MINUTES OF THE FOURTH MEETING OF 


THE U.S. COMMODITY FUTURES TRADING COMMISSION'S 


MARKET RISK ADVISORY COMMITTEE 


APRIL 26, 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 Tuesday, 

April 26, 2016, at 10:04 a.m., at the CFTC's Washington, DC, headquarters, located at Three 

Lafayette Centre, 1155 21st Street NW., Washington, DC 20581. The meeting consisted of two 

panel sessions. Panel I discussed "How well are our derivatives markets functioning for market 

participants, particularly end-users?" Panel II discussed "How is the market using portfolio 

compression today?" 

MRAC Members and Invited Panelists/Guests in Attendance 

Anat Admati, George G.C. Parker Professor of Finance and Economics, Graduate School of 

Business, Stanford University, Representing Better Markets 

Stephen Berger, Director, Government and Regulatory Policy, Citadel Investment Group 

("Citadel) 

Lucio Biase, CEO and Founder and LMRKTS 

Tom Coyle, Vice President and General Manager, Chicago & Illinois River Marketing, LLC 

Nathan Jenner, Head of Market Transparency, Bloomberg LP 

Jerry Jeske, Group Chief Compliance Officer, Mecuria Energy Trading, Representing 

Commodity Markets Council 

Sebastiaan Koeling, Chief Executive Officer, Optiver US, Representing Futures Industry 

Association's Principal Traders Group 

Claire Lobo, Global Head of Business Development, Markit Trade Processing 

Glenn Mackey, Chief Risk Officer, NRG Energy ("NRG") 

Dennis McLaughlin, Group Chief Risk Officer, LCH Clearnet 

Richard Miller, Consultant, American Council of Life Insurers 

Michael Madlock, Head of triReduce North America, Tri Optima 

John Nixon, Group Executive Director, Americas for ICAP 

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

Optimization, Morgan Stanley 

Lee Olesky, CEO and Co-founder, Tradeweb Markets, LLC 

Angela Patel, Senior Vice President, Putnam Investments 

Ed Pla, Managing Director, Head of Clearing Execution, UBS Investment Bank 

Marcus Stanley, Policy Director, Americans for Financial Reform 

Kim Taylor, President, Global Operations, Technology and Risk, CME Group ("CME") 

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

Rana Y ared, Managing Director, Principal Strategic Securities Division, Goldman Sachs 

("Goldman") 

Luke Zubrod, Director of Risk and Regulatory Advisory, Chatham Financial Group ("Chatham") 

CFTC Commissioners and Staff in Attendance 

Chairman Timothy G. Massad 

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Commissioner Sharon Y. Bowen 

Commissioner J. Christopher Giancarlo 

Daniel Bucsa, Deputy Director of the Division of Market Oversight ("DMO") 

Vince McGonagle, Director of DMO 

Sayee Srinivasan, Chief Economist of the Office of the Chief Economist ("OCE") 

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

I. 	 Opening Remarks 

Petal Walker called the MRAC meeting to order. 

Following welcoming remarks by Commissioner Bowen, Chairman Massad made his opening 

remarks in which he discussed: (1) how the derivatives markets are functioning for market 

participants, especially for commercial end users who use them to hedge commercial risk; and 

(2) the issues concerning the use of portfolio compression. 

Next, Commissioner Giancarlo made his opening remarks, which included his increasing 

concerns about changes in trading liquidity. He also noted that the issue is whether the amount 

of capital constraint being placed on financial institutions is calibrated to support market health 

and vibrancy, and he emphasized the need to understand the full implications of constrained 

capital. He also noted that portfolio compression benefits the safety and soundness of the 

market, and that it should be incentivized not penalized. 

Commissioner Bowen then thanked Chairman Massad and Commissioner Giancarlo for 

attending and their support of the Committee. She also thanked the staffs ofthe DMO and the 

OCE for providing technical support. Among her remarks, she stated that one of the goals of 

MRAC is to assist the Commission in identifying and understanding the impact and implications 

of an evolving market structure. Additionally, she commented on volatility and liquidity levels 

in the markets, the role of introducing brokers, and how technology changes have altered the way 

market participants access the markets. 

II. 	 Panel I: How Well Are Our Derivatives Markets Functioning for Market 

Participants, Particularly End Users? 

John Nixon facilitated the discussion. 

