December 11, 2023 Market Risk Advisory Committee Meeting

Commissioner

Caroline D. Pham

Chairman

Rostin Behnam

Commissioner

Christy Goldsmith Romero

Commissioner

Kristin N. Johnson

Commissioner

Summer K. Mersinger
Global Markets Advisory Committee

Welcome and 

Opening Remarks
Global Markets Advisory Committee

Section One—CCP Risk and Governance, International Perspective

Opening remarks from

Christopher Hayward, Policy Chairman, City of London Corporation

Klaus Loeber, Chair of the CCP Supervisory Committee, ESMA

Richard Haynes, Deputy Director, CFTC Division of Clearing and Risk
Global Markets Advisory Committee

Section Two—CCP Risk and Governance, Panel One

Legal Entity Identifiers
DISCLAIMER

The following analyses and views are those of the 

presenters and do not necessarily reflect the views of the 

Commission, its Commissioners, or CFTC Staff

5
6

Benefits of Legal Entity Identifiers

• During the response to the 2008-2009 financial crisis, there was a global regulatory desire to 

identify risk at the beneficial account owner level.

• The EU response mandated the use of Legal Entity Identifiers (LEIs).

• The US response made the use of LEIs voluntary, primarily related to the unknown operational 

costs.

• In early 2023, the ION cyber incident highlighted the benefits of using LEI’s at the beneficial 

account owner level and the need to explore implementing the use of LEI’s in the US. 

NEXT STEPS:

Develop recommendation to propose amending CFTC Reg. 39.19 to bring the US 

regulatory structure inline with the global standards by mandating the use of Legal 

Entity Identifiers at the beneficial account owner level.
Global Markets Advisory Committee

Section Two—CCP Risk and Governance, Panel Two

Third-Party Risk
8

Review of Mission Critical Third Parties

• Currently, there is limited oversight of mission-critical third parties relied upon by CFTC registrants.

• As innovation continues to bring efficiencies to capital markets, all participants are increasing 

dependencies on third party service providers.

• The Workstream has inventoried several domestic and international regulations including FRB, 

SEC, Treasury, FSB, Bank of England, and EU and reviewed these regulations for common 

definitions and themes

• Independent of the regulations, many CFTC registrants have implemented protocols to define and 

manage these third-party dependencies.

NEXT STEPS

Continue to assess global regulation of third-party service providers, build a consensus 

and deliver a more comprehensive report at the next MRAC meeting.
Global Markets Advisory Committee

Section Two—CCP Risk and Governance, Panel Two

Third-Party Risk
10

FIA Cyber Risk Taskforce

• In March 2023, FIA formed an industry 

Taskforce in response to a ransomware 

attack on a single third-party service 

provider, which significantly impacted the 

processing of trades executed on multiple 

exchanges and CCPs globally. 

• In September 2023, FIA released an After 

Action Report with recommendations for 

improving the industry's ability to withstand 

future attacks.
11

Report Highlights: 

• Exchanges and CCPs play a critical role in the front-to-back trading and clearing 

ecosystem. In any outage that affects this ecosystem, resiliency and reconnection to 

exchanges and CCPs are essential steps in the recovery process. 

• Recommendations were made for all market participants and service providers, 

including but not limited to exchanges and CCPs, such as: 

o Encouraging alignment with existing reconnection guidelines.

o Supporting the sharing of information with connected parties regarding 

contingency plans in the event of a cyber incident or other type of outage.

o Improving risk assessment of third-party service providers.
12

Other Recommendations: 

• FIA to form an “Industry Resilience Committee” as a standing industry-wide group 

that serves as a trusted forum for key stakeholders to discuss cyber incident 

management and resilience planning and recommend best practices for the 

industry. 

• Engage with sector-wide groups on cyber and operational resilience through FIA.

