data suggest that growth in less traditional 

cash-like products may be particularly responsive to a shortfall in traditional safe, 

short-term investment opportunities. Deposits have generally grown steadily over 

the past 2 decades, with relatively limited responsiveness to economic conditions. 

On the other hand, other short-term assets, such as CP vehicles and money market 

funds, have had a more volatile growth pattern, responding to the relative demand 

for incremental safe assets in any given period. Figure 15 suggests that when households and corporates have a low percentage of total assets in short-term investments, the growth rate of short-term alternatives picks up sharply. In other words, 

when there is a shortage of traditional short-term safe assets, alternative assets 

have historically stepped in to fill the void. 

The last trough of short-term assets as a percentage of total financial assets coincided with a large rise in the use of what were deemed to be near-safe short-term 

asset substitutes. CP and ABCP balances surged as investors stretched to find additional safe assets and pick up incremental yield and banks sought cheaper sources 

of funding (Figure 16). When market sentiment turned in 2008, these non-traditional sources of liquidity proved to be less liquid and stable than expected. The decline in bank commercial paper has not reversed due to increased regulation and 

lower ratings at banks, while more esoteric products such as auction rate securities 

and asset backed—CP proved to bear much higher liquidity and credit risk than expected and are thus unlikely to return any time soon. 


11424014.eps
84 

7 Institutional Investors Turning to Fixed-Income ETFs in Evolving Bond Market, Greenwich 

Associates, 2014. 

Figure 16 

Holdings of Cash-Like Substitutes Grew Dramatically Pre-Crisis and Have 

Shrunk Since 

Commercial Paper and Bankers Acceptances Outstanding ($trn) 

Source: Federal Reserve Flow-of-Funds, Barclays Research. 

Investors Now Appear To Be Seeking Liquidity in Mutual Funds and ETFs 

Evidence suggests that investors have settled on fixed income mutual funds and 

ETFs as stores of liquidity. These funds offer daily liquidity such that investors can, 

in principle, redeem their money as quickly as in a money market fund. The influx 

into these types of funds has been heavy. Since 2009, taxable bond funds have received a massive $1.2trn in inflows, excluding the effect of significant market appreciation. Investment grade corporate funds have been the biggest beneficiaries 

(+$588bn), followed by flexible funds that can typically roam freely across the credit 

spectrum (+$311bn) and high yield funds (+$70bn), according to Lipper data (Figure 

17). 

Similarly, ETFs are growing rapidly in fixed income. For example, although virtually nonexistent before the crisis, credit ETFs have grown to account for c.2.5% 

of the investment grade corporate debt market and nearly 3% of the high yield corporate market (Figure 18). 

Despite their passive nature and management fees, ETFs appear to be gaining 

traction not only for retail end users and hedge funds, but also among institutional 

investors. In effect, ETFs are being used not only by end investors looking for instruments with daily liquidity, but also by mutual funds seeking to mitigate the differences between the liquidity their investors expect versus the (poor) liquidity available in the underlying bonds. ETFs function as a trading vehicle, aided by their increasing liquidity, such that portfolio managers can meet daily inflows and redemptions without actually needing to trade bonds.7


11424015.eps
85 

Figure 17 

Cumulative Retail Flows By Fixed Income Asset Class ($bn) 

Source: Lipper. 

Figure 18 

ETFs Have Gained a Significant Foothold in the Management of Fixed Income Assets 

Source: Lipper, Barclays Research. 

Investors are increasingly using the ultra-liquid CDX indices to satisfy 

their daily liquidity needs . . . 

Similarly, portfolio managers have increased their trading in other related products. For example, investors are increasingly using the ultra-liquid CDX indices to 

satisfy their daily liquidity needs. In the high yield market, where the on-the-run 

CDX index trades nearly as much as all TRACE bonds combined, the correlation 

between large fund flow events and positioning data shows that portfolio managers 

use the derivatives index as a source of liquidity in periods of high fund flow volatility (Figure 19). 

However, these alternative sources of liquidity come at a cost, even if such cost 

is not immediately apparent in bid-offer prices. With CDX, the price of liquidity 

comes in the form of basis risk, which can be very significant in times of market 

stress (Figure 20). This risk comes as a result of mismatches in rates exposure (CDX 

has virtually none) and differing credit exposure, among other potential mismatches. 

With the ETFs, the costs include non-trivial management fees and a market that 


11424016.eps 11424017.eps
86 

can dislocate significantly from its underlying asset value. Holding more cash to 

fund potential liquidity events is an alternative whose risks are better understood, 

but the consequent performance drag can make this the least appealing option to 

managers. 

The increased use of these tools to manage the disparity between the provision 

of daily liquidity to end-investors and poor liquidity in the underlying fixed income 

assets is itself evidence of the tension that the influx into mutual funds has caused. 

Fund managers have found that they need to use these tools already, in relatively 

calm markets. In the event of a market disruption, these tools may no longer be 

effective—if outflows exceed the extent to which fund managers have built in flexibility to meet them, they would have no choice but to turn to the underlying markets to meet their liquidity needs. This could become self-perpetuating if the corresponding price declines in the underlying led to further outflows. 

Thus, regulations aimed at bolstering stability at the core of the financial system, 

combined with a growing demand for liquidity, may eventually lead to increased instability and fire-sale risk in the periphery (e.g., the secondary markets for investment grade, high yield, leveraged loans, and emerging markets). The fragile new 

equilibrium comes not only from the reduced tradability of these asset classes, but 

also from deep liquidity mismatches between the assets themselves and the instruments being used to manage daily liquidity needs. 

Figure 19 

Changes in Investor Positioning in HYCDX (OTR) Are Consistent With Liquidity Needs ($mn) 

Source: DTCC, EPFR, Barclays Research. 


11424018.eps
87 

Figure 20 

Basis Between the HYCDX Index and the Barclays U.S. High Yield Very 

Liquid Index (bp) 

Source: Barclays Research. 

Analyst Certification: 

We, Joseph Abate, Eric Gross, Jeffrey Meli, Brian Monteleone and Conor Pigott, hereby certify (1) that the views expressed in 

this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or 

views expressed in this research report. 

Important Disclosures: 

Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, ‘‘Barclays’’). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 14th Floor, New York, NY 

10019 or refer to http://publicresearch.barclays.com or call 212–526–1072. 

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As 

a result, investors should be aware that Barclays may have a conflict of interest that could affect the objectivity of this report. 

Barclays Capital Inc. and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as 

market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). 

Barclays trading desks may have either a long and/or short position in such securities, other financial instruments and/or derivatives, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information 

barrier restrictions, Barclays fixed income research analysts regularly interact with its trading desk personnel regarding current 

market conditions and prices. Barclays fixed income research analysts receive compensation based on various factors including, but 

not limited to, the quality of their work, the overall performance of the firm (including the profitability of the investment banking 

department), the profitability and revenues of the Fixed Income, Currencies and Commodities Division and the potential interest of 

the firm’s investing clients in research with respect to the asset class covered by the analyst. To the extent that any historical pricing information was obtained from Barclays trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are historical and do not represent current market levels, prices or spreads, some or all of which may have 

changed since the publication of this document. Barclays produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research 

may differ from recommendations contained in other types of research, whether as a result of differing time horizons, methodologies, or otherwise. Unless otherwise indicated, Barclays trade ideas are provided as of the date of this report and are subject to 

change without notice due to changes in prices. In order to access Barclays Statement regarding Research Dissemination Policies

and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. In order to access Barclays Research Conflict Management Policy Statement, please refer to: https://live.barcap.com/ 

publiccp/RSR/nyfipubs/disclaimer/disclaimer-conflict-management.html. 