Rana Yared began the first panel by stating that Goldman has used Swap Execution Facilities 

("SEFs") since their inception on an electronic and voice basis. She noted that participants in the 

credit market find SEF execution for packaged trades to be challenging, which impacts 

commercial end users. In the rates market, she also noted that clients who want to trade in 

Request for Quote or Request for Stream fashion to obtain or hedge exact risk believe there is a 

benefit associated with the relationship they have with the various dealers with whom they 

transact. Ms. Yared further stated that Goldman has seen inter-dealer brokers develop central 

limit order books ("CLOBs"), and the development of CLOBs in more than one venue reflects a 

level of comfort dealers have with this type oftrading. 

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Kristen Walters discussed the fixed income market, both bonds and derivatives, and noted that 

the changes in liquidity in these markets are juxtaposed and very dependent on each other. Ms. 

Walters also stated that BlackRock uses both rate and credit default swaps ("CDS") extensively 

not only as hedging instruments but also as risk transfer mechanisms. Additionally, she noted 

that there has been a structural change in liquidity markets, particularly in the fixed income 

space, which is a direct consequence to the regulatory changes designed to stabilize the banking 

sector and ensure sufficient dealer capital liquidity and reduced leverage. 

Luke Zubrod discussed the interest rate market, focusing on SEP-traded cleared swaps and 

traditional bilateral swaps. With respect to SEP-traded cleared swaps, he noted that there have 

been notable improvements in market function for many of Chatham's clients. However, he also 

noted that market participants who transact in small volumes must overcome significant barriers 

to access the OTC derivatives market, and that such entities face substantial minimum fees to 

establish and maintain a relationship with a Futures Commission ("FCM"). He recommended 

that the Commission intervene by exempting financial entities that transact a de minimis volume 

of swaps. Among other remarks, Mr. Zubrod then commented on the traditional bilateral swap 

market and also suggested a framework for the Commission to prioritize interventions to address 

market functioning concerns. 

Mr. Nixon opened the floor to questions and first asked Ms. Walters how to enhance the use of 

CLOBs by end users. She stated that average pricing was the issue and it posed a significant 

barrier to entry for other end users. Commissioner Giancarlo asked Ms. Walters for her 

recommendation to bring some vitality to the CDS marketplace. She suggested to: (1) encourage 

central clearing and execution by SEFs, similar to interest rate markets; and (2) use the single 

name CDS market as a hedging vehicle to complement bond trading in the corporate credit 

market. Commissioner Giancarlo then asked Ms. Walters whether the issues of liquidity also 

apply to the single name CDS. Ms. Walters agreed, and noted that if single name CDS were 

clearing along with index CDS through exchanges that might change liquidity. 

Mr. Nixon then asked other MRAC members to comment on the lack of growth in the CDS 

marketplace. Among the comments, Mr. Olesky stated that in the last two years of post-SEF 

introduction, the transition of the volume of trading to the electronic platforms have gone 

incredibly well. However, he noted the issues of liquidity and volume in the market are much 

more tied to regulation, capital constraints, profit and loss pressure, and the low rate 

environment. Ms. Admati added that not every CDS needs to be traded every split second. She 

commented that liquidity appears to be the national objective, but it is just allocating resources to 

manage risk. Finally, Ms. Admati noted that she is a big advocate of capital regulations, 

however in their current form they were badly managed and distorted. 

Next, Glenn Mackey resumed the panel presentations and commented that there has been a 

fundamental change in the physical and financial ways companies are accessing markets. He 

stated that NRG generally accesses the financial energy market in two ways: (1) using electronic 

brokerage platforms, such as Intercontinental Exchange, New York Mercantile Exchange, and 

Nodal Exchange; and (2) using an introducing broker over voice lines associated with a clearing 

entity or FCM. Additionally, in his remarks, Mr. Mackey stated that his primary concern is the 

inability to provide liquidity to properly hedge and manage the cash flow of an organization, 

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such as an energy company, where there is extreme volatility in margins overall and any change 

in cost due to risk is ultimately passed through to the end user. He also remarked that smaller 

players and asset hedgers have less access to the market if they are unable to post appropriate 

collateral or to meet appropriate credit thresholds required by other market participants. Further, 

he noted that regulators can enhance market access by removing the swap data reporting 

requirements on the end users. 

