MINUTES OF THE FIRST MEETING OF 


THE U.S. COMMODITY FUTURES TRADING 


COMMISSION'S MARKET RISK ADVISORY COMMITTEE 


APRIL 2, 2015 


The Market Risk Advisory Committee ("MRAC" or "Committee") convened for a public 

meeting on Thursday, April 2, 2015, at 10:10 a.m., at the U.S. Commodity Futures Trading 

Commission's ("CFTC" or "Commission") Headquarters Conference Center, located at Three 

Lafayette Centre, 1155 21st St. NW, Washington, DC. The meeting consisted of two panels. 

Panel I discussed current risk management techniques employed by the Derivatives Clearing 

Organizations ("DCOs") in the event of a potential default of a significant clearing member. 

Panel II discussed the evolving structure of the derivatives markets with respect to Swap 

Execution Facilities ("SEFs"). 

MRAC Members in Attendance 

Dr. Anat Admati, George G.C. Parker Professor of Finance and Economics, Stanford University 

Graduate School of Business, Better Markets Representative 

Robert Anderson, Executive Director, Committee of Chief Risk Officers 

David Burlage, Chief Financial Officer, CoBank 

Sunil Cutinho, President, CME Clearing, CME Group 

Scott Flood, Managing Director, Institutional Clients Group, Citigroup 

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

Corporation 

William Hale, Export Grain Manager, Cargill 

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

San Francisco 

Nathan Jenner, Head of Market Transparency, Bloomberg LP, Bloomberg SEF LLC 

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

Market Council 

Thomas Kloet, Trustee, Elmhurst College 

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

Principal Traders Group 

Clifford Lewis, Independent Director, Eurex Clearing 

Dr. Andrew Lo, Director, Massachusetts Institute of Technology's Laboratory for Financial 

Engineering 

Glen Mackey, Chief Risk Officer, NRG Energy 

Dennis McLaughlin, Group Chief Risk Officer, LCH.Clearnet 

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

Richard Miller, General Counsel, Prudential Global Funding 

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 

Angela Patel, Senior Vice President, Putnam Investments 

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

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Representing Futures Industry Association 

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

JPMorgan Chase & Co. 

Marcus Stanley, Policy Director, Americans for Financial Reform 

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

BlackRock 

Rana Yared, Managing Director, Principal Strategic Investments, Securities Division, Goldman 

Sachs 

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

CFTC Commissioners and Staff in Attendance 

Chairman Timothy G. Massad 

Commissioner and MRAC Sponsor Sharon Bowen 

Commissioner J. Christopher Giancarlo 

Commissioner Mark W etjen 

Petal Walker, Chief Counsel, Office ofCommissioner Bowen, Designated Federal Officer 

Robert Wasserman, Chief Counsel, Division of Clearing and Risk 

Invited Speakers in Attendance 

Stephen Berger, Director, Government and Regulatory Policy, Citadel 

Darcy Bradbury, Managing Director, D.E. Shaw Group 

Rana Chammaa, Executive Director, Head of Rates and Credit Agency Trading Sales, Americas, 

UBS Securities Co., Ltd 

Kara Dutta, Assistant General Counsel, ICE Clear Credit 

Douglas Friedman, General Counsel and Managing Director, Tradeweb 

Ada Lee, Chief Risk Officer and Group Head, CaLM Risk and Portfolio Analytics, 

LCH.Cleamet 

Susan Milligan, Executive Director, US Public Affairs, LCH.Cleamet 

Michael O'Brien, Vice President and Director, Global Trading, Eaton Vance Management 

Michael Prokop, Director, Deloitte and Touche, LLP 

Ian Springle, ICE Clear Credit 

I. Opening Remarks 

Commissioner Bowen called the inaugural meeting ofthe MRAC to order. After welcoming the 

attendees, she turned to Chainnan Massad for his opening remarks. The Chairman opened with 

a few remarks about the importance of the Committee and then moved on to discuss the first 

panel regarding centralized counterparty ("CCP") resilience, stability, and default management 

by noting these issues have received a lot of attention. He then discussed the second panel on 

SEFs and how important it is to understand the market's reaction to SEFs. Commissioner 

Wetjen and Commissioner Giancarlo thereafter made their opening remarks. 

Following Commissioner Giancarlo, Commissioner Bowen made her opening remarks and 

provided background on the MRAC. She then introduced the panels. She discussed the first 

panel on market risk asking whether default drills and other default preparations in place at CCPs 

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are sufficient, and whether these drills actually reflect market conditions in the event of a default. 