• Participate in regular cyber preparedness exercises.
Global Markets Advisory Committee

Section Two—CCP Risk and Governance, Panel Three

Recovery and Resolution
14

Progress Update

Progress Update

• Workstream plans on issuing a report in Q2 2024 

• Intend to address public comments received on DCO Recovery and Orderly 

Wind-Down Plans NPR, and international developments (ex. EU Regulations, 

FSB Financial Resources and Tools for Central Counterparty Resolution 

Consultation Report)
15

Resilience as First Line of Defense

Resilience is the first line of defense

• Well structured Central Counterparty Clearinghouse (CCP) 

default waterfall: robust margin from top tranches of the 

waterfall with appropriately sized initial margin and 

defaulting member default fund contribution (See Figure)

• CCP skin in the game as risk management incentive - see 

prior MRAC work on this topic: DCO Capital and Skin in the 

game, Report of the Central Counterparty Risk and 

Governance Subcommittee 

• Resilience of Systemically Important Derivative Clearing 

Organizations (SIDCOs): Regulations require SIDCOs to 

allocate losses and restore a matched book through cash or 

variation margin haircuts

Initial Margin from 

Transaction

Defaulting clearing 

member default fund

CCP Capital/Skin in 

the Game

First Three Tranches of CCP 

Default Waterfall
16

Resilience as First Line of Defense - Continued

Resilience of DCOs, FCMs, clients 

• Recovery tools put in place because of regulatory requirements decrease the likelihood of a 

resolution and require SIDCOs to allocate losses and restore a matched book 

• Given the loss mutualization feature of CCPs, the ability of the SIDCO to recover from 

losses depends on the SIDCO’s risk management, as well as ability of FCMs and clients to 

cover losses if needed

Choice of recovery tools has policy implications 

• CCPs mutualize risk between clearing members. CCP shareholders have limited exposure 

through skin in the game 

• Guarantee fund replenishment means losses are allocated to FCM, ultimately flowing to 

Bank shareholders

• VM haircutting and tear ups means losses are allocated to hedgers, institutional investors 

and other end users
17

Liquidity and CCP Recovery 

CCP recovery is dependent on liquidity supply/demand

• Recovery depends exposure type: synthetic (cashbased movement) versus actual exchange of the 

security

• Liquidity depends on factors like volatility, concentration, 

market specific liquidity, and central bank access

• Consider the 2018 Nordic/German Power futures 

default: CCP tapped into the waterfall (see Figure) due 

to an undiversified, large position in a small market

• Moral of the story: liquidity of members (membership 

standards) and market liquidity are very important, 

particularly when clearing cash market securities

Figure 3. Einar Aas variation margin default tap 

into default waterfall
18

International Harmonization

Bankruptcy laws are specific to each legal jurisdiction. 

As a result: 

• clearing may have different outcomes in a default/resolution in different jurisdictions

• the cost of compliance for buy-side clients is increased

• increased barrier to entry for FCMs due to higher compliance costs from asymmetric 

regional/national rules

• Some CCPs have separate entities serving different clients in different jurisdictions

• Consequence of harmonization may be that there are fewer FCMs

• Consider harmonizing CCPs rules to the point that is feasible, while recognizing the specifics 

of each legal jurisdiction
19

Transparency

Goal of identifying areas where increased transparency is desired:

• A level playing field for all CCPs in terms of risk management disclosures (ex. public quantitative disclosures)

• Are there additional items which should be included in PQDs? (noting that there is ongoing work in this area being 

conducted by FIA/SIFMA/CCP Global)

• Beyond PQDs, areas of further discussion include: 

• default waterfall, 

• depth of backstop facilities and central bank access,

• Need for greater margin model transparency (margin calls and anti-pro cyclical measures)
Global Markets Advisory Committee

Section Two—CCP Risk and Governance, Panel Four

Margin and Collateral
Global Markets Advisory Committee

Section Three—Market Structure, Panel One

Futures Commission Merchant Capacity
22

Top Observations

 Futures industry has experienced significant FCM consolidation over the period 2002 to 2023

 All FCMs (Highest = 195, Lowest = 61; 69% decline); Non-Carrying (Highest = 94, Lowest = 8; 91% decline); Carrying (Highest = 111, Lowest = 47; 58% decline)

 Decline is attributable to not only the departure of many “shell” FCMs (FCMs conducting only retail forex business) as well as “non-carrying” FCMs (FCMs that hold no customer 

funds), but also to the shrinkage of the important group of FCMs who hold customer funds intended for futures trading (“carrying” FCMs”).

 Exits/ Downsizing by some notable banks in recent years including BNY Mellon (2014), State Street (2016) and Credit Suisse, which had begun exiting even prior to the sale

 Decline led by the exit of many independent FCMs who are neither dually-registered as broker-dealers nor affiliated with banks or bank holding companies. 