Jerry Jeske commented that he was speaking on behalf of the real businesses, which he described 

as those businesses that keep the lights on, bring gasoline to the pump, and raise and bring food 

from farm to table. Mr. Jeske stated that real businesses have a place in the markets and that 

without liquidity or without the ability for people to transfer risk, there is added risk to those real 

businesses. And, if they are unable to pass that risk on to others, the whole system will fail. Mr. 

Jeske also noted that SEFs are not used by the energy and agricultural markets because ofthe 

registration costs and the burdens imposed by CFTC Regulation 1.35. Further, for end users, 

access to clearing is very important, and the ability to self-clear should be considered by the 

Commission. 

Tom Coyle stated that agriculture participants use the standard FCMs and introducing brokers, 

and also direct electronic order entry to access the market. He noted that order entry has 

improved dramatically for all market participants due to electronic advances. However, 

commercial hedgers are at a disadvantage as to speed, from microseconds to nanoseconds. He 

stated that electronic order systems reduce the amount ofinformation about who's trading in the 

market, and financial trading leads the market more often than the price activity of traditional 

hedgers, who now find themselves nanoseconds behind financial market participants. Mr. Coyle 

then made some recommendations for the Commission to consider, including more detailed and 

timely trade data; making rules that require a minimum oftwo to three second duration for 

algorithmic trading orders; and a broad definition of bona fide hedge for participants engaged in 

handling, processing, storage and distribution of those involved in the fiscal market. 

Angela Patel discussed currency forwards. She explained that with non-deliverable forwards 

("NDFs"), market participants access the market electronically or via voice depending on a 

firm's level of comfort with the technology and rule book. She noted that the market remains 

liquid and deep but with the different capital requirements coming into effect, there will be some 

changes to the overall liquidity at the dealers. Ms. Patel also stated that ifNDFs were not treated 

as SEFs, more participants may trade them, and that some counterparties that previously traded 

with buy side firms have limited their trading because they now count toward swap dealer limits. 

Further, she stated that experienced firms have cut back on their ability to trade NDFs with 

Putnam and are only trading deliverable forwards. Among other remarks, Ms. Patel commented 

that this market does not need enhancement by the Commission, and the non-cleared swap 

margin rules in the FX market, effective September 2016, will ultimately create a cost that will 

be borne by the investor. And, that while Putnam favors increased transparency into areas of the 

market that were opaque, the focus on a segment of the market that already has procedures in 

place to mitigate risk and promote stability seems counterintuitive and counterproductive. 

Mr. Nixon opened the floor to discussion by other MRAC participants. 

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Among the issues, Richard Miller discussed a concern of the life insurance industry, which 

consists of directional hedgers, who execute complicated hedges in a programmatic way that 

often takes days in order to execute. He commented that he would like to see some relief from 

having to report these trades immediately in the timeframe that is required to the swap data 

repository and make the market more efficient. Stephen Berger stated the challenges that exist 

with respect to liquidity conditions also create opportunities for innovation. He noted Citadel's 

efforts to improve liquidity: (1) providing firm prices; (2) providing firm quotes; and (3) being 

reliable in volatile market conditions. Additionally, he commented that the biggest barrier to 

market access is the economics of clearing. 

Chairman Massad then noted the importance of making the Commission's analysis of these 

issues data driven, and to remember that during the crisis in the fall of 2008 there was no 

liquidity and a lot of these regulations were not in place. He also noted that the Commission's 

rule is designed to require reasonable risk controls, and some very good questions were raised 

about the scope of who should be subject to those controls. He emphasized that the Commission 

does not want to impose excessive costs on the market, but there is the need to address the risk 

that automatic trading poses in our markets today. 

After the discussion, Mr. Nixon remarked that: (1) the CFTC has a difficult role of balancing 

safety with market efficiency; (2) end users need an efficient marketplace in order to transact and 

it is a benefit to the American and global economy to have accessible markets; and (3) regulators 

need to be careful that rules do not smother the opportunity for this efficiency in the marketplace. 

Break ( 10 minutes) 

III. Panel II: How Is the Market Using Portfolio Compression Today? 

Edward Pla facilitated the discussion. 

