The U.S. Commodity Futures Trading Commission’s Market Risk Advisory Committee adopted three sets of recommendations for the CFTC’s consideration after a public meeting on Dec. 10.
The recommendations, from various subcommittee, address three critical issues: 1) The Treasury cash-futures basis trade and effective risk management practices; 2) the DCO system safeguard standards for third party service providers, including recommendations to build upon and incorporate the language, concepts and principles already set out in the System Safeguards Rule of the CFTC’s regulations with respect to DCOs; and 3) the benefits and limitations of adopting legal entity identifiers for beneficial account holders of certain market intermediaries.
“The MRAC’s success advancing three sets of recommendations adopted on Dec. 10 as well as the recommendations on derivatives clearing organization recovery and resilience and the report on concentration risk related to the declining number of futures merchant commissions adopted in April demonstrate the exceptional work of the members of the MRAC,” CFTC Commissioner Kristin Johnson said.
For the first recommendation related to Treasury cash-futures basis trade and effective risk management practices, MRAC suggested the following:
• Market participants engaged in or providing intermediation for trades associated with the cash-futures basis should continuously assess and manage the risks associated with these trades including market, liquidity, counterparty credit, and other risks. These risks should be modeled, and a mark-to-market attribution analysis should be conducted.
• Market participants should manage market risks that could affect the performance of their portfolios.
• Market participants should evaluate and manage their liquidity risks, including the risk that margin costs increase rapidly and significantly, and that financing is reduced or becomes unavailable.
• Market participants should appropriately monitor and manage counterparty credit risks associated with the basis trade or its intermediation, including through effective due diligence, onboarding, credit risk mitigants, and continuous monitoring process.
Regarding DCO system safeguards standards for third party service providers, MRAC proposed specific amendments on the assessment methodology for the oversight expectations applicable to critical service providers. As noted in the recommendations, the proposals seek to inform the Commission’s mission of promoting the integrity, resilience, and vibrancy of the U.S. derivatives markets through sound regulation.
For the third set of recommendations on legal entity identifiers at the beneficial account holder level, the committee examined the concept of the Legal Entity Identifier to align the domestic regulatory framework. The framework includes global standards that mandate the use of LEIs, or equivalent identifiers, by beneficial account owners for daily reporting by DCOs. The MRAC approved an amended recommendation that invites the Commission to host a roundtable.
Further, the recommendations propose a roundtable to examine CFTC Reg. §39.19 (17 C.F.R. § 39.19) and whether CFTC Reg. §39.19 should be amended to align U.S. regulatory structure with global standards by mandating the use of LEIs, or equivalent identifiers, by the beneficial account owner for daily reporting by DCOs.
After the meeting, CFTC Commissioner Johnson expressed thanks to the members of MRAC and the subcommittees that worked on the recommendations.
“It is an honor and a privilege to serve the Commission as the sponsor of the MRAC and to facilitate engagement among the diverse stakeholders who serve as members of MRAC and the Commission as we build and reinforce our regulatory framework,” Johnson said.