Disclaimer: 

This publication has been prepared by the Corporate and Investment Banking division of Barclays Bank PLC and/or one or more 

of its affiliates (collectively and each individually, ‘‘Barclays’’). It has been issued by one or more Barclays legal entities within its 

Corporate and Investment Banking division as provided below. It is provided to our clients for information purposes only, and 

Barclays makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays will not treat unauthorized recipients of this 

report as its clients. Prices shown are indicative and Barclays is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. 

Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays, nor any affiliate, nor any of 

their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential 

damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. 

Other than disclosures relating to Barclays, the information contained in this publication has been obtained from sources that 

Barclays Research believes to be reliable, but Barclays does not represent or warrant that it is accurate or complete. Barclays is not 

responsible for, and makes no warranties whatsoever as to, the content of any third-party website accessed via a hyperlink in this 

publication and such information is not incorporated by reference. 


11424019.eps
88 

The views in this publication are those of the author(s) and are subject to change, and Barclays has no obligation to update its 

opinions or the information in this publication. The analyst recommendations in this publication reflect solely and exclusively those 

of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or 

objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays recommends 

that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors

they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, 

which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

This material has been issued and approved for distribution in the UK and European Economic Area (‘‘EEA’’) by Barclays Bank 

PLC. It is being made available primarily to persons who are investment professionals as that term is defined in Article 19 of the 

Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. It is directed at, and therefore should only be relied 

upon by, persons who have professional experience in matters relating to investments. The investments to which it relates are 

available only to such persons and will be entered into only with such persons. Barclays Bank PLC is authorised by the Prudential 

Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member 

of the London Stock Exchange. 

The Corporate and Investment Banking division of Barclays undertakes U.S. securities business in the name of its wholly owned 

subsidiary Barclays Capital Inc., a FINRA and SIPC member. Barclays Capital Inc., a U.S. registered broker/dealer, is distributing 

this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to 

effect a transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the 

U.S. at 745 Seventh Avenue, New York, New York 10019. 

Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise. 

Barclays Bank PLC, Paris Branch (registered in France under Paris RCS number 381 066 281) is regulated by the Autorite ́ des 

marche ́s financiers and the Autorite ́ de controˆle prudentiel. Registered office 34/36 Avenue de Friedland 75008 Paris. 

This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer and member of IIROC 

(www.iiroc.ca). 

Subject to the conditions of this publication as set out above, the Corporate & Investment Banking Division of Absa Bank Limited, an authorised financial services provider (Registration No.: 1986/004794/06. Registered Credit Provider Reg. No. NCRCP7), is 

distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This publication is 

not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary

Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or entity wishing to effect a transaction in any security discussed 

herein should do so only by contacting a representative of the Corporate & Investment Banking Division of Absa Bank Limited in 

South Africa, 15 Alice Lane, Sandton, Johannesburg, Gauteng 2196. Absa Bank Limited is a member of the Barclays group. 

In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research 

reports are distributed to institutional investors in Japan by Barclays Securities Japan Limited. Barclays Securities Japan Limited 

is a joint-stock company incorporated in Japan with registered office of 6–10–1 Roppongi, Minato-ku, Tokyo 106–6131, Japan. It is 

a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of 

Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143. 

Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the 

Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong. 

Information on securities/instruments that trade in Taiwan or written by a Taiwan-based research analyst is distributed by 

Barclays Capital Securities Taiwan Limited to its clients. The material on securities/instruments not traded in Taiwan is not to be 

construed as ‘recommendation’ in Taiwan. Barclays Capital Securities Taiwan Limited does not accept orders from clients to trade 

in such securities. This material may not be distributed to the public media or used by the public media without prior written consent of Barclays. 

This material is distributed in South Korea by Barclays Capital Securities Limited, Seoul Branch. 

All equity research material is distributed in India by Barclays Securities (India) Private Limited (SEBI Registration No: INB/

INF 231292732 (NSE), INB/INF 011292738 (BSE) ≥ Corporate Identification Number: U67120MH2006PTC161063 ≥ Registered Office: 208 ≥ Ceejay House ≥ Dr. Annie Besant Road ≥ Shivsagar Estate ≥ Worli ≥ Mumbai—400 018 ≥ India, Phone: + 91 22 67196363). 

Other research reports are distributed in India by Barclays Bank PLC, India Branch. 

Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt fu ̈ r 

Finanzdienstleistungsaufsicht (BaFin). 

This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd. 

This material is distributed in Brazil by Banco Barclays S.A. 

This material is distributed in Mexico by Barclays Bank Mexico, S.A. 

Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Principal place of business in the Dubai International Financial Centre: The Gate Village, Building 4, Level 

4, PO Box 506504, Dubai, United Arab Emirates. Barclays Bank PLC–DIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. 

Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a 

branch of a commercial bank incorporated outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, 

Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira 

Towers, Hamdan Street, PO Box 2734, Abu Dhabi). 

Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory 

Authority (QFCRA). Barclays Bank PLC–QFC Branch may only undertake the regulated activities that fall within the scope of its 

existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar. Related financial products or services are only available to Business Customers 

as defined by the Qatar Financial Centre Regulatory Authority. 

This material is distributed in the UAE (including the Dubai International Financial Centre) and Qatar by Barclays Bank PLC. 

This material is distributed in Saudi Arabia by Barclays Saudi Arabia (‘BSA’). It is not the intention of the publication to be used 

or deemed as recommendation, option or advice for any action(s) that may take place in future. Barclays Saudi Arabia is a Closed 

Joint Stock Company, (CMA License No. 09141–37). Registered office Al Faisaliah Tower, Level 18, Riyadh 11311, Kingdom of 

Saudi Arabia. Authorised and regulated by the Capital Market Authority, Commercial Registration Number: 1010283024. 

This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177–11850–100000; Dealer License #177–11855–010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21. 

This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the 

Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore 

branch of Barclays Bank PLC, whose registered address is One Raffles Quay Level 28, South Tower, Singapore 048583. 

Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed 

at ‘wholesale clients’ as defined by Australian Corporations Act 2001. 

IRS Circular 230 Prepared Materials Disclaimer: Barclays does not provide tax advice and nothing contained herein should be 

construed to be tax advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) 

(i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) 

was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should 

seek advice based on your particular circumstances from an independent tax advisor. 

89 

©Copyright Barclays Bank PLC (2015). All rights reserved. No part of this publication may be reproduced or redistributed in any 

manner without the prior written permission of Barclays. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request. 

SUBMITTED REPORTS BY CHRISTOPHER S. EDMONDS, SENIOR VICE PRESIDENT, 

FINANCIAL MARKETS, INTERCONTINENTALEXCHANGE, INC. 

Barclays 

Repo Reform 

JOSEPH ABATE, +1 212 412 7459, joseph.abate@barclays.com 

Interest Rates Research 

U.S. Money Markets 

12 March 2015 

This is an excerpt from Regulatory reform: Repo-cussions, (https:// 

live.barcap.com/go/publications/content?contentPubID=FC2120226) March 12, 

2015. 

Following up on an article prepared for the Equity Gilt Study 2015, 

(https://live.barcap.com/go/publications/content?contentPubID=FC2115179) 

we take a closer look at how recent bank reforms have changed the size, 

scope, and nature of the $2.5trn repo market. We also explore how these 

challenges are likely to intensify in coming years. 

• The effect of tougher bank regulation on the repo market extends beyond trading volumes. 

• Capital requirements appear to have the most significant effect on repo 

volumes. Net stable funding requirements will amplify the effect. 

• As regulatory deadlines approach, we expect these mix and volume effects to intensify. Non-Fed tri-party repo may contract 20% in the next 

year or so. 

While further volume reduction and collateral shifts will likely produce 

market ‘‘winners’’ and ‘‘losers,’’ they will also spur market changes and 

alter the way banks and dealers think about the business. 

