MINUTES OF THE THIRD MEETING OF THE 


U.S. COMMODITY FUTURES TRADING COMMISSION'S 


MARKET RISK ADVISORY COMMITTEE 


NOVEMBER 2, 2015 


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, 

November 2, 2015, at 10 a.m., at the CFTC's Washington, DC, headquarters, located at 1155 21st 

Street, NW, Washington, DC 20581. The MRAC discussed the Central Counterparty ("CCP") 

Risk Management Subcommittee's recommendations to the MRAC regarding how the CCP 

default plans that were presented at the April 2, 2015 MRAC meeting can better reflect market 

conditions in the case of the default of a significant clearing member. The meeting consisted of 

three panel sessions. Panel I addressed interdependencies among CCPs and key intermediaries. 

Panel II discussed portability and availability of financial and operational resources by clearing 

members. Finally, in Panel III, the buy-side representatives presented their views on various 

aspects of the Subcommittee's recommendations. 

MRAC Members and Invited Panelists/Guests in Attendance 

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

David Burlage, Chief Financial Officer, Co Bank 

Sunil Cutinho, President, CME Clearing, CME Group ("CME") 

Douglas Friedman, General Counsel, Tradeweb 

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

Corporation ("DTCC") 

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

San Francisco 

Nathan Jenner, Head, Market Transparency Products, Bloomberg L.P 

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

Commodity Markets Council 

Thomas Kloet, Trustee, Elmhurst College 

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

Association Principal Traders Group 

Clifford M. Lewis, Independent Director, Eurex Clearing ("Eurex") 

Glen Mackey, Chief Risk Officer, NRG Energy Inc. 

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

Dennis McLaughlin, Group Chief Risk Officer, LCH Clearnet ("LCH") 

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

Richard Miller, General Counsel, Prudential Financial 

Michael Modlock, Head of TriReduce North Americas, Tri Optima 

Angela Patel, Senior Vice President, Putnam Investments 

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

Emily Portney, Global Head of Agency Clearing, Collateral Management and Execution, JP 

Morgan 

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

Optimization, Morgan Stanley 

Marcus Stanley, Policy Director, Americans for Financial Reform 

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William Thum, Principal, Vanguard 


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


BlackRock 

Luke Zubrod, Director of Risk and Regulatory Advisory Services, Chatham Financial 

Rana Yared, Managing Director, Goldman Sachs 

CFTC Commissioners and Staff in Attendance 

Timothy G. Massad, Chairman 

Sharon Y. Bowen, Commissioner 

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. 

Chainnan Massad first provided his opening remarks on the importance ofthe CCP strength and 

resilience. Commissioner Bowen then provided her opening remarks, in which she discussed the 

inaugural April 2, 2015 meeting of MRAC during which CME, LCH, and ICE described their 

efforts to prepare for a default by a significant clearing member. Commissioner Bowen also 

noted the creation of the CCP Risk Management Subcommittee, which was tasked with 

answering whether those efforts could better reflect actual market conditions and how CCPs can 

better coordinate their actions in this area. She also stated that the Subcommittee would present 

its recommendations to the MRAC in early 2016. Concluding her remarks, Commissioner 

Bowen thanked the MRAC and the Subcommittee for their work and welcomed their views. 

II. 	 Panel I: Recommendation 1 - Interdependencies Among CCPs and Key 

Intermediaries 

Ms. O'Flynn facilitated the discussion. 

Ms. O'Flynn first summarized the Subcommittee's recommendations to: (1) incorporate in 

default drills the potential default of a large liquidity provider; (2) in stress tests, cover a default 

by two large clearing members; and (3) disclose CCP liquidity resources to a broad audience, 

taking into account resource diversity and confidentiality concerns. 

The Subcommittee members next presented their views on these proposals. Mr. Cutinho first 

addressed existing CFTC rules, access to alternate banks, and the roles ofthe CFTC, SEC, 

Financial Industry Regulatory Authority, and the Federal Deposit Insurance Corporation. Mr. 

McLaughlin next discussed CCP deposit accounts at the central bank, portability in a stress 

scenario, transfer of financial resources, and the impact ofliquidity on a CCP's investment 

activities. Messrs. Cutinho and McClear then discussed the need for CCP's to have access to 

sufficient liquidity resources during a default event, especially in light of shrinking repo markets 

and bank balance sheet capacity. Mr. McClear also addressed the role of non-bank resources in 

ensuring liquidity, the importance of access to the Federal Reserve discount window, ICE's 

default testing, and transparency-related issues, and also remarked on ICE's confidentiality 

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obligations. Next, Mr. Lewis described certain differences between American and European 

clearinghouses, including the fact that Eurex Clearing has full segregation at the customer level, 

and that it functions as a systematically important bank, thereby having close relationship with 

Bundesbank. In this context, Mr. Lewis stressed the importance of having access to the central 

monetary authority. Following these presentations, Messrs. Kloet, McClear, and Cutinho, and 

Ms. O'Flynn exchanged views on a CCP's disclosure of its liquidity resources. 

