LONDON, May 10 (IFR) - Acting CFTC chairman Christopher
Giancarlo has called on global regulators to recalibrate bank
capital requirements to restore liquidity to markets in a bid to
avoid 'flash' trading events.
Speaking at ISDA’s annual general meeting in Lisbon,
Giancarlo warned that stringent Basel III demands have sapped
capital from trading activities, leading to reduced market
liquidity that may have been the trigger for more than a dozen
major flash trading events since the passage of Dodd-Frank.
"Recurring liquidity flash events are not a fair price to
pay for enhanced bank stability," Giancarlo told delegates.
“The time has come for regulators on both sides of the
Atlantic to recalibrate bank capital requirements to better
balance systemic risk concerns with healthy economic growth and
prosperity,” he said.
Giancarlo called for customer cash collateral held in
clearinghouses to be excluded from a clearing member’s leverage
calculation under the supplementary leverage ratio. He also
called for customer collateral to be taken into account when
calculating potential future exposure under the Basel
Committee’s standardised approach to counterparty credit risk.
“Applying the SLR to clearing customer margin reflects a
flawed understanding of central counterparty clearing,” he said.
The SLR requires large US banks to put aside around 5% of
assets for loss absorption purposes. Current rules mean that
capital is also charged against customer margin held against
swaps in clearinghouses, which many see as a barrier to
providing a service that is intended to steer risk away from
The onerous treatment has caused many futures commission
merchants to cease operations. At the start of this year, the
number of registered FCMs stood at 55 – down from over 100 in
2002. Just 19 of those FCMs currently hold customer funds for
swaps clearing, causing extreme concentration in the business
following the departure of large banks such as Bank of New
York-Mellon, Nomura, RBS and State Street, while Deutsche Bank
recently shut its US swaps clearing operations.
“A consolidated FCM industry could pose difficulties in
transferring customer positions and margin to other FCMs in
times of stress or an FCM default,” said Giancarlo. “In certain
exchange-traded derivatives markets, three to four firms clear
nearly half of the trades. Such concentration can potentially
impact market functioning and be a source of systemic risk.”
According to Giancarlo, his suggested changes to the SLR
rules could reduce capital costs for clearing members by as much
as 70%, translating into a 1% capital reduction at bank holding
company level. He also believes that the reductions could
translate into a three-fold increase in trading activity –
particularly in hedge positions that are carried overnight.
“This dramatic reduction in costs on a service imperative to
managing systemic risk in swaps is entirely worth the trade-off
of a minuscule reduction in balance sheet protection,” Giancarlo
said. "The financial system will be safer and more stable for
The derivatives regulator also warned that cross-border
regulatory coordination was critical in avoiding fragmentation
of the global marketplace.
"The CFTC should operate on the basis of comity, not
uniformity, with overseas regulators," Giancarlo said. "The CFTC
should move to a flexible, outcomes-based approach for
cross-border equivalence and substituted compliance.”
Giancarlo welcomed the opportunity to discuss the CFTC’s
experience of CCP supervision with officials in Europe as they
debate the location of euro derivatives clearing following the
UK’s departure from the European Union in 2019.
He said that the key regulatory policy decision must be made
with care by European officials as they weigh up perceived
benefits of relocation to facilitate central bank support,
against the higher costs to the European financial system
associated with the loss of netting euro-denominated risk
“Given the closeness of the US and European derivatives
markets, what Europe chooses to do on the supervision of CCPs
undoubtedly will inform the evolution of US regulatory policy
for cross-border swaps clearing,” he said.
(Reporting by Helen Bartholomew)