 Two essential primary safeguards: (i) maintenance of minimum capital and (ii) segregation of customer funds from proprietary funds and trading activities of 

FCM. Capital provides an added layer of protection to an FCM’s customer base from losses incurred by fellow customers. 

 There is a large decline in the number of FCMs, but at the same time a large increase in their holdings of customer funds

 Decline in FCMs providing client clearing in swaps, even as the swap clearing requirement has gone into effect - i.e., the contrast of rising demand for clearing, combined with 

shrinking capacity.

 Remaining FCMs are dominated by the larger FCM-BDs

 FCM-BDs now hold all top ten industry positions in terms of holdings of customer funds, and these ten FCMs account for 80+% of all customer funds. 

 Leading FCMs appear to possess levels of both scope and scale in services provided to enable them to meet the rising costs stemming from regulatory requirements and 

technological advances.

 Significant levels of excess capital important for maintaining financial solvency and reducing systemic risk (FCMs hold excess levels of capital relative to CFTC minimum 

requirements in order to adhere to more stringent requirements).

 Few New Entrants, suggesting barriers to entry

 Providing FCM services has become an increasingly high fixed cost business, with the costs of infrastructure, and regulatory compliance climbing materially post Dodd Frank. 

 Smaller FCMs may not have the scale critical to running a successful FCM and justify costs of infrastructure and regulatory compliance.

 Increased capital requirements has resulted in FCMs becoming more restrictive on their offering because products became disproportionately expensive.

 Some FCMs took hedges OTC and in some cases FCMs took the hedges off altogether.

 Tying up too much capital has the effect of reducing the headroom for when the market stresses occur.

 FCM concentration coupled with the new capital rules may make the possibility of porting more challenging
23

Top Observations

More recently Proposed Capital Rules like the GSIB Surcharge and Basel III Endgame can impact client clearing and have the potential to further reduce 

Capacity in Cleared Markets

 GSIB Surcharge Proposal (Fed Only Proposal)

 The proposal would add OTC client cleared leg under the agency model to the Complexity and Interconnectedness Indicators of the GSIB Surcharge.

• This proposal would significantly increase capital requirements for the OTC client clearing activities of US GSIBs.

• Since the inception of the GSIB Surcharge in the US, its Complexity and Interconnectedness indicators have been excluded.

 Basel III Endgame Proposal (Joint Fed/FDIC/OCC Proposal)

 Credit Valuation Adjustment 

• Inclusion of client clearing in the CVA framework is unnecessary as the only client-related credit risk that the clearing member faces is risk of client 

default, which is already captured in existing counterparty credit risk framework.

 Operational Risk

• The Endgame Proposal’s approach to calculating the services component of operational risk would serve as a tax on clearing; doesn't distinguish risk 

and is based on gross fees.

 Counterparty Credit Risk

• The requirement for an investment grade company to be publicly traded to get a lower risk weight harms end-users, many of which are not publicly 

traded and will receive higher risk weight.

• SA-CCR should be revised to permit netting of STM/CTM client cleared transactions.

• The inability to decompose non-linear trades under SA-CCR is problematic for listed options.

• The proposed increased risk weights for exposures to foreign banks could make it more difficult for banks, or their foreign affiliates, to offer client 

clearing services outside the US.
24

FCM Data

The Source of the FCM data is based on the monthly financial reports that are filed by Futures commission 

merchants (FCMs) and retail foreign exchange dealers (RFEDs) with the CFTC's Market Participants 

Division (MPD) within 17 business days after the end of the month. 

 Registered FCM: Futures Commission Merchant that is registered with the Commodity Futures Trading 

Commission 

 Customers’ Seg Required 4d(a)(2): This represents the total amount of funds that an FCM is required to 

segregate on behalf of customers who are trading on designated contract markets (DCMs). This is the sum of 

all accounts that contain a net liquidating equity.

 Customer Part 30 Secured Amount: This represents the amount of funds an FCM is required to set 

aside for customers who trade on commodity exchanges located outside of the United States.

 Total Amount of Retail Forex Obligation: This represents the total amount of funds at an FCM, RFED, or 

FCMRFD that would be obtained by combining all money, securities and property deposited by a retail forex 

customer into a retail forex account or accounts, adjusted for the realized and unrealized net profit or loss.

