MINUTES OF THE FIFTH MEETING OF 


THE U.S. COMMODITY FUTURES TRADING COMMISSION'S 

MARKET RISK ADVISORY COMMITTEE 


JUNE 27, 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 Monday, 

June 27, 2016, at 10 a.m. at the CFTC's Washington, D.C., headquarters, located at 1155 21st 

Street, NW, Washington, DC 20581. The meeting consisted of three panel sessions. Panel I 

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

recommendations on how CCPs can better coordinate their efforts in preparing for the default of 

a significant clearing member. In Panel II, staff of the Federal Deposit Insurance Corporation 

("FDIC") presented on resolution of Global Systemically Important Banks ("G-SIBs"). Finally, 

in Panel III, CFTC and FDIC staff discussed planning for the resolution of CCPs. 

MRAC Members and Invited Panelists/Guests in Attendance 

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

Herbert Held, Deputy Director, Systemic Resolution Planning and Implementation Group, 

FDIC 

Clifford M. Lewis, Independent Director, Eurex Clearing 

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

Dennis McLaughlin, Group Chief Risk Officer, LCH Cleamet 

Michael Modlock, Head ofTriReduce North Americas, TriOptima 

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

Optimization, Morgan Stanley 

Marcus Stanley, Policy Director, Americans for Financial Reform 

R. Penfield Starke, Assistant General Counsel, Receivership, FDIC 

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

Chicago 

Kimberly Taylor, President, Global Operations, Technology & Risk, CME Group 

Charlton Templeton, Chief, Resolution Planning, FDIC 

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

BlackRock 

CFTC Commissioners and Staff in Attendance 

Timothy G. Massad, Chairman 

Sharon Y. Bowen, Commissioner 

J. Christopher Giancarlo, Commissioner 

Jeffrey Bandman, Acting Director, Division of Clearing and Risk 

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

Robert Wasserman, Chief Counsel, Division of Clearing and Risk 

I. Opening Remarks 

Ms. Walker called the MRAC meeting to order. 

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Following introductory and welcoming remarks, Chairman Massad highlighted certain issues 

of special importance to the Commission on the agenda. He remarked first that the 

Commission has been closely monitoring markets in response to the United Kingdom's 

("UK") vote to exit the European Union ("EU") ("Brexit") and would continue to work with 

exchanges, clearinghouses and regulators to ensure the proper functioning ofthe markets. 

Among other things, Chairman Massad noted that resolution of G-SIBs is relevant to 

resolution planning for CCPs because it could impact the resilience of clearinghouses. He 

also noted progress at the domestic and international levels in planning for the resolution of 

CCPs and thanked the FDIC for its collaboration in this area. Additionally, he stated that 

CCP resiliency, recovery, and resolution are a critical priority for the Commission and 

international regulators, as evidenced by an agreement to examine clearinghouse resiliency 

standards, recovery and resolution planning, and interdependencies among clearinghouses and 

clearing members. 

Commissioner Giancarlo made his opening remarks next, thanking Commissioner Bowen, 

CFTC staff and other participants for preparing the meeting, and noted that MRAC reflects 

the Commission's commitment to examine and understand market risk and how to mitigate 

it. Commissioner Bowen then remarked on Brexit, stating that regulators will need to make 

many decisions in response to this development and that industry participants need to develop 

a better understanding of the exit's temporary versus long-lasting impact, pointing to MRAC 

as a key source of such analysis for the CFTC. Among other things, Commissioner Bowen 

also welcomed new and thanked outgoing MRAC members. Thereafter, Commissioner 

Bowen introduced the agenda for the meeting, emphasizing among other things the 

importance of coordination between the FDIC and CFTC in order to avoid duplication or 

undermining of mutual efforts. 

II. 	 Panel I: Enhancing CCP Coordination in Default Management - Discussion of

Draft Recommendations of the CCP Risk Management Subcommittee 

Ms. O'Flynn facilitated the discussion. 

During Panel I, Ms. Taylor and Messrs. McClear and McLaughlin discussed issues related to 

the Subcommittee's recommendations on CCP coordination in default management. The 

panelists first discussed ways in which CCPs can improve their communication with each 

other and with the Commission prior to and during a default by a shared clearing member. 

Ms. Taylor recommended establishing a global directory of key market players to ensure that 

default management branches of clearinghouses have already in place strong communication 

channels during an actual crisis. Mr. McLaughlin also noted the importance of 

communication between regulators, and Mr. McClear observed that CCPs already had good 

relationships and regularly communicates through existing channels. 

The speakers next discussed ways in which CCPs can improve coordination of trader scheduling 

so that trading desks are not overtasked during a crisis. Among other things, Ms. Taylor 

encouraged better trader coordination for the purpose of hedging and running the auction 

process, as well as coordination of the rotation of clearing members serving on various default 

management committees. Ms. Taylor and Messrs. McLaughlin and McClear also exchanged 

views on the best number of traders serving on CCP default management committees. Ms. 