Evidence of Regulatory Effects 

In regulators’ minds, the behavior of the repo market during the financial crisis 

as it helped to spread contagion and amplified systemic risk makes it a prime target 

for reforming. Nearly every post-crisis financial industry reform has in some way 

zeroed in on repo activity. In The decline in financial market liquidity, (https:// 

live.barcap.com/go/publications/content?contentPubID=FC2115196) we detail several of these new regulations. 

Among the ones with the most direct consequence for the market are leverage ratios (including supplemental capital buffers), net stable funding requirements, and 

the liquidity coverage ratio. And although QE and the RRP account for some of the 

post-crisis decline in repo trading volumes, we expect regulatory pressures to begin 

taking a more prominent role in the market this year. Below, we present some key 

regulations and how they have begun to influence behavior in the repo market. 

Leverage Ratio 

The leverage ratio has probably had the most significant regulatory effect 

on repo . . . 

Perhaps the most significant regulatory change affecting the repo market since 

the crisis has been the leverage ratio. Since leverage is calculated off of total assets 

rather than risk-weighted assets, low-risk (and consequently, low-return) activities 

that consume a large portion of bank balance sheets have become far less attractive. 

Repo—and, more generally, running a match book—is the poster child for a low return balance sheet-intensive business. As we detailed in Leverage Ratio—An Attack 

on Repo? (https://live.barcap.com/go/publications/content?contentPubID=FC19 

53529) (August 2, 2013), this has led banks to reconsider how they operate in the 

repo market. Although obscured by the Fed’s programs, accounting rule changes, 

and efforts to strengthen their balance sheets, we suspect the tightening of balance 

sheet flexibility caused by the leverage ratio has led to three specific post-crisis 

changes. 

. . . producing sharp, recurrent plunges in volume . . . 

90 

1Since detailed industry-wide money fund rates are available only at month-end, we are comparing market rates at a time of month when dealer balance sheet is particularly scarce and, 

correspondingly, money market repo rates are low. 

First, although banks and dealers have always shrunk their balance sheets on 

quarter-ends, ‘‘window dressing’’ seems to have intensified since 2012. The shortterm nature of repo—on both the asset and liability sides of a bank’s balance 

sheet—makes it an ideal candidate for end-of-period balance sheet adjustment. This 

makes it easy to switch on and off—curtailing balances as quarter-end approaches 

and then ramping them up again once the reporting period has passed. Indeed, this 

‘‘on/off’’ propensity is most evidence in data on money fund repo holdings, as money 

funds provide about 1⁄3 of the cash in the repo market. Not only has their overall 

level of non-Fed repo declined over time, but their repo holdings plunge an average 

of 13% in the final month of a quarter—and quickly recover (Figure 1). In 2014, the 

average quarter-end decline was 17%, compared with 10% in 2013. These declines 

and their clockwork repetitiveness point to intensifying bank and dealer balance 

sheet rationing. 

. . . and a reduced willingness to intermediate between smaller dealers 

and cash providers . . . 

Second, there is also evidence of balance sheet rationing in other areas of the repo 

market, such as the inter-dealer GCF market. Higher capital requirements have reduced the incentive for larger dealers to ‘‘supplement’’ their pool of repo collateral 

by reversing in Treasuries (lending cash) in the inter-dealer GCF market to then 

pass this collateral on to money funds. Volumes in the GCF market are falling (Figure 2). Larger dealers have traditionally been able to take advantage of an arb in 

the GCF market that reflects the fact that smaller or weaker institutions may be 

unable to raise cash directly from money funds and the GSEs. Instead, the larger 

dealer acts as an intermediary—effectively renting its balance sheet—exchanging 

cash and collateral between the smaller dealers and cash providers. Larger banks 

appear increasingly reluctant to expand their balance sheets through these types of 

trades and have begun demanding wider spreads. 

In addition to the volume effect, we look at the spread widening in GCF repo rates 

compared with the rates that money funds earn on their repo holdings (recall that 

their repo collateral is provided by stronger and generally larger banks).1 This 

spread has averaged 6bp since late 2011, although late last year, as balance sheet 

pressures intensified, the spread widened to 18bp. 

Net Stable Funding 

Leverage ratios are not the only reason for banks to reduce their repo footprint 

or widen spreads. Recall that large institutions are subject to net stable funding requirements (NSFR) under Basel III. At its simplest, the NSFR compares the asset 

and liability sides of a bank balance sheet assuming normal, business-as-usual conditions, to judge the risk of the institution’s funding model. The NSFR compares the 

amount of available stable funding (based on the bank’s liability mix) with the 

amount of required funding that regulators judge the bank should have given the 

composition of its assets. 

Most repo and other forms of wholesale funding are not considered available stable funding sources because of their short tenors (generally under 1 year) and their 

behavior during the financial crisis. Moreover, who provides the funding is almost 

as important as its type. Generally, regardless of the type and tenor of the funding 

they provide to banks, most cash lent from money funds generally adds nothing to 

a bank’s stock of available stable funding. This, along with the leverage ratio, may 

be contributing to the decline in (non-Fed) money fund repo holdings. While capital 

and leverage effects may already be pushing large banks and dealers to reduce and 

re-price their repo activity, the NSFR will add additional pressure as these institutions move to get compliant before 2018. 

91 

Figure 1 

Money Fund Repo Holdings ($bn) 

Note: Excludes repo from the Fed’s RRP program. 

Source: Crane’s Data, Barclays Research. 

Figure 2 

GCF Repo Volume ($bn) 

Note: 20 day average. Source: DTCC. 

Shifting Collateral Mix 

The collateral mix is shifting toward non-government securities . . . 

Declining repo volumes and GCF repo spread widening, however, are not the only 

manifestations of regulatory pressure on the repo market. In addition, the mix of 

collateral in the tri-party market seems to be shifting away from government securities: Treasuries, agencies, and MBS. With RRP collateral netted out, governmentonly collateral has shrunk to 70% of tri-party repo outstanding, down from nearly 

80% in December 2012. Moreover, the amount of non-government financed collateral 

has increased 10% since December 2012 and is roughly the same volume as in late 

2010. 

Although there has been growth in other types of securities, such as structured 

products and corporate bonds, the primary driver of the non-government collateral 

share increase has been equities (Figure 3). Pledged equity collateral has risen 50% 

since December 2012 and has grown to 10% of the private sector (that is, non-RRP) 


11424020.eps 11424021.eps
92 

tri-party repo market. The $160bn in pledged equities now accounts for about $1 

of each $3 in non-government collateral. 

Our sense is that the liquidity coverage ratio (LCR) may be encouraging banks 

to swap equity collateral for Treasuries given the different haircuts regulators apply 

to holdings of high-quality liquid assets. Recall that Treasuries have no haircut or 

discount in the numerator of the LCR. By contrast, the haircut applied to equities 

used as HQLA is 50%. Given this differential, as well as the traditional role that 

repo markets play in collateral substitution, banks may be more willing to repo out 

their equity holdings while simultaneously reversing in Treasuries to be applied to 

the bank’s HQLA. 

The Future of Repo 

In addition to increasing regulatory pressures, the repo market faces a number 

of other cross-currents. While it is difficult to identify and quantify all these forces, 

we outline some of the more important ones below. 

Figure 3 

Non-Government Collateral Mix ($bn) 

Source: Federal Reserve. 

Figure 4 

Money Fund Repo Holdings by Region ($bn) 

Note: Non-U.S. includes banks from France, Germany, UK and Japan. 

Source: Crane’s Data, Barclays Research. 


11424022.eps 11424023.eps
93 

Regulation—and more specifically, the tightening of dealer balance sheets—points 

to further reduction in repo volumes. But banks are at different stages in their adjustments to regulation. Generally, U.S. institutions are further along in adapting 

to a new world of leverage limits and net stable funding and liquidity requirements 

than their European colleagues. This is most apparent in the intra-quarterly pattern 

of repo activity, which largely reflects the fact that many (non-U.S.) institutions 

have yet to migrate to quarterly average balance sheet reporting (Figure 4). The 

Basel Committee on Bank Supervision, however, recommends that all banks move 

to calculating their leverage ratios based on quarterly averages within the next few 

years. 