 Funds in Separate Cleared Swap Segregation: This represents the total amount of money, securities, and 

property held in cleared swap customer accounts for cleared swap customers in compliance with Section 4d(f) 

of the Commodity Exchange Act.

70% decline in the total number of FCMs
25

FCM Data

700+% increase in the holding of 

customer funds
26

Top Firms With Client Margins Greater Than 1 USD Billion

December 2003
27

Top Firms With Client Margins Greater Than 1 USD Billion

December 2008
28

Top Firms With Client Margins Greater Than 1 USD Billion

December 2013
29

Top Firms With Client Margins Greater Than 1 USD Billion

December 2018
30

Top Firms With Client Margins Greater Than 1 USD Billion

March 2020
31

Top Firms With Client Margins Greater Than 1 USD Billion

May 2023
32

Funds in Separate Cleared Swap Segregation: This represents the total amount of money, securities, and property held in cleared swap 

customer accounts for cleared swap customers in compliance with Section 4d(f) of the Commodity Exchange Act.

Concentration of Swap Margin May-23 Dec-22 Dec-21 Dec-20 Dec-19 Dec-18 Dec-15 Jan-14

Top 1 20% 21% 21% 23% 26% 27% 18% 18%

Top 2 37% 38% 39% 40% 43% 42% 33% 34%

Top 3 52% 52% 51% 54% 57% 56% 45% 49%

Top 4 65% 64% 62% 64% 67% 67% 57% 60%

Top 5 75% 75% 72% 73% 76% 75% 66% 71%

Top 6 84% 84% 81% 81% 83% 82% 74% 80%

Top 7 93% 93% 89% 89% 90% 89% 83% 85%

Top 8 95% 95% 94% 95% 96% 96% 89% 89%

Top 9 97% 97% 96% 97% 97% 97% 92% 92%

Top 10 98% 98% 97% 98% 98% 98% 94% 95%

Top 10 Margin ($bn) 162 155 147 144 121 95 58 29

Total Margin in Cleared Swap Segregation 166 158 151 148 124 97 61 31
33

 -

 20

 40

 60

 80

 100

 120

 140

 160

 180

 200

3/1/2002

10/1/2002

5/1/2003

12/1/2003

7/1/20042/1/20059/1/20054/1/2006

11/1/2006

6/1/20071/1/20088/1/20083/1/2009

10/1/2009

5/1/2010

12/1/2010

7/1/20112/1/20129/1/20124/1/2013

11/1/2013

6/1/20141/1/20158/1/20153/1/2016

10/1/2016

5/1/2017

12/1/2017

7/1/20182/1/20199/1/20194/1/2020

11/1/2020

6/1/20211/1/20228/1/20223/1/2023

Billions

Capital

 Adjusted Net Capital Net Capital Requirement Excess Net Capital

0%

10%

20%

30%

40%

50%

60%

70%

80%

3/1/2002

11/1/2002

7/1/20033/1/2004

11/1/2004

7/1/20053/1/2006

11/1/2006

7/1/20073/1/2008

11/1/2008

7/1/20093/1/2010

11/1/2010

7/1/20113/1/2012

11/1/2012

7/1/20133/1/2014

11/1/2014

7/1/20153/1/2016

11/1/2016

7/1/20173/1/2018

11/1/2018

7/1/20193/1/2020

11/1/2020

7/1/20213/1/2022

11/1/2022

Customer Seg Funds Req'd Concentration

Top 4 % Top 8 %%

Excess Net Capital Concentration

As a whole, the remaining FCMs are well-capitalized and most hold significant 

excess capital relative to CFTC minimum requirements, with the FCM-BDs and the 

bank-affiliated FCMs holding significantly greater levels of excess capital than 

independent FCMs, primarily due to the fact that, they need to adhere to other more 

stringent regulatory or jurisdictional capital requirements. 
34

FCM Failures and Regulatory Consequences

A number of notable FCM bankruptcies, some of which led the CFTC to add regulations intended to increase protections for customer funds. 