Clair Lobo discussed portfolio compression, netting, and the benefits for managing different 

types of risks. She discussed the CFTC rules requiring swap dealers to establish and implement 

written portfolio compression policies, and also described different types of compression and 

netting. Next, Michael Modlock commented on the various forms of compression, such as: (1) 

executing swaps with particular cash flows to find perfectly offsetting trades in a clearing house 

to be risk-free netted; (2) coupon blending offered by CCPs to end up with a residual trade with a 

different coupon, which is also defined as risk-free compression; and (3) a multilateral riskconstrained compression where participants would set different tolerances for market and credit 

risks, which enables the algorithm to compress trades with different but similar characteristics at 

the same time. Lucio Biase then discussed the goals of compression: (1) to reduce gross notional 

and trade count; and (2) to lower the amount of trades proactively before a crisis to have a 

manageable number of trades, while assessing the risk and the impact of a party's failure. 

Kim Taylor discussed risk mitigation and how is it different from compression. She described 

risk mitigation/compaction as a way for a party with a package of trade exposures in a selection 

of different trades to go to the marketplace and look for someone to trade an offsetting package 

of trades. Ms. Taylor explained that a party is looking to create offsetting trades that can be 

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netted, and the replacement trades tend to be smaller to reinstate the exposure. She noted the 

new package of offsetting trades is different in exposure from the original package, and is 

offered to the marketplace in an auction type format. She also explained the differences between 

compaction and the other types of compression. 

Dennis McLaughlin shared his perspective on how widely market participants are currently using 

compression and risk mitigation services. He stated that since June 2014, compression has 

reduced the amount of notional outstanding clearing houses, and that regulatory capital is 

notional driven. Ms. Lobo then discussed what data elements should be used to gauge the use of 

compression and mitigation risk services and Mr. Biase discussed how the risk reduction or 

mitigation services differ from low-frequency dynamic hedging strategy. He noted that the 

fundamental difference among compression, risk mitigation through a form of compression 

coordinated by a third party, and individual parties doing dynamic hedges, is the efficiency with 

which it can be achieved. 

Ms. Taylor also discussed the distinction between risk mitigation services that provide price and 

non-price discovery execution methods. She commented that compression services, whether 

riskless or risk constrained, reduce notional exposure, and the distinction is basically a broader 

set of trades to work with to execute that risk reduction. 

Ms. Taylor also discussed the policy justification for allowing non-price discovery services to 

take place in the realm of unregistered service providers. 

Ms. Lobo discussed the burdens that would be imposed by the draft technical specifications, 

which require reporting parties to include information pertaining to compression services. 

Among her remarks, she stated that comments from International Swaps and Derivatives 

Association ("ISDA") and others indicate there would be an increased burden to systematically 

label those compression trades appropriately because trade compression activities occur at 

several different places. She also noted the concern that global regulations would not be 

coordinated, and the definition of these different types of compressions might overlap or conflict. 

Mr. McLaughlin next discussed the effect of portfolio compression on removing risk from the 

market. In his remarks, he commented that portfolio compression brings risk down in a 

controlled way, so it becomes easier to also manage a default and porting. 

The panelists next considered how the Commission should or should not act with respect to 

portfolio compression. Among the responses, Mr. McLaughlin stated that compression should 

be encouraged at all costs. Ms. Taylor stated the Commission should encourage the broader use 

of compression activities, as they extinguish trades and reduce exposure. Mr. Modlock stated 

there should be relief for partially terminated swaps and replacement swaps for the purpose of 

bilateral margin. Ms. 0 'Flynn stated what needs to be recognized is the efficiency that exists in 

both CDS and interest rate swaps netting and portfolio compression. Mr. Marcus Stanley added 

that portfolio compression is complex in terms of the ability to compress a multilateral portfolio 

and that cannot be done unless a group of people get together to do it. 

Chairman Massad next remarked that the discussion was very helpful, especially the last points 

regarding compression. He also commented that, going forward, the Commission should think 

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about the different types of compression and how it relates to the requirements on trading, 

clearing, and margin. 

IV. Closing Remarks 

Commissioner Bowen noted several takeaways: (1) not all compression is equal; (2) our markets 

are functioning pretty well but not as well as they could be for some small end users; and (3) the 

Commission needs to continue to balance its regulatory mandate in a way that promotes efficient 

and innovative markets without undue burdens and cost. 

Commissioner Bowen thanked the Chairman and Commissioner Giancarlo for attending the 

meeting. She also thanked the MRAC members, especially the facilitators, key speakers, and 

everyone for attending the meeting. 

Ms. Walker adjourned the MRAC meeting at 1:28 p.m. 

I hereby certify that the foregoing minutes are accurate: 

Petal Walker 

Acting Chair, Market Risk Advisory Committee 

Date 

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