Repo volumes could fall another 20% . . . 

Since the intra-quarterly pattern—and, most importantly, the size of these quarter-end declines in primary dealer repo activity—is a direct consequence of balance 

sheet reporting, we reckon that it can provide useful insight on the future size of 

the repo market once all banks are required to report leverage on a quarterly average basis. We expect this to flatten out the calendar peaks and troughs in repo. But 

it effectively means that every day will be a quarter-end, so while the provision of 

repo from large global banks may become more constant and predictable, there will 

be less of it. Based on the current peak-to-quarter-end declines, we see Treasury 

repo volumes falling another 20% from their current level. However, whether this 

decline will be concentrated in 2015 or spread out over the next few years as global 

banks move into Basel compliance is unclear. 

Smaller Is Better, But Less Speculative Is Best 

If asked, most regulators would probably feel more comfortable with a smaller 

repo market. But while an additional 20% reduction—on top of the 50% reduction 

since 2008—will likely further reduce systemic risk, it is not clear how much safer 

the market will become. More important, we doubt that regulators are targeting a 

specific size for the repo market—say, based on the volume of cash trading. Instead, 

our sense is that they are more interested in changing market behavior—reducing 

the propensity for investors to run, cause asset fire sales, or increase leverage in 

the shadow banking sector. 

More than reducing size, regulators probably seek to change behavior in 

repo . . . 

Along these lines, regulators probably have two goals in mind: to shift much of 

repo trading back to its former infrastructure role while moving more volume onto 

centrally cleared platforms. Prior to 2005, dealer repo businesses were structured 

primarily to finance firms’ holdings of securities, along with a limited role in providing customer leverage. But, by 2006, repo trading became more speculative, with 

more emphasis on large trading volumes involving extensive maturity and collateral 

transformation. Returning repo to its former role, however, could entail significant 

externalities. For example, the reduction in repo volumes will change the capacity 

of banks and dealers to act as intermediaries between securities buyers and sellers. 

And, as we outline in the Equity Gilt Study 2015, (https://live.barcap.com/go/publications/content?contentPubID=FC2115179) this has implications for market liquidity. 

Revenge of the Plumbing 

Most people pay little attention to plumbing, provided it works properly. The repo 

market has long been considered a dull part of the financial market plumbing, 

largely overlooked by many until it stops working, as it did during the financial crisis. However, just as plumbing attracts considerable focus when the taps run dry 

(or otherwise), this mundane market is about to get significantly more attention. 

Regulatory reform is likely to shrink the market further and reduce the role of 

banks and dealers as intermediaries in the exchange of collateral and cash. Similarly, balance sheet scarcity is likely to lead to further spread widening with clear 

winners (banks) and losers (long-only investors who cannot net trades). At the same 

time, the Fed’s efforts to put a floor under short-term interest rates is likely to increase the central bank’s presence in the repo market despite its discomfort with 

the RRP program. 

Stay tuned. 

Analyst Certification: 

I, Joseph Abate, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any 

or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. 

Important Disclosures: 

94 

Barclays Research is a part of the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually,

‘‘Barclays’’). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 14th Floor, New York, NY 10019 or refer to http:// 

publicresearch.barclays.com or call 212–526–1072. 

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As 

a result, investors should be aware that Barclays may have a conflict of interest that could affect the objectivity of this report. 

Barclays Capital Inc. and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as 

market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). 

Barclays trading desks may have either a long and/or short position in such securities, other financial instruments and/or derivatives, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information 

barrier restrictions, Barclays fixed income research analysts regularly interact with its trading desk personnel regarding current 

market conditions and prices. Barclays fixed income research analysts receive compensation based on various factors including, but 

not limited to, the quality of their work, the overall performance of the firm (including the profitability of the Investment Banking 

Department), the profitability and revenues of the Markets business and the potential interest of the firm’s investing clients in research with respect to the asset class covered by the analyst. To the extent that any historical pricing information was obtained 

from Barclays trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are 

historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. The Investment Bank’s Research Department produces various types of research including, but not limited 

to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of 

research may differ from recommendations contained in other types of research, whether as a result of differing time horizons, 

methodologies, or otherwise. Unless otherwise indicated, trade ideas contained herein are provided as of the date of this report and 

are subject to change without notice due to changes in prices. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. In order to access Barclays Research Conflict Management Policy Statement, please refer to: https:// 

live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-conflict-management.html. 

Disclaimer: 

This publication has been prepared by the Investment Bank of Barclays Bank PLC and/or one or more of its affiliates (collectively 

and each individually, ‘‘Barclays’’). It has been issued by one or more Barclays legal entities that are a part of the Investment Bank 

as provided below. It is provided to our clients for information purposes only, and Barclays makes no express or implied warranties, 

and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Barclays will not treat unauthorized recipients of this report as its clients. Prices shown are indicative 

and Barclays is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. 

Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays, nor any affiliate, nor any of 

their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential 

damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. 

Other than disclosures relating to Barclays, the information contained in this publication has been obtained from sources that 

Barclays Research believes to be reliable, but Barclays does not represent or warrant that it is accurate or complete. Barclays is not 

responsible for, and makes no warranties whatsoever as to, the content of any third-party website accessed via a hyperlink in this 

publication and such information is not incorporated by reference. 

The views in this publication are those of the author(s) and are subject to change, and Barclays has no obligation to update its 

opinions or the information in this publication. The analyst recommendations in this publication reflect solely and exclusively those 

of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or 

objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays recommends 

that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors

they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, 

which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

This material has been issued and approved for distribution in the UK and European Economic Area by Barclays Bank PLC. It is 

being made available primarily to persons who are investment professionals as that term is defined in Article 19 of the Financial 

Services and Markets Act 2000 (Financial Promotion) Order 2005. It is directed at, and therefore should only be relied upon by,

persons who have professional experience in matters relating to investments. The investments to which it relates are available only 

to such persons and will be entered into only with such persons. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London 

Stock Exchange. 

The Investment Bank of Barclays Bank PLC undertakes U.S. securities business in the name of its wholly owned subsidiary 

Barclays Capital Inc., a FINRA and SIPC member. Barclays Capital Inc., a U.S. registered broker/dealer, is distributing this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a 

transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 

745 Seventh Avenue, New York, New York 10019. 

Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise. 

Barclays Bank PLC, Paris Branch (registered in France under Paris RCS number 381 066 281) is regulated by the Autorite ́ des 

marche ́s financiers and the Autorite ́ de contro ̃le prudentiel. Registered office 34/36 Avenue de Friedland 75008 Paris. 

This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer, a Dealer Member of 

IIROC (www.iiroc.ca), and a Member of the Canadian Investor Protection Fund (CIPF). 

Subject to the conditions of this publication as set out above, the Corporate & Investment Banking Division of Absa Bank Limited, an authorised financial services provider (Registration No.: 1986/004794/06. Registered Credit Provider Reg. No. NCRCP7), is 

distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This publication is 

not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary

Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or entity wishing to effect a transaction in any security discussed 

herein should do so only by contacting a representative of the Corporate & Investment Banking Division of Absa Bank Limited in 

South Africa, 15 Alice Lane, Sandton, Johannesburg, Gauteng 2196. Absa Bank Limited is a member of the Barclays group. 

In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research 

reports are distributed to institutional investors in Japan by Barclays Securities Japan Limited. Barclays Securities Japan Limited 

is a joint-stock company incorporated in Japan with registered office of 6–10–1 Roppongi, Minato-ku, Tokyo 106–6131, Japan. It is 

a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of 

Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143. 

Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the 

Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong. 