 Two of the more notable failures that did not entail customer seg fund violations represent failures of significantly large FCMs resulted in all customer accounts being successfully liquidated and/or transferred to other FCMs

 Refco, which petitioned for protection under Chapter 11 in October 2005, was the subject of fraudulent behavior and related-party transactions by its CEO. Upon its failure, the majority of firm’s FCM business was sold to 

Man Financial

 Lehman Brothers, a large FCM-BD, filed for Chapter 7 bankruptcy in September 2008 following the failure of its parent holding company due to losses related to investments in subprime mortgages. Lehman’s customer 

funds and futures positions were quickly returned to customers or transferred to Barclay Capital and other firms

 Three notable FCM failures involving customer seg fund violations

 Sentinel Management Group Inc. petitioned for protection under Chapter 11 in August 2007. Sentinel was a registered FCM-BD that engaged in a number of fraudulent activities including commingling customer funds with 

its own proprietary funds and using client funds to collateralize a line of credit. According to estimates reported by the NFA, Sentinel’s customer losses were over $130 million.

 MF Global became the 8th largest U.S. firm to file for bankruptcy when it filed for protection under Chapter 11 in October 2011. MF Global was formerly Man Financial (the same FCM that acquired the customer accounts of 

Refco following its failure in 2005). In 2007, the Man Group spun off Man Financial and changed its name to MF Global. MF Global’s new CEO decided to seek additional channels of revenues for the firm through 

proprietary trading. Part of this strategy included making investments in European sovereign debt involving repurchase agreements, which by 2011 exceeded $6 billion. It was subsequently discovered that approximately $1 

billion in customer funds had been improperly transferred to meet losses on these investments. As a result of recoveries in the bankruptcy process and payouts in other legal settlements, the total recoveries in MF Global as 

of August 2013 were 96% for seg fund customers (leaving a $205 million shortfall), and to 90% for Part 30 customers (or a $100 million shortfall). There were reports that MF Global customers ultimately received all funds 

back. The collapse of MF Global may have also affected the level of industry customer funds as anecdotal evidence suggests that customers became more reluctant to leave excess funds in their accounts and to regularly 

sweep back excess funds beyond those directly needed to support margin requirements. Following the collapse of MF Global the amount of excess funds left in customer accounts had been cut in half.

 Peregrine Financial Group filed for bankruptcy on July 10, 2012, on the same date that the CFTC filed an injunction against the firm. It was discovered that the firm’s CEO had embezzled customer funds for several years 

and had submitted false statements to the CFTC and auditors at the NFA to cover up his actions. It is estimated that Peregrine customers ultimately experienced a shortfall of about $200 million or 50% of customer seg 

funds.

In response to the above events, the CFTC took initiatives to provide additional protections for customer funds. 

 In 2011, the CFTC approved final rules amending Rule 1.25 (effective February 17, 2012) to restrict FCMs from investing customer funds in foreign sovereign debt.

 On October 30, 2013, the CFTC approved final rules (effective January 13, 2014) to require FCMs to maintain residual interest balances in any customer seg fund, secured fund, or cleared swap accounts that they hold. 

 These rules also imposed requirements on FCMs to file daily segregation reports with the CFTC and their DSROs and required FCMs to establish risk management programs to oversee the protection of customer accounts. 
35

Changes to Permissible Investments, Residual Interest, Retail Forex

Permissible Investments

 FCMs are subject to risk-related restrictions on the set of instruments in which they may invest excess customer funds, which are covered by CFTC Rule 1.25. 

 Several changes in this rule occurred over our study period. 

 In December 2000, rule amendments expanded permitted investments to include general obligations of any enterprise sponsored by the U.S. government, sovereign debt, bank CDs, commercial paper, money market 

mutual funds, and some corporate notes. At the same time, the CFTC added provisions to limit exposures to the credit, liquidity and market risks of these products. 

 In 2004 the CFTC amended Rule 1.25 to allow repurchase agreements. 

 Further amendments in 2005 allowed investments in eligible instruments having embedded derivative features and in adjustable-rate securities tied to benchmark rates on a variety of previously approved instruments. 

 In December 2011, in response to the financial crisis and in reaction to the failure of MF Global, the CFTC approved amendments (effective February 2012), which tightened the list of eligible investments. Of note was 

the removal of corporate debt whose interest and principal payment obligations were not guaranteed by the U.S. government (which essentially eliminated most corporate debt), the prohibition of investments in foreign 

sovereign debt, the elimination of in-house and affiliate transactions such as those involving repurchase agreements, and limitations place on investments in money market mutual funds. The CFTC also harmonized the 

list of eligible investments for the investment of Rule 30.7 secured funds to match those in Rule 1.25 for segregated funds. Prior to 2012, secured funds were not technically subject to Rule 1.25, but the CFTC reminded 

FCMs of their fiduciary duty and to use Rule 1.25 as guidance. Losses from investments in sovereign debt was one cause for the MF Global collapse as it had invested approximately $6 billion in repurchase agreements 

involving the debt of countries including Ireland, Italy, Spain, and Portugal.