Ms. Walters next presented the buy-side's perspective on liquidity, addressing issues such as 

assessment of clients' counterparty credit risk, transparency ofthe CCP 's loss absorbing 

resources, disclosure of margin methodologies, stress testing, the amount of potential losses, and 

whether clients will be made whole in a default scenario. Among other things, Ms. Walters also 

presented arguments in favor of sufficient capital against losses, standardized disclosures, and 

supervisory stress tests. Mr. Gray followed with remarks on DTCC's efforts to identify and limit 

exposure to its counterparties, and also encouraged cooperation with the Committee on Payments 

and Market Infrastructures ("CPMI") of the International Organization of Securities 

Commissions ("IOSCO"). 

Next, Mr. Miller remarked on the need to further discuss access to the Federal Reserve discount 

window during exigent circumstances, and Mr. Wasserman then briefly addressed progress being 

made by the CFTC, CPMI, IOSCO, and the Federal Reserve Board on certain issues discussed 

during the meeting. Next, Mr. Cuthino and Ms. Walters exchanged views on the role of the 

central bank, the scope of transparency, and principle-based stress testing, and Ms. Portney and 

Mr. Stanley followed with a discussion of the previously discussed access to the Federal Reserve 

discount window. Ms. O'Flynn concluded Panel I by recapping the discussion and thanking the 

panelists for their input. 

III. Panel II: Recommendation 2 - Portability and FCM Resource Availability 

Ms. O'Flynn facilitated the discussion. 

Ms. 0 'Flynn first introduced matters to be discussed during the Panel, in particular the 

availability of Futures Commission Merchants ("FCMs") in the event of a large FCM default in 

light of constraints posed by the new regulatory environment. She next asked the panelists for 

their views, with a focus on financial and operational resources availability. 

The panelists first discussed customer access to the market throughout the porting process. Mr. 

Cutinho supported porting of a group of customers all at once, and also referenced the use of 

negative client consent and gross margining. Mr. Cutinho also discussed Basel III capital rules 

on the agency side of a bank's business. In addition, he asked regulators to provide relief to 

receiving FCMs with regard to the "know your customer" due diligence process so they could 

expedite the porting process, and also noted the need to have contact information for end clients 

during porting. Mr. McClear next described steps taken by ICE Clear Credit to facilitate porting, 

including PCM-focused default testing, automation, and a simulated trustee process. He also 

stated that customers must have backup FCMs in case of a default by their primary FCM. Mr. 

McLaughlin added that there must be extra margin to manage client positions. 

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Mr. Cuthino then suggested a "white knight" planning of a mix of potential solvent FCMs to 

have available before a default occurs. He also offered that the receiving FCM must be able to 

take the entire client book, or its subset, and noted the importance of gross margining. Next, Ms. 

Yared observed that a sufficient margin is not enough to take on the entire portfolio of a failing 

clearing member due to capital rules. She also discussed coordination between clearinghouses, 

drills involving European clearinghouses, and auctions for portable client portfolios. Mr. Lewis 

criticized capital rules and observed that any rules should address end-user protections and 

certainty of hedging. Mr. Pla next remarked on Basel III and leverage ratio rules, and his 

remarks were followed by Mr. Stanley who commented on adequate capitalization of mutualized 

risks and criticism of exemptions from capital rules. Mr. Zubrod focused his remarks on the 

costs and impact of a backup FCM on clearing, and proposed a financial entity de minimis 

exception from central clearing. 

Ms. Portney and Mr. Jeske next discussed margin segregation and barriers to entry faced by new 

clearing firms, and their remarks were followed by Mr. McLaughlin's proposal for creating a 

fictitious clearing member as a mechanism for posting margin for defaulting portfolios. Mr. 

Stanley responded that he would revisit with the banking regulators the issue of margin 

segregation. Mr. Cuthino next remarked that many clients are unable to self-clear and that 

capital to cover risk should consider the margin collected by the CCP from a market participant. 

Mr. Jeske referred back to his comments on barriers to entry and noted the complexity of 

hedging portfolios. 

Chairman Massad responded that he supported stronger capital requirements for banks and that 

he appreciated the Supplementary Leverage Ratio ("SLR") as a non-risk based backstop. He 

also noted the effects of SLR's exposure measurement methodology on client clearing, and 

called for a realistic measure of the exposure that would allow market participants to hedge 

risks. Chairman Massad also explained that the Commission will mandate clearing only where it 

can reduce the overall risk in the system as opposed to increasing clearing as such. He suggested 

that cash given to the clearinghouse should be deposited with the Federal Reserve. Among other 

things, Chairman Massad also noted the benefits of gross margining. 