Information on securities/instruments that trade in Taiwan or written by a Taiwan-based research analyst is distributed by 

Barclays Capital Securities Taiwan Limited to its clients. The material on securities/instruments not traded in Taiwan is not to be 

construed as ‘recommendation’ in Taiwan. Barclays Capital Securities Taiwan Limited does not accept orders from clients to trade 

in such securities. This material may not be distributed to the public media or used by the public media without prior written consent of Barclays. 

This material is distributed in South Korea by Barclays Capital Securities Limited, Seoul Branch. 

95 

All equity research material is distributed in India by Barclays Securities (India) Private Limited (SEBI Registration No: INB/

INF 231292732 (NSE), INB/INF 011292738 (BSE) ≥ Corporate Identification Number: U67120MH2006PTC161063 ≥ Registered Office: 208 ≥ Ceejay House ≥ Dr. Annie Besant Road ≥ Shivsagar Estate ≥ Worli ≥ Mumbai—400 018 ≥ India, Phone: + 91 22 67196363). 

Other research reports are distributed in India by Barclays Bank PLC, India Branch. 

Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt fu ̈ r 

Finanzdienstleistungsaufsicht (BaFin). 

This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd. 

This material is distributed in Brazil by Banco Barclays S.A. 

This material is distributed in Mexico by Barclays Bank Mexico, S.A. 

Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Principal place of business in the Dubai International Financial Centre: The Gate Village, Building 4, Level 

4, PO Box 506504, Dubai, United Arab Emirates. Barclays Bank PLC–DIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. 

Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a 

branch of a commercial bank incorporated outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, 

Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira 

Towers, Hamdan Street, PO Box 2734, Abu Dhabi). 

Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory 

Authority (QFCRA). Barclays Bank PLC–QFC Branch may only undertake the regulated activities that fall within the scope of its 

existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar. Related financial products or services are only available to Business Customers 

as defined by the Qatar Financial Centre Regulatory Authority. 

This material is distributed in the UAE (including the Dubai International Financial Centre) and Qatar by Barclays Bank PLC. 

This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177–11850–100000; Dealer License #177–11855–010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21. 

This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the 

Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore 

branch of Barclays Bank PLC, whose registered address is One Raffles Quay Level 28, South Tower, Singapore 048583. 

Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed 

at ‘wholesale clients’ as defined by Australian Corporations Act 2001. 

IRS Circular 230 Prepared Materials Disclaimer: Barclays does not provide tax advice and nothing contained herein should be 

construed to be tax advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) 

(i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) 

was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should 

seek advice based on your particular circumstances from an independent tax advisor. 

©Copyright Barclays Bank PLC (2015). All rights reserved. No part of this publication may be reproduced or redistributed in any 

manner without the prior written permission of Barclays. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request. 

Barclays 

Central Clearing and the Repo Market 

JOSEPH ABATE, +1 212 412 7459, joseph.abate@barclays.com, BCI, U.S. 

Interest Rates Research 

U.S. Money Markets 

5 June 2015 

Balance sheet reporting pressures are intensifying and have reduced liquidity in the market for Treasury collateral. An expansion of the current 

GCF framework or the development of a new centrally cleared repo product might significantly improve liquidity. 

• In a central counterparty (CCP), the central agent is the buyer to every 

seller and the seller for every buyer. In effect, the agent is counterparty 

to every repo transaction. 

• In addition to balance sheet netting capacity, a repo CCP would set collateral eligibility requirements and determine minimum haircuts while 

increasing market transparency. The CCP structure also minimizes 

post-default asset fire sales. 

• Although generally supportive, Fed officials have recently expressed 

concern about the ability of CCPs to withstand shocks. 

We think the current GCF framework will eventually be expanded to include limited ‘‘buy side’’ participation, but this is likely to take several 

years and much regulatory scrutiny. 

Signs of Repo Illiquidity 

Another month-end has come and gone. And although repo rates did not become 

as disjointed as at the end of March, the market is clearly showing signs of strain. 

In particular, rates on Treasury collateral are trading considerably above the Fed’s 

overnight RRP rate while program usage is above its long-term average on the last 

day of the month. The strain also shows up as a widening of the spread between 

the rate money funds earn on their Treasury repo and what lower-rated or smaller 

banks pay to borrow cash against Treasuries (Figure 1). 

96 

1See, Regulatory reform: Repo-cussions, (https://live.barcap.com/go/publications/content?contentPubID=FC2120226) March 12, 2015. 2 Repo is bankruptcy remote—the collateral can be liquidated immediately without having to 

wait for a judge’s decision. Some lenders are not legally able to own the underlying collateral 

or they don’t have the expertise to sell it. 3See, Repo and fed funds inversion, April 9, 2015. 4 Another solution, which we leave for a later date, would be a relaxation on counterparty 

credit requirements on rated money funds. It can reasonably be argued that counterparty credit 

restrictions applied to overnight Treasury repo transactions are extreme and all rated funds 

should be able to ‘‘look through’’ to the underlying collateral. 

Moreover, based on foreign bank cash holdings, this tendency for banks to step 

away from the repo market at quarter-ends appears to have intensified since 2012. 

However, as all banks move to daily average balance sheet reporting, these seasonal 

dips in repo availability will eventually be smoothed out, with every day effectively 

a quarter-end. We expect this to lead to a permanent gap between where some 

large, highly rated banks raise cash and where their smaller, lower-rated counterparties are able to borrow against Treasury collateral. Moreover, we expect volume 

in the Treasury repo market to be at least 20% smaller.1

Not All Repo Is Equal 

The balance sheet wedge reflects a shortage of collateral from the top-tier 

banks . . . 

Essentially, this balance sheet wedge at the largest banks, which is driving 

spreads wider and keeping RRP usage high, partly reflects the fact that even in the 

overnight market for borrowed cash collateralized with Treasuries there is still an 

element of counterparty risk. Counterparty risk is influenced by the cash lender’s 

assessment of the borrower’s default probability and the resulting likelihood that he/ 

she will need to liquidate collateral to get his/her cash back.2 As a result, and also 

because of counterparty ratings restrictions, money funds and some other cash lenders are able to lend only to top-tier banks. Smaller institutions or those with lower 

credit ratings are able access cash from these lenders only through the intermediation of a larger, more highly rated bank. But since this intermediation boosts the 

larger bank’s balance sheet and increases its leverage ratio, these institutions are 

reluctant to trade, creating the balance sheet wedge in the market. As a result, the 

larger banks step away from the repo market on key reporting dates, including 

quarter-ends.3

In the absence of counterparty credit issues (or balance sheet limits), our sense 

is that the repo market would adjust: as collateral flows from the largest institutions retreat, those flows from the smaller institutions might rise to make up the 

difference. In effect, the current decline in repo volume and the widening in the 

spread between those banks with access to money fund cash and those without is 

a ‘‘locational shortage’’—the largest, capital-constrained banks are not providing 

enough repo to meet market demand from money funds who cannot find replacement supply since repo from smaller, lower rated banks is not a substitute. 

In an ideal world, this locational shortage would be arbed away if the smaller 

banks could borrow directly from the same lenders as the largest institutions without having to rely on the larger banks to act as intermediaries. Another solution 

would be to increase the balance sheet capacity of the largest banks—expanding 

their ability to act as repo market intermediaries—through the creation of a repo 

CCP.4

CCP Basics 

The CCP is the counterparty to every transaction . . . 

At the most basic level, the CCP is a network in which the central agent is the 

buyer to every seller and the seller to every buyer. The central agent is thus the 

counterparty to every transaction—and, correspondingly, each member’s credit exposure is to the CCP rather than to the party on the other side of the transaction. 

Members are required to contribute to the CCP’s guarantee fund and the CCP is 

capitalized. Members must also post an initial margin on their trades. This is meant 

to protect the CCP from losses associated with having to find other members willing 

to take over a defaulting dealer’s trades or to liquidate those trades outright. The 

size of the initial margin should, in theory, cover the potential risk to the CCP that 

it might not be able to immediately liquidate or transfer a defaulting dealer’s trades. 

