MINUTES OF THE SIXTH MEETING OF 


THE U.S. COMMODITY FUTURES TRADING COMMISSION'S 


MARKET RISK ADVISORY COMMITTEE 


NOVEMBER 17, 2016 


The U.S. Commodity Futures Trading Commission's ("CFTC" or "Commission") Market Risk 

Advisory Committee ("MRAC" or "Committee") convened for a public meeting on Thursday, 

November 17, 2016, at 10 a.m. at the CFTC's Washington, D.C., headquarters, located at 1155 

21st Street, NW, Washington, DC 205 81. The meeting consisted of two panels. Panel I 

discussed the Central Counterparty ("CCP") Risk Management Subcommittee's 

("Subcommittee") draft recommendations on how CCPs can better coordinate their efforts in 

preparing for the default of a significant clearing member. Panel 2 addressed a regulatory 

perspective on CCP resilience. 

MRAC Members and Invited Panelists/Guests in Attendance 

David Bailey, Director, Financial Market Infrastructure, Bank ofEngland 

Gerald Beeson, Chief Operating Officer and Chief Financial Officer, Citadel 

David Burlage, Chief Financial Officer, CoBank 

Thomas Coyle, Vice President and General Manager, Chicago and Illinois River Marketing, 

LLC 

Andrew Gray, Managing Director and Group Chief Risk Officer, Depository Trust and Clearing 

Corporation 

Michael Hennessy, Vice President, Treasury and Capital Markets, Federal Home Loan Bank of 

San Francisco 

Nathan Jenner, Head of Market Transparency Products, Bloomberg LP 

Jerry Jeske, Group Chief Compliance Counsel, Mercuria Energy Representing Commodity 

Markets Council 

Andrew W. Lo, Director, Massachusetts Institute ofTechnology's Laboratory for Financial 

Engineering 

Glen Mackey, Chief Risk Officer, NRG Energy Inc. 

Kevin McClear, Corporate Counsel, Intercontinental Exchange, Inc. ("ICE") 

Dennis McLaughlin, Group Chief Risk Officer, LCH Cleamet 

Susan McLaughlin, Senior Vice President, Federal Reserve Bank of New York 

Richard Miller, Consultant, American Council of Life Insurers 

Michael Modlock, Head of TriReduce North Americas, Tri Optima 

John Nixon, Group Executive Director, Americas for ICAP 

Susan O'Flym1, Managing Director and Global Head of CCP Strategy, Governance and 

Optimization, Morgan Stanley 

Angela Patel, Senior Vice President, Putnam Investments 

Edward Pla, Managing Director, Head of Clearing and Execution, UBS Investment Bank 

Marcus Stanley, Policy Director, Americans for Financial Reform 

Robert Steigerwald, Senior Policy Advisor for Financial Market, Federal Reserve Bank of 

Chicago 

Kimberly Taylor, President, Global Operations, Technology & Risk, CME Group ("CME") 

Kristen Walters, Global Chief Operating Officer, Risk and Quantitative Analysis Group, 

BlackRock 

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Scott Zucker, Chief Administrative Officer, Tradeweb

CFTC Commissioners and Staff in Attendance 

Timothy G. Massad, Chairman 

Sharon Y. Bowen, Commissioner 

J. Christopher Giancarlo, Commissioner 

Steve Greska, Associate Director, Division of Clearing and Risk 

Petal Walker, Chief Counsel, Office of Commissioner Bowen, Designated Federal Officer 

I. Opening Remarks 

Ms. Walker called the MRAC meeting to order. 

Following introductory and welcoming remarks by Commissioner Bowen, Chainnan Massad 

made his opening remarks in which he noted that CCP resilience was a priority for the 

Commission and described some ofthe Commission's actions in this area. Additionally, he 

noted that the CFTC had released a report on the results of supervisory stress tests for the largest 

clearinghouses under CFTC's jurisdictions and had summarized the report's findings; however, 

he also noted that more needed to be done in this area. 

Commissioner Giancarlo spoke next. In his remarks, he noted that clearing and non-clearing 

members should be able to communicate and understand their roles in a default situation. He 

also stressed the importance of understanding the mechanics of porting customer portfolios in the 

event of a default and addressing any related obstacles. 

Commissioner Bowen followed with her opening statement and noted in her remarks that the 

purpose of MRAC was to advise the Commission on how to detect, analyze, and mitigate market 

risk and to provide information and analysis on the evolving market structure. Commissioner 

Bowen also briefly summarized MRAC's actions to meet these objectives. 

II. 	 Panel 1: Discussion of CCP Risk Management Subcommittee's Recommendations 

for CCP Default Management 

Ms. O'Flynn facilitated the discussion, preceding it with a brief introduction of the 

Subcommittee's recommendations on default management, coordination, harmonization, 

enhancement, and porting. 

Next, Mr. Beeson presented on customer participation in auctions. Among other things, he 

stated that the Subcommittee's recommendations encourage participation of non-clearing 

members in auctions, and that governance of such participation should be established upfront. 

Mr. Beeson also commented on governance mechanisms, such as confidentiality agreements, 

minimum deposits, and a demonstration of the financial resources to meet the initial margin 

deposits, and the capacity to clear the portfolio at another clearing member. In addition, he 

referenced a potential penalty if a bid falls below a certain threshold. Mr. Beeson also observed 

that the ability of a solvent customer of a non-clearing member firm to port its portfolio and the 

associated collateral to a solvent clearing member are key customer protections of central 

clearing. Further, he stated that the Subcommittee recommended the development of solutions to 

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allow remaining solvent clearing members to service the portfolios of non-defaulting customers 

on an interim basis, post the clearing member's default. 

