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Remarks of Chairman Timothy G. Massad before the European Union 

Parliament, Committee on Economics, Brussels, Belgium 

May 6, 2015

As Prepared for Delivery 

Good afternoon, Chairman Gualtieri and members of the Economic and Monetary 

Affairs Committee. Thank you for inviting me to participate in today’s exchange of 

views. I very much appreciate the opportunity to meet with you. I have wanted to come 

to Brussels for some time. Frankly, shortly after I took this job, I had expected we would 

solve this issue regarding equivalence and recognition of CCPs relatively quickly, and I 

would be coming over to finalize an agreement many months ago. Of course, it has 

taken us longer. However, I think we and the Commission continue to work together in 

good faith toward that goal and hopefully we can reach agreement soon. 

Before I begin, I also want to thank Lord Hill whom I will be meeting with tomorrow. I 

have appreciated our cooperation and collaboration on a wide range of issues, and look 

forward to that continuing. As he and I have discussed, there are many areas of 

derivatives regulation outside of CCPs where it’s important to try to harmonize our rules 

as much as we can. I appreciate that these are global markets, and the only way we 

can effectively regulate them, and avoid regulatory arbitrage, is by working together. I 

would be happy to discuss any of these issues with you. But I thought that given the 

current focus on the CCP recognition issues, I would say a few words about how we 

view these issues. I would be happy to take your questions and discuss whatever 

issues you wish. 

Last year, we spent a lot of time on the subject of whether the U.S. had an effective 

equivalent system of recognition of EU CCPs. The European Commission felt strongly 

that the CFTC needed to implement a framework for substituted compliance in addition 

to the existing recognition program that provides market participants in the U.S. with 

access to European futures markets. We worked hard to come up with that substituted 

compliance framework, and I believe that, if we can work through the rest of our 

differences, we have a framework that is satisfactory to both the EC and the CFTC. 

I believe you know that lately we have been discussing our respective rules on margin 

methodology, and the focus has been on futures. And as you probably know, there has 

been much attention on the fact that, under CFTC regulations, our CCPs use a one-day 

minimum liquidation period and the new European regulatory regime requires a 

minimum two-day period. Now I will come back in a moment to the fact that the 

liquidation period is just one factor of several, and we believe it is critical to look at 

margin methodologies as a whole. Indeed one must look at risk mitigation practices as 

a whole. But I want to discuss this specific issue with you given the attention it has 

received. 
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There is no question that a two-day period produces more margin than a one-day 

period, all other things being equal. It is a simple mathematical relationship: two-day is 

higher by 41% – because one multiplies by the square root of two. But all other things 

are not equal. As you probably also know, we follow a policy of gross collection and 

posting of customer margin. That is, the clearing members must pass on to the CCP 

the full amount of initial margin for each customer. The new European regime allows for 

netting: if one customer’s exposures offset another’s, then the clearing member can 

post initial margin netted across customers. For some time we and the European 

Commission debated whether one-day gross was higher than two-day net or vice versa. 

Then in late February, when Lord Hill visited the U.S., we agreed to each do an analysis 

and share our results. 

For our analysis, we used actual data for seven days. We reconstructed what the 

required margin would be under each regime for the nine largest clearing members of 

one U.S. CCP. These clearing members represent about 80% of the total customer 

margin. And what we found was that one-day gross was substantially higher than twoday net for each clearing member, and for each day. That is, the total amount of 

customer margin under one-day gross was as high as 421% of the amount under twoday net, and was never less than 160% of that amount. We have since looked at two 

other clearinghouses, and found even larger percentage differences. 

I have prepared a few charts to illustrate the relative effects of netting and increasing 

the liquidation period. The first two charts do not contain actual numbers due to the 

need to protect confidentiality, but they are quite representative of the issues. Chart 

One illustrates the netting effect by comparing one-day gross to one-day net assuming 

the customers and portfolios are the same. The diagram at the top of the page shows 

that with gross posting, the clearinghouse receives $3000. The diagram at the bottom 

of the page shows the effect of netting. In our hypothetical the CCP receives $800. 