In the event that a member defaults, there is a mandated loss waterfall. Initially, 

losses are absorbed by the defaulting dealer’s margin on the trade. If this is insufficient, losses move to the defaulting dealer’s guarantee fund and, if this, too, is insufficient, the CCP’s capital is charged. Beyond this point, the remaining members of 

97 

5 Assuming the CCP has collected sufficient initial margin and the defaulter has a sufficiently 

deep guarantee fund. 

the CCP face charges to their own guarantee funds (loss mutualization). The CCP’s 

ability to absorb losses in this waterfall is based on a balanced mixture of pre-funded resources from participating members as well as pre-determined ‘‘cash calls’’ that 

are triggered under certain conditions. 

Figure 1 

TSY GC Less TSY Repo Rate Earned by MMFs (bp) 

Note: Weighted average rate on money fund Treasury repo at month-end. 

Source: DTCC, Crane’s Data. 

Figure 2 

Treasury GCF Repo Volume ($bn) 

Note: 20d average. Source: DTCC. 

General Benefits 

There are several generalized benefits to the CCP structure. First, members are 

insulated against another member’s default.5 Second, the CCP establishes eligibility 

and other membership requirements which, in the case of repo, could include the 

type of collateral that can be traded on the platform as well as the corresponding 

haircuts. Moreover, since members are subject to loss mutualization, they all have 

a strong incentive to see that these standards are rigidly maintained. 


11424024.eps 11424025.eps
98 

Most important, in today’s world of constrained balance sheets, the CCP increases 

market efficiency via netting. Since all transactions are with the same counterparty, 

longs and shorts can be netted. Recall that, under existing accounting rules, repo 

balance sheet netting outside the CCP requires that trades have the same 

counterparty, same maturity date and be of the same collateral type. 

Unsurprisingly, given these accounting limits, trade coordination across multiple 

customers is much more difficult outside the CCP. 

The CCP returns cash to the lender in the event of a member default . . . 

Additionally, in the event of a member default, lenders receive cash rather than 

the underlying collateral as they would in a standard (uncleared) repo trade. The 

CCP agent either transfers the defaulting dealer’s transaction to another CCP member willing to take over the trade or the CCP liquidates it. In theory, and depending 

on the strength of the CCP, this should prevent post-default asset fire sales. 

Unsurprisingly given these benefits, and particularly given the intense balance 

sheet pressure in the repo market, there is strong support for a repo CCP. 

Magic Balance Sheet Bullet 

Of course, there already exists a repo CCP—the GCF interdealer market. The 

GCF repo market is a blind, brokered market, sponsored by DTCC, where Treasury, 

Agency, and MBS collateral is traded. In this market, roughly $115bn/day in Treasury collateral is traded. This market is made up of dealers as legal restrictions on 

money funds and their capacity to participate in loss mutualization schemes prohibits their participation. 

GCF could be expanded to include limited RIC participation . . . 

However, last October, the DTCC submitted a proposal to the SEC to expand this 

market to include members from the buy-side (‘‘registered investment companies or 

RICs’’) in a limited capacity. Technically, they and the current GCF membership 

would participate in a new program called ‘‘institutional tri-party.’’ In this program, 

a member can be either a cash lender or a cash borrower; the RICs would always 

be cash lenders. Cash lenders in ‘‘institutional tri-party’’ would have different membership status than dealers who borrow cash. Their ‘‘membership-lite’’ status is justified by the fact that the RICs do not pose the same credit risk to the platform 

as, say, a dealer, who could default while owing money to the other members. 

Our understanding is that a typical trade between a RIC and a dealer would be 

similar to current bilateral arrangements. RIC A and dealer X would agree to exchange cash and collateral at a fixed rate for a set term. But both would agree to 

novate the trade to the GCF. Although RICs would not face loss mutualization in 

the event of a member default (and would receive cash instead of the underlying 

collateral), it is still possible for the RIC to experience a loss. For example, if dealer 

X defaults on a repo with RIC A, the latter might face a loss if the margin it collects 

on the transaction is insufficient. 

Although the repo is novated by the GCF, the RIC still faces counterparty risk— 

and, importantly, these risk-averse cash lenders are likely to limit their loans to the 

largest banks and dealers. Consequently, we do not expect that an expansion in 

GCF membership will necessarily increase smaller dealers’ ability to raise repo 

funding at lower rates. 

GCF dealers could expand their balance sheet capacity by netting more 

transactions . . . 

However, expanding GCF membership could boost the balance sheet capacity of 

the larger banks and dealers. Bilateral trades with RICs that previously consumed 

balance sheet could now be moved (novated) to the GCF. And these transactions 

could be netted against the large bank/dealer’s collateral borrowings on the platform. In effect, the more that dealers can net down via this shift, the more trading 

capacity they can create for themselves. 

. . . and RICs could earn more from lending their cash in repo . . . 

All else equal, we would expect this to boost the return that RICs earn from lending their cash. But, as noted above, RICs are likely to remain fairly risk averse, so 

they might continue to avoid lending to smaller dealers and lower-rated institutions 

on GCF. Thus, although the balance sheet premium illustrated in Figure 1 might 

narrow, smaller dealers’ funding costs might not change at all. Of course, increasing 

the scope for netting could increase trading volume on the GCF market, which has 

been falling for several years (Figure 2). 

GCF expansion is not the only current repo market proposal. Others include the 

creation of cleared repo on an exchange. Clearinghouse operators CME and 

99 

6See, ‘‘Large Banks Backing New Safeguards in Short-term Lending Markets’’, K. Burne, October 9, 2014. 7See ‘‘Does a Central Clearing Counterparty Reduce Counterparty Risk?’’, D. Duffie and H. 

Zhu, Stanford University, July 2010. 8See, ‘‘Systemic Risk: The Dynamics under Central Clearing’’, A. Capponi, W.A. Cheng, S. 

Rajan, Office of Financial Research, U.S. Treasury May 7, 2015. 9See, ‘‘Hidden Illiquidity with Multiple Central Counterparties’’, P. Glasserman, C. Moallemi, 

K. Yuan, Office of Financial Research, U.S. Treasury, May 7, 2015. 

LCH.Clearnet Group are working on proposals, but no details have been released 

yet.6

CCP Conundrum 

The most efficient CCP structure is large, with many members across different assets . . . 

A CCP for repo, however, creates a conundrum for regulators. On the one hand, 

it reduces counterparty risk, increases market transparency and establishes strict 

trading and membership guidelines. On the other, some regulators worry that these 

platforms could themselves become ‘‘too big to fail’’. 

Recent academic work notes that the most efficient CCP structure is one that has 

many participating members, accounts for a large share of market volume, and, 

ideally, spans multiple asset classes.7 But a single, enormous multi-asset CCP that, 

for example, clears repo, as well as interest rate and credit derivatives might create 

a substantial concentration risk. Within the CCP, regulators worry about membership concentration and the risk that default by a single, large member could overwhelm the CCP and bring the whole platform down.8 Capponi, et al., illustrate the 

risks of membership concentration by examining a model where an increasingly concentrated banking industry uses CCPs to hedge loan book risks. 

CCPs need to collect sufficient initial margin . . . 