Residual Interest

 Each day an FCM must determine a customer’s open trade equity and current margin requirements to ensure that the customer has sufficient funds. If there is a deficit, the customer must rectify it. Further, if the FCM 

determines that there is an aggregate net shortage in its customers’ funds, the FCM must report this immediately to the CFTC and to its designated self-regulatory organization (DSRO). To avoid the regulatory consequences 

of becoming underfunded or “under-seg,” FCMs will establish a buffer by depositing some of their own house funds into their customer accounts, with such funds referred to as “residual interest.”

 The use of residual interest to avoid becoming under-seg is important as violations are viewed seriously by regulators. 

 To illustrate, for the three days January 24–26, 2012, Cantor Fitzgerald & Co, a large FCM, became under-seg due to an inadvertent transfer of funds from their customers’ segregated account, rather than the intended house 

account. This error was discovered upon the return of the responsible operations employee who had been out of the office. Though the firm quickly returned into compliance, the firm failed to report the event to either the CFTC 

or the Chicago Mercantile Exchange (its DSRO) until March 13, 2012, when the event was discovered during a routine CME audit. As a result, Cantor was fined $700,000 for failing to maintain sufficient funds in its segregated 

accounts and for not reporting the violation in a timely manner. 

 In March 2013, the CFTC amended its Rule 1.22 to mandate that FCMs maintain residual interest in amounts equal or greater to the customers’ aggregated under-margined amounts.

Retail Forex

 In 2000, Congress passed the Commodity Futures Modernization Act (CFMA), which attempted to bring clarity to the regulation of retail forex. Specifically, the CFMA required retail forex trades to be conducted through a 

regulated entity such as a financial institution, BD, insurance company, financial or investment bank holding company, or, importantly, an FCM.

 Consequently, many previously unregulated entities that wished to participate as counterparties in retail forex trading then registered as FCMs due to their relatively low capital requirement, which at the time was only 

$250,000. These firms were often referred to as “shell” FCMs as they were registered as FCMs, but did not hold any customer segregated funds.

 In 2008 Congress passed the CFTC Reauthorization Act that gave the CFTC jurisdiction over retail forex and created a new category of registrants—the retail foreign exchange dealer (RFED). Importantly, this Act 

established a minimum capital requirement of $20 million for RFEDs and FCMs offering retail forex contracts. This became effective on October 18, 2010. While some retail forex dealers complied with the new regulation 

and met the $20 million capital requirement, many others either closed their business or moved their operations offshore.
36

Changes to FCM Capital Requirements

August 2004

Greater of

•(i) $250,000

•(ii) 4% of total funds required to be 

segregated or secured

•(iii) For BD FCMs, the amount of net capital 

requirement under SEC Rule 15c3-1(a)

September 2004

Greater of

•(i) $250,000

•(ii) 8% of total risk margin of customer 

accounts plus 4% of non-customer 

accounts

•(iii) For BD FCMs, the amount of net capital 

requirement under SEC Rule 15c3-1(a)

2009 - Present

Greater of

•(i) $1,000,000

•(ii) 8% of total risk margin of customer 

accounts plus non-customer accounts, 

including cleared swap positions

•(iii) For BD FCMs, the amount of net capital 

requirement under SEC Rule 15c3-1(a)

October 2010

RFED

•CFTC Reauthorization Act that gave CFTC 

jurisdiction over retail forex

•Minimum Capital Requirement of $20 

million for Retail Foreign Exchange Dealers 

(RFED)

December 2016

SD

•CFTC Proposed rules that raised the 

minimum to $20 million for FCMs also 

registered as swap dealers

 CFTC Rule 1.17

Capital is a driver of internal caps on clearing 

members’ capacity to offer clearing for clients.

 Binding Constraints on clearing capacity through capital requirements 

 Bank-affiliated FCMs are subject to significantly higher capital post 2008 (SLR, GSIB, SA-CCR etc.) 

even pre-Basel III Endgame Proposal
Global Markets Advisory Committee

Section Three—Market Structure, Panel Two

Treasury Market Reform
38

Treasury markets are the bedrock of our global financial system.