The extent of the difference will of course vary depending on the customers’ portfolios. 

But the purpose here is to show the relative effects. 

Chart two then does the same comparison, but this time using two-day net. The 

diagram at the bottom of the page shows that the total to the clearinghouse is $1120. 

This illustrates that the effect of the 41% increase for a two-day liquidation period 

doesn’t offset the negative effect of netting. Indeed, one would have to have a very 

extreme distribution of customer positions for the two day effect to be greater than the 

netting effect. These hypothetical numbers include a clearing member with an 

extremely directional position (clearing member C). One-day gross is more than 21⁄2 

times higher than two-day net overall. 

Chart Three is based on actual data. The chart illustrates actual customer initial margin 

for futures at one clearinghouse under both one-day gross and two-day net, involving 

positions held with the nine largest clearing members. This data was collected as part 

of our regular oversight and was used in the analysis performed by CFTC staff and 

provided to EC staff last month. These results are an average from a sampling period 

of seven different days over a six week period. 
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Chart Three shows that under one-day gross, the clearinghouse held $58 billion. Under 

two-day net, the clearinghouse would have held only $23 billion. The difference is $35 

billion in initial margin held at the clearinghouse. 

The results from our analysis of the nine largest clearing members based on one-day 

gross ranged from 2.4 times to 2.6 times the amount of two-day net , depending on the 

day. 

Let me turn to house margin – the amount due from the clearing firm itself, which as you 

know is kept separate and cannot be commingled with customer margin. Two-day 

produced more than one-day. That is to be expected because if there is no netting 

effect, then two-day will be 41% higher. 

But the size of house positions in futures markets is much smaller than the size of 

customer positions. Therefore, house margin is much lower than customer margin. 

Generally, house margin is around 14% of the total. 

The first diagram in Chart Four shows actual house margin, again using real data. As 

you see, if we simply went to a two-day house requirement, the increase here is $4 

billion dollars – $13 billion held under two-day compared to $9 billion held under oneday. 

However, there is a difference in the treatment of house affiliates in the two regimes. 

We require that affiliate transactions be in the house account so that they don’t 

jeopardize customers. Europe allows affiliates to be treated as customers. 

The second diagram on Chart Four shows the difference between total house margin 

under U.S. rules today, and total house margin if the U.S. followed European rules –

that is, excluding affiliates from the house account, but requiring margin for a two-day 

period. As you can see, the difference is very small – approximately $1.5 billion. 

Chart Five summarizes the relative impact of our two regulatory regimes using the data 

we analyzed. The diagram on top shows the difference on the customer side – $35 

billion. The difference in house margin, assuming we exclude affiliates, as is done in 

the EU, is only $1.5 billion. 

The European Commission has nevertheless been concerned that the lower house 

margin is a risk. Doesn’t this mean less margin is available in a default? We would 

agree that it does, but the far greater risk is the difference in customer margin. If a 

clearing member defaults, the question is how do we protect the customers of that 

member, the clearinghouse, and the other clearing members and their customers? The 

amount of total customer margin is what will largely drive the answers. It will determine 

whether the customers of the defaulted member can be transferred to another clearing 

member, or whether their positions must be liquidated, potentially destabilizing markets. 

It will determine whether the guaranty fund will be tapped. So if we wish to look at 

overall financial stability, there is far more to be gained by requiring gross posting for all 

customers than by increasing the minimum liquidation period for house accounts. 
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As for house margin, it has been suggested that U.S. CCPs could collect customer 

margin calculated using a one-day liquidation period, and could collect house margin 

calculated using a two-day liquidation period. The liquidation period for a product is 

typically based on its risk characteristics. We are concerned that charging different 

margin depending on who holds the product will create incentives to evade the 

regulation, and it would be especially problematic if Europe and the United States 

continue to treat house affiliates differently. In addition, while the amount of house 

margin is certainly relevant in a default, so is the house member’s guaranty fund 

contribution, and the amount of one will affect the amount of the other. 