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O'Flynn also observed that clearing members must centralize coordination and should coordinate 

with clearinghouses. 

The MRAC next discussed whether CCPs can engage in regular joint fire drills in order to better 

understand how their mutual markets interact during the default of shared clearing members. 

Ms. Taylor recommended simultaneous or joint default drills, and noted that the default 

management process may serve as the first step towards CCP recovery. Mr. McLaughlin 

observed certain limits to CCP coordination and remarked that regulators could also help in 

coordination efforts. In tum, Mr. McClear noted that individual clearinghouses regularly 

conduct formal default drills and recommended similar drills across clearinghouses. 

Next, Ms. Taylor and Messrs. McClear and McLaughlin discussed how CCPs can better 

coordinate their auction processes so that market participants are prepared for auctions of various 

CCPs. Ms. Taylor favored standardized auctions and referenced uniform CCP terminology for 

default management auctions developed by an external working group. Mr. McLaughlin 

cautioned that it was also important to determine and minimize the underlying reasons for an 

auction failure, such as a lopsided market. Mr. McClear then suggested that uniform 

terminology needs to be incorporated into the respective CCPs' processes, noting ICE's own 

efforts. 

The speakers then followed with a discussion of how to improve CCP coordination to mitigate a 

default of one or more significant clearing members. Ms. Taylor remarked on the need for better 

communication between regulators of G-SIBs and CCPs, and also discussed coordination on the 

porting of customers. Mr. McLaughlin stated that the porting of customers has become 

problematic because of regulatory capital requirements and favored their alleviation to ease the 

onboarding process. 

Next, Ms. Taylor, Messrs. McClear and McLaughlin, and other meeting participants debated 

certain previously discussed issues. First, Mr. Modlock generally referenced proactive and 

reactive opportunities for reducing a default risk, and Mr. Lewis noted existing bottom-up 

coordination across different CCPs, giving Brexit as an example. Mr. Lewis also spoke about 

the benefit of centralizing risk and establishing the right margining regimes in advance of a 

crisis, and noted certain benefits of portfolio margining. Next, Ms. Walters advocated further 

discussions on the porting process, and Mr. Beeson suggested automation of the daily porting 

process. Ms. O'Flynn commented that it was critical to understand how G-SIB and CCP 

regulators coordinate in the area of default processes, and to understand the sequencing and 

treatment of clients of a defaulting clearing broker. Following Ms. O'Flynn's remarks, Ms. 

Taylor and Mr. Stanley commented on the leverage ratio's treatment of customer margin. 

Ms. Taylor and Messrs. McLaughlin and McClear next discussed operational, legal, logistical, 

and other barriers impeding CCP coordination and ways to overcome them. Ms. Taylor first 

opined that CCPs differ on whether such barriers impede coordination, and referenced CME 

Group's memorandum of understanding with various global CCPs, which allows it to share 

information about its exposures during a crisis. She offered that CCPs across various 

jurisdictions should be able to share information during crisis management. Mr. McLaughlin 

commented on the role of CFTC, stating that since the CFTC knows the positions of CCPs, it 

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can decide whether market participants should talk. Mr. McClear cautioned about coordinating 

an auction and noted that different regulations, laws, jurisdictions and bankruptcy regimes make 

it difficult to achieve a coordinated auction, with Ms. Taylor suggesting an auction of smaller 

portfolios. 

Next, the MRAC discussed a variety of other issues. For example, Ms. Taylor cautioned against 

situations where resolution would preempt recovery, and also suggested that the industry should 

use plans for the recovery and resolution process to accommodate a particular situation rather 

than treat them as an inflexible step-by-step list. Next, Ms. Walters offered that while recovery 

is the ultimate goal, resolution may be necessary in some circumstances, and suggested that a 

process administered by the FDIC when recovery is no longer possible should be followed for 

CCPs. She also stated that variation margin should never be used in any part of default because 

it belongs to non-defaulting clients, but noted that an auction is an exception where variation 

margin would need to be used over a 24-hour period to stabilize and close out all positions. She 

further stressed the importance of greater transparency around the loss absorbing capacity 

calculation. 

At this point, Chairman Massad commented, among other things, that the CFTC is trying to 

come up with plans that would not use taxpayers' money, and Ms. Walters added that clients 

and fiduciary accounts should have the option to continue using products at a higher cost. 

Ms. Taylor, Ms. Walters, and Mr. McClear next discussed various issues related to resolution 

and recovery, variation margins during default and variation margin gains haircutting, 

transparency of the loss absorbing capacity calculations, clearinghouse risk management 

practices and rule books, as well as CFTC's role in resolution. Other issues discussed concerned 

the costs of clearing and default, adequacy of loss absorbing capacity, and end-user fees. 