State of the U.S. Treasury Markets 

• The U.S. Treasury markets are the largest 

and most liquid government bond markets 

in the world. 

• Since 2000, the supply of Treasuries has 

grown significantly to support the 

expanding U.S government debt.

• It is critical to understand the potential 

consequences of significant modifications 

to markets. $0

$5

$10

$15

$20

$25

$30

20012002200320042005200620072008200920102011201220132014201520162017201820192020202120222023

$ Trillions

Size of U.S. Treasury Markets, By Year
39

Diversity of Market Participants is Key

Preserving robust participation by a diverse group of market participants 

is essential. It ensures that demand keeps up with supply and that 

government funding costs are kept as low as possible as debt continues 

to expand. 

Treasury market participants include:

• Foreign entities

• Mutual funds

• Depository institutions

• State & local governments

• Hedge funds

• Private & public pensions

• Insurance companies

• U.S. savings bonds
40

Role of the Basis Trade in U.S. Treasury Markets

• Many investors—such as mutual 

funds and pension funds—rely on 

Treasury futures as an efficient way to 

manage risk while maximizing 

their allocation to other higheryielding assets, such as corporate bonds.

• Hedge funds and other market participants 

engage in a “basis trade" when there is a 

price dislocation between Treasury futures 

and the underlying cash Treasuries. 

Benefits of the basis 

trade include:

• Increasing liquidity;

• Dampening volatility;

• Reducing bid-ask 

spreads; and

• Lowering the cost of 

government 

borrowing.
41

Collateralization of the Basis Trade

• The price differences are small, so hedge funds often use leverage to 

make the trade economically viable. Collateral posted in connection 

with the basis trade includes both margin posted on the futures leg of 

the trade and any haircuts on the repo transaction to finance the cash 

leg of the trade.

• The futures leg is over-collateralized. CME margins the short 

futures position as an outright directional position and does not 

account for the underlying cash Treasury being held against it.

• Low haircuts for repo financing are due to master netting 

agreements where a dealer/prime broker recognizes that its client 

has a netted package of a Treasury future and a cash Treasury. 

Therefore, this is not true “zero haircut” repo financing.
42

“[Most] funds already satisfy the 

collateral requirement and, in our 

analysis, do not need additional 

capital to support existing 

borrowing... [Imposing leverage 

limits] may affect the size and 

volatility of spreads among related 

instruments in Treasury cash and 

derivatives markets, as well as 

market liquidity conditions in those 

markets.” – U.S. Federal Reserve

Risk Management Practices Already Limit Leverage

• Counterparty banks—through their own 

risk management protocols—determine 

margin requirements on hedge fund 

financing arrangements. 

• Bank regulators work with banks to 

ensure appropriate counterparty and 

collateral risk management. 

• The Federal Reserve noted that 

imposing additional limits could have 

negative impacts on Treasury markets. 
43

Treasury Market Oversight & Transparency

• Regulators have significant oversight of Treasury markets:

• Cash transactions reported to FINRA through TRACE;

• Treasury Futures are subject to CFTC regulation;

• Centrally cleared repo data is collected by OFR; and

• Non-centrally cleared tri-party repo market data is collected by 

BONY under the supervisory authority of the Federal Reserve 

Board.

• Hedge fund managers provide data and information to the SEC about 

the fund, their investments, and use of leverage through Form PF. 
44

Recent Proposals Risk Harming Markets & Investors

• Dealer Proposal: The SEC’s proposal to expand the scope of who is a 

“dealer” to capture a large number of private funds and their advisers 

that are already subject to SEC registration, examination, and 

reporting requirements. Many private funds will be forced to curtail 

their participation in the U.S. Treasury markets.

• Treasury Clearing Proposal: The SEC’s proposal to mandate clearing 

in the U.S. Treasury markets before the necessary infrastructure is 

developed would be counterproductive. In addition, the proposal 

singles out hedge funds for a cash clearing mandate, which risks 

limiting their participation in the U.S. Treasury markets.
45

Enhancing Treasury Markets

• Treasury markets are expected to continue growing, so it is important 

to modernize these markets to meet evolving market dynamics. 