Next, Mr. McLaughlin addressed the communication-related recommendations, including 

establishment of a global directory of key individuals at clearing and non-clearing member firms, 

and permissible communications among such individuals. Mr. McLaughlin also commented on 

the Subcommittee's recommendations that joint fire drills be formalized across CCPs with a 

significant product overlap and on certain porting-related simulations. 

Mr. Miller then addressed the Subcommittee's recommendation for CCPs to develop auction and 

porting playbooks, and to create a "break the glass" solution as a safety net for customers lacking 

relationships with multiple Futures Commission Merchants ("FCMs"). Among his remarks, Mr. 

Miller noted that the Subcommittee did not reach a consensus on whether to offer an FCM a 

relief from higher capital requirements during a crisis situation. He also commented on certain 

bankruptcy-related concerns associated with customer porting. 

Next, Ms. O'Flynn summarized the Subcommittee's recommendations on default management 

committees. She stated that CCPs should harmonize certain aspects of their default management 

committees, maintain an up-to-date register of seconded representatives to be shared between 

clearinghouses, and that default management committees should include non-clearing member 

representatives. Ms. O'Flynn next commented on auction-related recommendations, including a 

recommendation that CCPs harmonize their auctions whenever feasible, and develop auction 

playbooks to provide ex ante transparency into the CCP's auction procedures. Ms. O'Flynn then 

summarized recommended elements of an auction playbook. 

Other Committee members also commented on the Subcommittee's recommendations. Ms. 

Taylor observed that rules governing crisis management coordination and standardization should 

be treated as guidelines rather than ex ante commitments about the auction process. She 

expressed support for cross-CCP coordination on membership of default management 

committees and for including non-clearing member firms in default management and auction 

process. Among other remarks, she also stated her support for joint fire drills, porting-related 

recommendations, certain paperwork-related safe harbors associated with transferring customers 

from one clearing member to another, and a temporary relief from capital requirements. Mr. 

McClear then described a joint CME/ICE fire drill and Mr. Jeske followed with comments on a 

regulatory framework for porting, stressing the importance oftiming. Mr. Jeske also advocated 

for a relaxation of know-your-customer and anti-money laundering related requirements, and 

commented on his support for leniency with respect to capital requirements. 

Thereafter, Ms. Walters announced a briefbreak and the Committee returned for a vote at 11:05 

a.m. The MRAC adopted by a vote of 19-0 with one abstention, the Subcommittee's 

recommendations as recommendations of the MRAC and for the MRAC to recommend these 

recommendations to the Commission. Following the vote, Chairman Massad made briefremarks 

and Ms. Walker announced another brief break. 

III. Panel 2: A Regulatory Perspective on CCP Resilience 

Ms. Walker called the meeting back to order at 11 :20 a.m. Mr. Steigerwald facilitated the 

discussion. 

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Panel II began with a presentation by Mr. Bailey on a joint fire drill performed by the Bank of 

England, and RCH Ltd. and Eurex Clearing, which is also regulated by Bafin and Bundesbank. 

Mr. Bailey explained that the drill test assumed the default of a common, hypothetical clearing 

member clearing interest rate swaps and futures, and was integrated into the two CCPs' parallel 

annual fire drills. He described the objectives and main areas tested by the drill, and related 

findings. In particular, he explained that the drill tested clearing members' ability to second 

traders to multiple CCPs in parallel as well as their operational capacity to process auction files 

from two CCPs at the same time. Mr. Bailey also noted that the Bank ofEngland, Bafin, and 

Bundesbank identified certain prerequisites for running more effective fire drills across multiple 

CCPs and that those prerequisites were communicated to the participating CCPs and clearing 

members. Mr. Bailey indicated that a similar multiple CCP fire drill, also including CME, would 

take place in 2017, and described the drill's objectives. He stressed the importance of fire drills 

and suggested that drills should involve a collaborative effort among CCPs, clearing members, 

and regulators. 

Mr. Bailey next responded to questions from the MRAC, including cost impacts of fire drills and 

whether they rely upon existing industry practices or require new tests; practical features of 

arranging joint fire drills, porting, and inclusion in the drills of end-users; and virtual fire drills 

and sharing drill data with academics. The group then discussed testing non-default losses in a 

fire drill, followed by a discussion of auction file formats, cross-product drills, coordination, 

capacity, and non-default losses, among other topics. Mr. Bailey then responded to Ms. Taylor's 

question regarding sequential versus simultaneous auctions, and Ms. Taylor also commented on 

transparency in the drill process and not committing the industry to a specific drill process. Mr. 

Bailey also addressed issues raised by Mr. Steigerwald concerning inclusion of liquidity 

management in drill tests and intraday variation margins, with Ms. Taylor also commenting on 

CCPs' profits. Panel II concluded with Mr. Bailey's comments on structural reasons for a fire 

drill failure, an issue raised by Mr. McLaughlin. 

V. Closing Remarks 

Commissioner Bowen thanked the panelists, Chairman Massad and Commissioner Giancarlo, 

Commission staff, as well as the MRAC and the Subcommittee members for their work on the 

recommendations and participation in the meeting. Commissioner Bowen also invited the public 

to comment on issues MRAC should tackle in the upcoming year. 

Thereafter, Ms. Walker adjourned the meeting at 12:10 p.m. 

I hereby certify that the foregoing minutes are accurate: 

{0/s I J 


Petal Walker Date 

Acting Chair, Market Risk Advisory Committee 

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