The last issue addressed by Panel I concerned the CFTC's role in encouraging greater 

coordination among CCPs in the default management process. Ms. Taylor suggested 

cooperation between CFTC and banking supervisors, and reiterated that regulators should 

ensure that resolution does not preempt recovery, while Mr. McLaughlin asked for the 

Commission's help in dealing with the porting issue. Mr. Lewis asked for an interim step, 

before gross margining can take place, where the clearinghouse would hold customer margins 

for a period oftime. He also recommended revisions to the U.S. Bankruptcy Code. 

Following the discussion, Chairman Massad ended Panel II with a few closing remarks. In 

particular, Chairman Massad agreed that resolution planning should not create incentives that 

undermine recovery. Thereafter, Ms. Walters announced a brief break. 

III. Panel II: FDIC Staff Presentations on G-SIB Resolution 

Ms. Walker called the meeting back to order at 11 :45 a.m. Mr. Steigerwald facilitated the 

discussion. 

Mr. Held began Panel II with an overview of Title II of the Dodd Frank Act, Orderly Liquidation 

Authority, including the goals of, and the process for invoking the FDIC's authority under Title 

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IL Mr. Starke next described the FDIC's powers as a receiver for G-SIBs, addressing the 

receivership process, accountability, and the Orderly Liquidation Fund. Mr. Templeton then 

discussed international engagement in the event of a G-SIB failure, including bilateral 

engagement, multilateral outreach, and institutional-specific engagement. Following the 

presentations, Messrs. Starke and Held answered questions concerning the impact of G-SIB 

resolution on continuity and services to a CCP, custodian, or settlement, and living will process 

and liquidity planning by a failing clearing member. Messrs. Starke and Held also addressed the 

credit line under Title II. 

IV. Panel III: CFTC & FDIC Staff Presentation on CCP Resolution

Mr. Steigerwald facilitated the discussion. 

Panel III began with a presentation by Mr. Bandman. Among other things, Mr. Bandman stated 

that CCP resilience is a critical priority for the CFTC, and remarked that the CFTC's Division of 

Clearing and Risks would continue to focus on CCP recovery rules and plans for the remainder 

of the year, and hoped to provide public guidance in the near future. Mr. Bandman also 

remarked on existing work in the area of DCO and CCP resolution, resolution planning, and 

strategies, including the 2014 Financial Market Infrastructure ("FMI") Annex. 

Next, Mr. Wasserman presented on the objectives of the FMI Annex, including financial 

stability, continuity of critical FMI functions, and avoiding exposure to taxpayer loss. Mr. 

Wasserman commented on continuity and timeliness of critical payment clearing, settlement, and 

recording functions, timing of entry into resolution, the powers of the Resolution Authority, 

differences between gains-based haircutting and initial margin haircutting, partial tear-up, 

jurisdictional considerations, and assessments and availability of information. 

Mr. Starke presented next. He first commented on the Financial Stability Board's work on CCP 

resolution, including a guidance paper he hoped to be available for comment by the end of the 

summer. Mr. Starke also addressed application to DCOs of the U.S. Bankruptcy Code and 

liquidation under Title II. Mr. Held also mentioned a memorandum of understanding on 

information sharing between the CFTC and FDIC, and Mr. Bandman also pointed to 

collaboration with international regulators. 

Next, Mr. Wasserman addressed a relationship between recovery plans and resolution planning 

for Systematically Important DCOs ("SIDCOs"), and recovery and resolution for CCPs, with 

Mr. Starke commenting that the goal should be for regulators not to go into resolution too early 

and that best resolution is one that does not happen. Mr. Starke also favored cash calls during 

recovery, especially where a resolution regime does not provide temporary financing. Mr. 

Wasserman also discussed the specific powers of the resolution authority. 

Next, Mr. Wasserman discussed incentives under a resolution strategy. Mr. Starke then 

addressed differences between resolution planning for DCOs and banks, followed by an 

exchange between Messrs. Starke, Bandman, and Wasserman on loss absorbing capacity in 

resolution by DCOs and CCPs. Messrs. Wasserman and Held also commented on the 

importance of continuity of critical functions and cooperation between the CFTC and FDIC. 

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Messrs. Lewis, Held, Wasserman, and Starke next discussed the treatment of FCMs in a bank 

resolution process, and transfer of FCM customers prior to, or during a resolution phase. Ms. 

Taylor and Mr. Starke then addressed the authority under Title II of the primary supervisor to put 

a CCP in resolution. Panel III concluded with Mr. Wasserman's comments on the applicability 

of the Bankruptcy Code to DCOs. 

V. Closing Remarks 

Commissioner Bowen thanked the panelists and the Subcommittee members for their work and 

participation in the meeting. 

Thereafter, Ms. Walker adjourned the meeting at 1 :23 p.m. 

I hereby certify that the foregoing minutes are accurate: 

{u}5}1-=fPetal Walker Date 

Acting Chair, Market Risk Advisory Committee 

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