Potential enhancements include:

• Improving data collection through TRACE;

• Expanding the use of voluntary central clearing in the dealer-tocustomer segment;

• Requiring clearing members of FICC to accept “done away” trades;

• Providing for segregation of customer margin at FICC; and

• Introducing cross-margining for end-users for Treasury futures and 

cash Treasury transactions.
Global Markets Advisory Committee

Section Three—Market Structure, Panel Three

Block Implementation Rule
47

Block Trade Analysis

• Questions intended to define two distinct data population sets to study 

and understand the scale of the number of market participants

1. Would it be appropriate to define the two data sets and focus the analysis on two 

representative items as these have the largest data population sets- are those two instruments 

10yr USD IRS and 5yr CDX in your data set? 

2. If we look at 2022 full year data, how many unique Swap Dealers (SDs) and unique non-SDs 

were part of the population of the two instruments in question 1? 
48

Block Trade Analysis

• Questions intended to determine the scale and concentration of 

the number of block participants and their trading needs

3. How many unique SDs reported block trades for each of those two data sets?

4. If you look at the % of number of block vs total trades for each SD reporting block trades, how 

many fall in each category: Less than 25%, 25-50%, 50-75% and greater than 75%

5. How many unique non-SDs executed block trades?

6. If you look at the % of number of block vs total trades for each non-SD reporting block trades, 

how many fall in each category: Less than 25%, 25-50%, 50-75% and greater than 75%
49

Block Trade Analysis

• Question on recalibration of swap data to check 

relevance/materiality of difference between block sizes being 

used by the market presently versus what the data under the 

67% and 75% calculation rules would impose

7. If the 67% calculation method is applied to full 2022 data, what is the computed block 

threshold [A mm]? 
50

Block Trade Analysis

• Questions on recalibration of the scale and concentration of the 

number of block participants and their trading needs if the new 

block sizes were to be used

8. If the 75% calculation method is applied to the full 2022 data, what is the computed block 

threshold [B mm]? 

9. If the A mm and B mm block numbers are applied to the 2022 data, how would the answers to 

questions 3-6 change?

3. How many unique SDs reported block trades for each of those two data sets?

4. If you look at the % of number of block vs total trades for each SD reporting block trades, how many fall in each 

category: Less than 25%, 25-50%, 50-75% and greater than 75%How many unique non-SDs executed block trades?

5. How many unique non-SDs executed block trades?

6. If you look at the % of number of block vs total trades for each non-SD reporting block trades, how many fall in each 

category: Less than 25%, 25-50%, 50-75% and greater than 75%
51

Block Trade Analysis

• Questions designed to identify how trading profile and reliance of 

block trading changes in volatile market conditions and lack of 

liquidity (first 3 months of global lockdown during COVID-19 

pandemic)

10. During the period Q2 2020, if the 67% [A mm] and 75% [B mm] calculation methods are 

applied, what would be the calculated block size?

11. During the period Q2 2020, what are the answers to questions 3-6?

3. How many unique SDs reported block trades for each of those two data sets?

4. If you look at the % of number of block vs total trades for each SD reporting block trades, how many fall in each 

category: Less than 25%, 25-50%, 50-75% and greater than 75%How many unique non-SDs executed block trades?

5. How many unique non-SDs executed block trades?

6. If you look at the % of number of block vs total trades for each non-SD reporting block trades, how many fall in each 

category: Less than 25%, 25-50%, 50-75% and greater than 75%
52

Block Trade Analysis

• Question designed to compute SOFR block size and compare to 

LIBOR block size

12. Based on 2023 YTD (end October 2023) SOFR swap data, what would the imputed block size 

for 5yr and 10yr SOFR swap be under 67% and 75% calculation methods compared to the 

answers to questions 7-8?

7. If the 67% calculation method is applied to full 2022 data, what is the computed block threshold [A mm]? 

8. If the 75% calculation method is applied to the full 2022 data, what is the computed block threshold [B mm]? 
Global Markets Advisory Committee

Section Three—Market Structure, Panel Four

Post-Trade Risk Reduction
Global Markets Advisory Committee

Section Four—Climate Related Market Risk

Kerstin Mathias, Director of Policy and Innovation, City of London Corporation
Global Markets Advisory Committee

Section Five—Future of Finance

Jai Massari, Co-Founder and Chief Legal Officer, Lightspark
Global Markets Advisory Committee

Closing Remarks
Global Markets Advisory Committee

Adjournment