She also stated that the Committee would consider whether the Commission ought to coordinate 

and standardize CCPs' practices in preparation for default. She then discussed the second panel 

on market structure stating that the discussion would explore whether SEFs have changed the 

fundamental swaps market, including the effect of the practice of name give-up and how the 

Commission should respond. 

Next, Acting MRAC Chair Walker turned to Mr. Kloet to facilitate the Committee's discussions 

in the first panel. Mr. Kloet noted that the agenda included presentations from three CCPs (i.e., 

ICE Clear Credit, CME Group, and LCH.Clearnet) followed by questions on real-life default 

scenaiios. 

II. Panel I: Default Management at CCPs 

A. Presentation by Mr. Springle, ICE Clear Credit 

Mr. Springle presented on preparing for default at ICE Clear Credit ("ICE"). He noted that ICE 

has a particular focus on four areas in the event of default. First, Mr. Springle noted the need for 

sufficient financial resources. He explained these resources will be used to liquidate and absorb 

the losses of a defaulted portfolio. Second, Mr. Springle discussed ICE's processes and tools. In 

terms of processes, the finn is focused on the details of its default management plan which 

describes the manner in which ICE will interact with its clearing participants, regulators, and 

vendors. He stated that two ways in which tools could be improved were quicker response times 

and more automation. Mr. Springle then stated that internal tools are needed to track the 

consumption of default resources in the auction bidding process. Third, Mr. Springle 

emphasized the importance of strong management information systems so that everyone 

involved can make informed decisions and testing to ensure timely execution. Fourth, he went 

on to provide context for the default waterfall methodology at ICE, which he noted is similar to 

LCH.Clearnet ("LCH") and CME Group ("CME"). Mr. Springle explained the firm's default 

waterfall contains a funded and unfunded component and discussed the order in which funds 

were liquidated. 

Mr. Springle also explained ICE's default management plan. He noted there are two phases. He 

explained Phase I consisted of declaring default, securing adequate funds, and activating a 

default committee and provided further details on each of these steps. He next described Phase 

II and stated that it generally included hedging, liquidation, and porting and discussed each in 

further detail. 

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B. Presentation by Mr. Cutinho, CME Group 

Mr. Cutinho presented next and first discussed CME's goals for the default management process. 

Among others considerations, he highlighted two overarching aims: (1) to restore a defaulting 

CCP's matched book; and (2) to port non-defaulting clients to a solvent FCM. 

He noted four key lessons learned by industry after the default of multiple CCPs in the recent 

past. First and foremost, he explained there is no one-size-fits-all approach in terms of 

constructing and managing auctions. However, he emphasized the goal is to attract bidders to 

auction to produce the best price while balancing the number of participants and the volume of 

information disseminated to the market. Second, Mr. Cutinho noted the importance of 

understanding bankruptcy rules associated with different types of porting. Third, he discussed 

the importance of default drills and emphasized how critical it is to reduce operational risk and 

broaden participation. Fourth, he noted that coordination with derivatives clearing houses and 

equity markets is essential. 

Mr. Cutinho went on to discuss best practices in default management. He noted the importance 

of market structure. He explained that, as it relates to listed markets, buy side participants have a 

broad array of tools to resolve an auction. He further explained that over-the-counter ("OTC") 

markets were different and that these markets are still evolving. Mr. Cutinho next noted the 

importance of macro-hedging and how it allows CCPs to significantly reduce risk from a markto-market perspective. He then moved on to highlight porting and coordination and how both 

should be considered in tandem as customers serviced through the defaulted film and cleared at a 

CCP likely have activities at other CCPs, which may be serviced by the same defaulted firm. He 

explained, in terms of coordination, that drills at major CCPs should be conducted jointly and 

should ensure clearing participants' risks are diverse. 

Moreover, Mr. Cutinho elaborated on CME's preparation for a default drill. He noted 

constructing a hypothetical defaulted portfolio is very important - i.e., a portfolio that contains 

difficult risks during the auction. Mr. Cutinho noted CME conducts default drills across all asset 

classes twice a year and discussed these drills in further detail. He also emphasized the 

importance of monitoring the various costs of default management. 

C. Presentation by Mr. McLaughlin, LCH.Clearnet 

Mr. McLaughlin presented next and first noted that most of what LCH does is similar to the 

other two CCPs that just spoke and that he would be noting some differences. He then noted that 

LCH's priorities in default management are risk management and coordination. He discussed 

that the aims of risk management are to ensure enough margin is collected and members' credit 

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quality is monitored as default approaches. In regard to coordination, he highlighted the need for 

better communication. 

Mr. McLaughlin highlighted how LCH differs from other CCPs in terms of default management. 