The alternative—of several loosely connected CCPs with largely the same membership—might also pose some risk. Glasserman, et al., focus on liquidity risks to 

the CCPs arising from uncoordinated initial margin requirements across multiple 

CCPs.9 Recall that the CCP collects initial margin to cover the cost of finding another member to take over a defaulting dealer’s trades or for the CCP to liquidate 

them. Because the liquidity cost increases more than proportionally with the size 

of the transaction, it is possible for the CCP to under-collect initial margin. This 

under-collection risk is compounded by the fact that CCP members have an incentive to minimize their transaction costs by shopping around for the platform with 

the lowest margin costs and spreading their transactions over multiple platforms, 

where possible. Naturally, those platforms with the lowest margins will attract a 

bigger share of total trading volumes. Thus, at any point, a CCP could be undercollecting initial margin, leaving it and its participating members more exposed to 

a member default. In addition, a single member defaulting across multiple CCPs 

could trigger asset fire sales—similar to the post-default fire sales in the bilateral 

(uncleared) repo market. 

Repo-Centric Risk 

Although this issue has not been studied academically, we wonder about risks 

specific to a repo-centric CCP. Ahead of each of the recent debt ceiling crises, activity in the Treasury GCF market dried up and rates shot up. Cash lenders stepped 

away from the market, fearful that they could receive ‘‘payment-delayed’’ collateral 

as they had no way to prevent this collateral from being pledged to them in the GCF 

market. Operationally, this might be solved by enabling lenders in the GCF market 

to exclude certain CUSIPs. But, given the similarity in risk tolerance and asset allocation across RICs, it is possible to imagine other, non-debt ceiling-scenarios where 

these members pull back en masse from providing cash to the repo market. 

Adding RICs to GCF might reduce repo volume and rate spikes at quarterends . . . 

More generally, as larger banks continue to step away from their role as principal 

cash providers in the GCF market, (GCF) repo market dynamics could change in 

unpredictable ways. First, since the RICs are not governed by the balance sheet reporting issues as the capital-constrained large banks, their lending of cash into this 

market should theoretically be more stable and not prone to the sharp—but predictable—quarter-end contractions that frequently shrink trading volume by more than 

15% and push funding rates sharply higher. As a result, adding RICs to GCF could 

remove some of the spikiness in repo rates. 

100 

10See, ‘‘Financial Institutions, Financial Markets, and Financial Stability’’, J. Powell, NYU, 

February 18, 2015. 11See, ‘‘Advancing Macro-prudential Policy Objectives’’, D. Tarullo, Office of Financial Research, January 30, 2015. 12See, ‘‘CCP Resiliency and Resources’’, DTCC, June 1, 2015. 

Federal Reserve Reservations 

Regulators generally support the creation of repo CCPs . . . 

Financial regulators have long favored the creation of central clearing in the repo 

market—at least since the formation of the Tri-party Repo Reform Task Force in 

2009. More recently, Fed Governor Powell observed that ‘‘central clearing holds the 

promise of enhancing financial stability through the netting of counterparty risks, 

creating greater transparency, and applying stronger and more consistent risk-management practices.’’ 10 However, in the same speech, he expressed concern about designing CCPs to be strong enough to sustain a significant financial shock, including 

a simultaneous default by multiple members. 

Earlier this year, Fed Governor Daniel Tarullo was more explicit in voicing his 

concerns about CCPs, noting for example that ‘‘more attention must be paid’’ to 

some of the assumptions underlying the structure of CCPs.11 Although systemically 

important CCPs are required to hold sufficient funds to cover defaults by their two 

largest members, it is not clear if this ‘‘coverage ratio’’ would be adequate in a financial crisis. Of course, like other precautionary liquidity buffers it is unclear a priori 

what the optimal size is. More significantly, CCPs assume that they can draw liquidity from their members, but during a systemic shock, their members might also 

be suffering redemptions and liquidity withdrawals, reducing their capacity to support the CCP. Dodd-Frank gives systemically important financial market utilities 

access to the Fed’s discount window, but it is not clear how the Fed might interpret 

this with respect to, say, an expanded GCF market. 

The DTCC recently published a study on the mechanics of strengthening CCPs’ 

loss absorption capacity.12 Although the DTCC supports regular stress-testing, it 

notes that given the various products traded on these platforms these stress tests 

may need to be customized for each platform. Similarly, they note that this loss absorption capacity should be sized (with pre-funded member contributions and future 

cash calls) to an ‘‘extreme event’’. We suspect, however, that defining an ‘‘extreme 

event’’ will be difficult. 

We expect the structure and mechanics of stress testing a repo CCP will be debated for some time. And although we expect that the GCF market will ultimately 

be expanded, it will likely face tough regulatory scrutiny from the Fed. 

Analyst Certification: 

I, Joseph Abate, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any 

or all of the subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. 

Important Disclosures: 

Barclays Research is a part of the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually,

‘‘Barclays’’). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 14th Floor, New York, NY 10019 or refer to http:// 

publicresearch.barclays.com or call 212–526–1072. 

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As 

a result, investors should be aware that Barclays may have a conflict of interest that could affect the objectivity of this report. 

Barclays Capital Inc. and/or one of its affiliates regularly trades, generally deals as principal and generally provides liquidity (as 

market maker or otherwise) in the debt securities that are the subject of this research report (and related derivatives thereof). 

Barclays trading desks may have either a long and/or short position in such securities, other financial instruments and/or derivatives, which may pose a conflict with the interests of investing customers. Where permitted and subject to appropriate information 

barrier restrictions, Barclays fixed income research analysts regularly interact with its trading desk personnel regarding current 

market conditions and prices. Barclays fixed income research analysts receive compensation based on various factors including, but 

not limited to, the quality of their work, the overall performance of the firm (including the profitability of the Investment Banking 

Department), the profitability and revenues of the Markets business and the potential interest of the firm’s investing clients in research with respect to the asset class covered by the analyst. To the extent that any historical pricing information was obtained 

from Barclays trading desks, the firm makes no representation that it is accurate or complete. All levels, prices and spreads are 

historical and do not represent current market levels, prices or spreads, some or all of which may have changed since the publication of this document. The Investment Bank’s Research Department produces various types of research including, but not limited 

to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of 

research may differ from recommendations contained in other types of research, whether as a result of differing time horizons, 

methodologies, or otherwise. Unless otherwise indicated, trade ideas contained herein are provided as of the date of this report and 

are subject to change without notice due to changes in prices. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. In order to access Barclays Research Conflict Management Policy Statement, please refer to: https:// 

live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-conflict-management.html. 

Barclays legal entities involved in publishing research: 

Barclays Bank PLC (Barclays, UK) 

Barclays Capital Inc. (BCI, U.S.) 

Barclays Securities Japan Limited (BSJL, Japan) 

Barclays Bank PLC, Tokyo branch (Barclays Bank, Japan) 

101 

Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) 

Barclays Capital Canada Inc. (BCCI, Canada) 

Absa Bank Limited (Absa, South Africa) 

Barclays Bank Mexico, S.A. (BBMX, Mexico) 

Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) 

Barclays Capital Securities Limited (BCSL, South Korea) 

Barclays Securities (India) Private Limited (BSIPL, India) 

Barclays Bank PLC, India branch (Barclays Bank, India) 

Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore) 

Barclays Bank PLC Australia branch (Barclays Bank, Australia) 

Disclaimer: 

This publication has been produced by the Investment Bank of Barclays Bank PLC and/or one or more of its affiliates (collectively and each individually, ‘‘Barclays’’). It has been distributed by one or more Barclays legal entities that are a part of the Investment Bank as provided below. It is provided to our clients for information purposes only, and Barclays makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to 

any data included in this publication. Barclays will not treat unauthorized recipients of this report as its clients. Prices shown are 

indicative and Barclays is not offering to buy or sell or soliciting offers to buy or sell any financial instrument. 

Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays, nor any affiliate, nor any of 

their respective officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential 

damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. 

Other than disclosures relating to Barclays, the information contained in this publication has been obtained from sources that 

Barclays Research believes to be reliable, but Barclays does not represent or warrant that it is accurate or complete. Barclays is not 

responsible for, and makes no warranties whatsoever as to, the content of any third-party website accessed via a hyperlink in this 

publication and such information is not incorporated by reference. 