Now I noted at the outset the importance of looking at margin methodologies, and 

indeed risk mitigation overall, holistically. There are many other issues one must 

consider to assess the overall outcome of a legal and supervisory framework. There 

are other differences in our respective frameworks. There are some areas where 

European rules are more conservative, and many where our rules are more 

conservative. I would be happy to discuss those with you. 

But if our goal is to equalize key differences, and our concern is financial stability, we 

should start with customer margin – with requiring gross posting and mandatory 

collection from customers. Those are the big differences that will enhance financial 

stability and customer protection. As you may know, one-day gross posting is followed 

in other jurisdictions, including ones that have been granted equivalence already. 

With respect to house accounts, we should reconcile differences in the treatment of 

affiliates. We should also look at guaranty fund contributions, and if we feel that a 

clearing member’s own initial margin, together with its guaranty fund contribution, are 

not sufficient in the event of a default, we should look at ways of changing that. But we 

should avoid creating incentives for evasive behavior. 

So with that let me stop and say again, thank you for inviting me to discuss these issues 

with you today. I welcome your thoughts and questions. 
Chart One Example Illustrating the Mechanics of One-Day Gross/One-Day Net

The amount of initial margin is the same for each contract or lot, $100. Under gross posting, clearing members 

must give to the CCP the total required margin for each customer. Under netting, clearing members may net 

offsetting exposures of different customers. Therefore, under netting the CCP receives less initial margin. 
Chart Two Example Illustrating the Mechanics of One-Day Gross/Two-Day Net

The amount of initial margin in the top diagram is $100 for each contract or lot, which represents a one-day 

liquidation period. The amount of initial margin in the bottom diagram is $140 per lot, which represents a twoday period. In all other respects, this example is the same as Chart One. 
Chart Three Actual Data From One CCP* 

* The same data used for the CFTC margin analysis provided to the EC in April of 2015. Due to confidentiality issues, amounts for clearing 

members are not included. 

Customer One-Day Gross Futures Margin 

(Based on average of same seven days of actual data from one CCP) 

Customer Two-Day Net Futures Margin 

(Based on average of same seven days of actual data from one CCP)
Chart Four Actual Data From One CCP 

Under US rules, positions of affiliates of the clearing member must be held in the house account. Under 

European rules, only positions of the clearing member itself may be held in the house account. Positions 

of affiliates of the clearing member are held in the customer account in Europe.

$0

$20

$40

$60

$80

House Futures Margin - Including Affiliates (US Rules)

Difference = $4 Billion

(Based on average of same seven days of actual data from one CCP)

$9 billion $13 billion

$0.00

$20.00

$40.00

$60.00

$80.00

House Futures Margin - Excluding Affiliates (EU Rules)

Difference = $1.5 Billion

(Based on the most recent of the seven days of actual data from one CCP)

$3.6 billion $5.1 billion

1 Day (US) 2 Day (Europe)

 1 Day (US) 2 Day (Europe)
Chart Five 

Impact of Gross Margin in the Customer Account

Compared to 

Impact of Two-Day Margin in the House Account 

$0

$20

$40

$60

$80

1 Day Gross (US) 2 Day Net (Europe)

Customer Futures Margin Comparison 

Difference = $35 billion

(Based on average of same seven days of actual data from one CCP)

$58 billion

$23 billion

$0.00

$20.00

$40.00

$60.00

$80.00

1 Day (US) 2 Day (Europe)

House Futures Margin Comparison - Excluding Affiliates 

Difference = $1.5 billion

(Based on the most recent of the seven days of actual data from one CCP)

$3.6 billion $5.1 billion