Next, Ms. O'Flynn asked the panelists to address new membership models. Mr. Miller 

responded that financial end users favor a direct access model provided they are not liable for 

mutualized risk, with Mr. Wasserman noting a general unwillingness to be responsible for 

mutualized loss. Mr. Yared then highlighted certain practical difficulties in developing an access 

model on a non-mutualized basis, and Ms. Flynn noted a future possibility of a sponsorship 

model. Ms. Portney observed that new membership models give greater access to the buy-side, 

but do so at the expense of the clearing members who have to guarantee the transaction. In 

response, Mr. Cutinho commented on Basel III rules for repo transactions. 

Ms. O'Flynn closed Panel II with a summary of three remaining MRAC recommendations on 

action process, consistency, and transparency, and stated that they would be subject to future 

Committee discussions. 

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IV. Panel III: The Buy-Side Perspective 

Mr. Beeson facilitated the discussion. 

Mr. Beeson first introducing topics to be discussed during the Panel as well as the panelists. The 

first panelist, Ms. Patel, addressed concerns regarding financial risk management by CCPs. 

Among other things, Ms. Patel discussed benefits of derivative contracts, their function prior to 

Dodd-Frank, and the role of ISDA and collateral documentation. She also expressed concerns 

about central clearing and the implementation of the principles assessment for financial market 

infrastructures. 

Mr. Thum next addressed issues faced by asset managers and described recommendations by the 

Securities Industry and Financial Markets Association's Asset Management Group to the CPMI 

and IOSCO regarding development of Principles for Financial Market Infrastructures, minimum 

standards for CCPs on risk management, stress testing, and financial safeguards, as well as the 

public quantitative disclosure standards for CCPs. 

Following Mr. Thum's remarks, Ms. Walters described certain recommendations by BlackRock 

regarding CCPs' risk management practices, including CCP contributions to the guarantee fund, 

and transparency and consistency of those practices. She also raised concerns about the use of 

the margin of non-defaulting counterparties as a recovery tool, and the need for resolution plans 

in a failure scenario. 

The open Panel discussion started with Mr. Cutinho's remarks on loss absorbing resources in 

case of a default, prefunding of customer assessments, and a clearing member's failure at 

multiple clearing houses. Mr. Thum commented on the need for enhanced standardization and 

transparency into a CCP's financial operations, and raised a concern about margin haircuts. Mr. 

Cutinho shared Mr. Thum' s concerns about haircutting, but noted that margin gains haircutting 

would incent paiticipation in default auctions. Mr. Lewis then described Eurex's approach for 

futures, stating that it allowed tri-party custody of margin money and full customer segregation. 

Mr. Thum next observed that mandated clearing guidelines should be assessed against risk 

management factors and be regularly refreshed to ensure that clearing is available at more than 

one CCP. He also favored standardization and transparency of stress testing. Mr. Miller 

similarly favored greater transparency as well as consistency of stress testing. 

The panelists next discussed risk-based contributions of CCPs. Mr. McClear first raised 

concerns about a clearinghouse's risk-based contribution to the default waterfall, stating that it 

could create incentives for participants further down the waterfall to increase their risk. Mr. 

Thum responded that CCP contributions bring discipline to the CCPs' performance of their roles. 

Mr. Cutinho next stated that CCP capital contributions to cover the failure of a participant are 

made from a risk perspective based on the amount of risk CCPs bring to the system. He added 

that in the "defaulter pays" model of a clearing member failure, a CCP cannot subsidize a 

clearing member's risk. He explained, however, that CCP operational and investments risks 

under its control should be borne by the CCP itself. Ms. Portney noted next that CCPs make 

daily risk decisions involving membership requirements, what products to clear, margin levels, 

and collateral and haircut requirements. She added that the consensus view of CCP end-users 

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and customers is that they want CCPs to "have more skin in the game," and advocated enhanced 

disclosure, greater oversight, and consistency in stress testing. Mr. Pla then opined that stress 

tests should be standardized, hard to meet, transparent, and easy to understand and compare. Ms. 

Walters also noted that stress testing standards implemented for commercial and investment 

banks could also be followed in central clearing. 

V. Closing Remarks 

Mr. Kloet, who had been asked by Commissioner Bowen to provide closing remarks, thanked 

Commissioner Bowen for her sponsorship of the meeting and Chairman Massad for his 

participation. He also thanked Ms. O'Flynn and MRAC for their first two recommendations, and 

noted that the remaining three recommendations would be considered by the CCP Coordination 

Subgroup and discussed during the New Year. He then thanked the presenters for their input. 

Thereafter, Ms. Walker adjourned the meeting at 1:31 p.m. 

I hereby certify that the foregoing minutes are accurate: 

Petal Walker 

Acting Chair, Market Risk Advisory Committee 

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