In terms of porting, LCH holds margin for an additional two days to cover the operational costs 

associated with a defaulting member having many clients. He also explained that LCH now 

looks into losses arising from investment activities that could cause a potential default. He stated 

that LCH prefers to run non-default loss drills where trades are continuing to settle. He also 

stated that one group-wide default drill will be held each year and an ad hoc drill will be 

conducted throughout the year for each ofthe ten default funds. With regard to coordination, 

Mr. McLaughlin noted LCH has not addressed coordinating with other CCPs. 

D. Questions and Discussion 

Mr. Kloet opened by stating he would take two questions from MRAC members related to the 

default management plans described by CME, ICE, and LCH. 

Ms. Walters opened with the first question. As an asset manager, she asked Mr. Springle to 

share the actual total expected dollars required to absorb the simultaneous default of two clearing 

participants and how this number was derived. Ms. Walters went further to ask how the initial 

margin would be allocated by ICE to absorb such a loss. In response, Mr. Springle generally 

described ICE's default waterfall offinancial resources. A discussion regarding Mr. Springle's 

remarks followed. 

Mr. Kloet then asked the following questions: (1) what is the most likely real-life default 

scenario of a significant clearing member; (2) how likely will this scenario be isolated; (3) 

alternatively, how likely will multiple clearing members and clearing members with multiple 

CCP membership be affected; and ( 4) what would it look like on a path before default. A robust 

discussion regarding these questions followed. Topics touched on included, stress testing, 

liquidity, post-default considerations, portability, reducing contagion, and focusing on 

inconsistencies between many of the capital rules. 

(Break) 

III. Panel II: Market's Response to the Introduction of SEFs 

Mr. Lo, the facilitator for the second panel, gave his opening remarks and then introduced three 

experts on SEFs to lead the panel's discussion - Mr. O'Brien, Ms. Chammaa and Ms. Bradbury. 

Mr. Lo stated that each speaker would provide an overview of their perspective on how the 

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swaps landscape has changed in response to the creation of SEFs. Thereafter, he noted the 

discussion will open to members ofthe MRAC for further comment. 

A. Presentation by Mr. O'Brien, Eaton Vance Management 

Mr. O'Brien presented on whether market structure has changed from a trading perspective with 

SEFs. He noted that, at a trading desk on the buy side, no substantial changes occur in terms of 

executing trades, interacting with the market, and market structure generally. He then 

commented, however, that costs oftrading since the introduction of SEFs have increased. He 

also explained that his firm's interaction with the market has been limited as trading has usually 

been over a few electronic platforms where banks provide liquidity and is usually via a request 

for quote ("RFQ"). 

B. Presentation by Ms. Chammaa, UBS Investment Bank 

Ms. Chammaa presented next and noted a few positive impacts made by implementing the 

CFTC's rules governing SEFs. First, she remarked that a cleaner and more robust execution 

workflow was created. Second, she explained that the impartial access mandate allows market 

participants to access markets that were previously only available to the dealer community. In 

addition, she noted that clients have a variety of alternatives for accessing the new liquidity 

pools. She also stated that more needs to be done to implement the remainder of the SEFs rules, 

in particular, as it relates to post-trade name give-up and impartial access. 

C. Presentation by Ms. Bradbury, D.E. Shaw Group 

Ms. Bradbury presented next and commented that the D.E. Shaw Group was very supportive of 

swaps reform and continues to maintain optimism regarding the availability of data at SEFs. She 

noted the importance of getting better information for trading, and she explained, although price 

screens now show data, the SEFs market is bifurcated into customer-to-dealer SEFs and interdealer broker SEFs. Further, she commented that this bifurcation affects access to crucial data 

needed to trade in the market. And, that having access to the interdealer broker SEFs will 

provide better information regarding pricing, more competition, and a shift from the RFQ 

process being only available for customer-to-dealer SEFs. 

D. Questions and Discussion 

Mr. Lo led the discussion focused on two main issues: (1) whether there are any particular 

factors affecting liquidity that if changed, would enhance liquidity; and (2) name give-ups. A 

robust discussion regarding each of these questions followed. Topics included central limit order 

books, the RFQ process, and the implications ofremoving name give-ups. 

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IV. Closing Remarks 

In closing, Commissioner Bowen thanked the members of the MRAC, Messrs. Lo and Kloet for 

moderating, and the public for their ideas and suggestions. Thereafter, Ms. Walker adjourned the 

meeting at 1:30 p.m. 

I hereby certify that the foregoing minutes are accurate: 

Petal Walker 

Acting Chair, Market Risk Advisory Committee 

Date 

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