The views in this publication are those of the author(s) and are subject to change, and Barclays has no obligation to update its 

opinions or the information in this publication. The analyst recommendations in this publication reflect solely and exclusively those 

of the author(s), and such opinions were prepared independently of any other interests, including those of Barclays and/or its affiliates. This publication does not constitute personal investment advice or take into account the individual financial circumstances or 

objectives of the clients who receive it. The securities discussed herein may not be suitable for all investors. Barclays recommends 

that investors independently evaluate each issuer, security or instrument discussed herein and consult any independent advisors

they believe necessary. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic markets (including changes in market liquidity). The information herein is not intended to predict actual results, 

which may differ substantially from those reflected. Past performance is not necessarily indicative of future results. 

This material has been issued and approved for distribution in the UK and European Economic Area by Barclays Bank PLC. It is 

being made available primarily to persons who are investment professionals as that term is defined in Article 19 of the Financial 

Services and Markets Act 2000 (Financial Promotion) Order 2005. It is directed at, and therefore should only be relied upon by,

persons who have professional experience in matters relating to investments. The investments to which it relates are available only 

to such persons and will be entered into only with such persons. Barclays Bank PLC is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London 

Stock Exchange. 

The Investment Bank of Barclays Bank PLC undertakes U.S. securities business in the name of its wholly owned subsidiary 

Barclays Capital Inc., a FINRA and SIPC member. Barclays Capital Inc., a U.S. registered broker/dealer, is distributing this material in the United States and, in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a 

transaction in any security discussed herein should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 

745 Seventh Avenue, New York, New York 10019. 

Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local regulations permit otherwise. 

Barclays Bank PLC, Paris Branch (registered in France under Paris RCS number 381 066 281) is regulated by the Autorite ́ des 

marche ́s financiers and the Autorite ́ de contro ̃le prudentiel. Registered office 34/36 Avenue de Friedland 75008 Paris. 

This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer, a Dealer Member of 

IIROC (www.iiroc.ca), and a Member of the Canadian Investor Protection Fund (CIPF). 

Subject to the conditions of this publication as set out above, the Corporate & Investment Banking Division of Absa Bank Limited, an authorised financial services provider (Registration No.: 1986/004794/06. Registered Credit Provider Reg. No. NCRCP7), is 

distributing this material in South Africa. Absa Bank Limited is regulated by the South African Reserve Bank. This publication is 

not, nor is it intended to be, advice as defined and/or contemplated in the (South African) Financial Advisory and Intermediary

Services Act, 37 of 2002, or any other financial, investment, trading, tax, legal, accounting, retirement, actuarial or other professional advice or service whatsoever. Any South African person or entity wishing to effect a transaction in any security discussed 

herein should do so only by contacting a representative of the Corporate & Investment Banking Division of Absa Bank Limited in 

South Africa, 15 Alice Lane, Sandton, Johannesburg, Gauteng 2196. Absa Bank Limited is a member of the Barclays group. 

In Japan, foreign exchange research reports are prepared and distributed by Barclays Bank PLC Tokyo Branch. Other research 

reports are distributed to institutional investors in Japan by Barclays Securities Japan Limited. Barclays Securities Japan Limited 

is a joint-stock company incorporated in Japan with registered office of 6–10–1 Roppongi, Minato-ku, Tokyo 106–6131, Japan. It is 

a subsidiary of Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of 

Japan. Registered Number: Kanto Zaimukyokucho (kinsho) No. 143. 

Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution regulated by the 

Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen’s Road Central, Hong Kong. 

Information on securities/instruments that trade in Taiwan or written by a Taiwan-based research analyst is distributed by 

Barclays Capital Securities Taiwan Limited to its clients. The material on securities/instruments not traded in Taiwan is not to be 

construed as ‘recommendation’ in Taiwan. Barclays Capital Securities Taiwan Limited does not accept orders from clients to trade 

in such securities. This material may not be distributed to the public media or used by the public media without prior written consent of Barclays. 

This material is distributed in South Korea by Barclays Capital Securities Limited, Seoul Branch. 

All Indian securities related research and other equity research are distributed in India by Barclays Securities (India) Private 

Limited (BSIPL). BSIPL is a company incorporated under the Companies Act, 1956 having CIN U67120MH2006PTC161063. BSIPL 

is registered and regulated by the Securities and Exchange Board of India (SEBI) as a Portfolio Manager INP000002585; Stock 

Broker/Trading and Clearing Member: National Stock Exchange of India Limited (NSE) Capital Market INB231292732, NSE Futures & Options INF231292732, NSE Currency derivatives INE231450334, Bombay Stock Exchange Limited (BSE) Capital Market 

INB011292738, BSE Futures & Options INF011292738; Merchant Banker: INM000011195; Depository Participant (DP) with the 

National Securities & Depositories Limited (NSDL): DP ID: IN–DP–NSDL–299–2008; Investment Adviser: INA000000391. The registered office of BSIPL is at 208, Ceejay House, Shivsagar Estate, Dr. A. Besant Road, Worli, Mumbai—400 018, India. Telephone 

No: +91 22 67196000. Fax number: +91 22 67196100. Any other reports are distributed in India by Barclays Bank PLC, India 

Branch. 

Barclays Bank PLC Frankfurt Branch distributes this material in Germany under the supervision of Bundesanstalt fu ̈ r 

Finanzdienstleistungsaufsicht (BaFin). 

This material is distributed in Malaysia by Barclays Capital Markets Malaysia Sdn Bhd. 

This material is distributed in Brazil by Banco Barclays S.A. 

This material is distributed in Mexico by Barclays Bank Mexico, S.A. 

102 

Barclays Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Principal place of business in the Dubai International Financial Centre: The Gate Village, Building 4, Level 

4, PO Box 506504, Dubai, United Arab Emirates. Barclays Bank PLC–DIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Related financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. 

Barclays Bank PLC in the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a 

branch of a commercial bank incorporated outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, 

Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City) and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira 

Towers, Hamdan Street, PO Box 2734, Abu Dhabi). 

Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory 

Authority (QFCRA). Barclays Bank PLC–QFC Branch may only undertake the regulated activities that fall within the scope of its 

existing QFCRA licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891, Doha, Qatar. Related financial products or services are only available to Business Customers 

as defined by the Qatar Financial Centre Regulatory Authority. 

This material is distributed in the UAE (including the Dubai International Financial Centre) and Qatar by Barclays Bank PLC. 

This material is distributed in Russia by OOO Barclays Capital, affiliated company of Barclays Bank PLC, registered and regulated in Russia by the FSFM. Broker License #177–11850–100000; Dealer License #177–11855–010000. Registered address in Russia: 125047 Moscow, 1st Tverskaya-Yamskaya str. 21. 

This material is distributed in Singapore by the Singapore branch of Barclays Bank PLC, a bank licensed in Singapore by the 

Monetary Authority of Singapore. For matters in connection with this report, recipients in Singapore may contact the Singapore 

branch of Barclays Bank PLC, whose registered address is One Raffles Quay Level 28, South Tower, Singapore 048583. 

Barclays Bank PLC, Australia Branch (ARBN 062 449 585, AFSL 246617) is distributing this material in Australia. It is directed 

at ‘wholesale clients’ as defined by Australian Corporations Act 2001. 

IRS Circular 230 Prepared Materials Disclaimer: Barclays does not provide tax advice and nothing contained herein should be 

construed to be tax advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) 

(i) is not intended or written to be used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) 

was written to support the promotion or marketing of the transactions or other matters addressed herein. Accordingly, you should 

seek advice based on your particular circumstances from an independent tax advisor. 

©Copyright Barclays Bank PLC (2015). All rights reserved. No part of this publication may be reproduced or redistributed in any 

manner without the prior written permission of Barclays. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14 5HP. Additional information regarding this publication will be furnished upon request. 

Æ