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I support the adoption of the Financial Stability Oversight Council’s (FSOC) annual report and its recommendations. I want to thank the FSOC members and their staffs for the great deal of work that went into this document, and Secretary Lew for his leadership.
I would like to say a brief word about a few areas the report covers that are of particular importance to the CFTC. These are cybersecurity, changes in market structure, and central counterparties.
Cybersecurity
First, the report makes clear that cyber threats should remain a top priority for the Council. I believe this is perhaps the single greatest risk our markets face today, and I strongly support the report’s recommendations.
As discussed in the report, the CFTC has proposed cybersecurity rules that we hope to finalize this year. These rules are designed to make sure that the companies running the core infrastructure under our jurisdiction—the exchanges, clearinghouses, and swap data repositories – are adequately evaluating cybersecurity risks and testing their cybersecurity and operational risk protections.
Changes in Market Structure and Concerns about Market Liquidity
Second, the report details changes in market structure and discusses concerns about market liquidity. It highlights in particular the increased use of automated trading systems, a trend we have seen for some time in the futures markets. At the CFTC, we are presently considering a proposal that focuses on pre-trade risk controls and additional requirements to minimize the risk of disruptions or other operational problems posed by automated trading systems. And having just returned from a trip to Asia, I would note the great deal of concern about these issues there, as well as in Europe.
The report also considers concerns about market liquidity, including the potential impact of new regulation and other changes. It can be challenging to sort out how different factors—such as macroeconomic conditions, changes in market structure, technology, and regulation—impact liquidity. But I support the report’s call for continued examination of these issues, and we will continue to do so at the CFTC.
Central Counterparties
Third, the report discusses the continued focus on making sure central counterparties, or clearinghouses, are resilient. Much has already been accomplished in this area, and there is a lot going on today both domestically and internationally. The CFTC is heavily involved in these efforts. Recent accomplishments include the agreement that European Commissioner Jonathan Hill and I reached, which resolves issues related to the EU’s “recognition” of clearinghouses located in the U.S., reduces risks of regulatory arbitrage, and provides a strong basis for working together. In addition, U.S. and international regulators are currently implementing a four part work plan to examine clearinghouse resiliency standards, recovery and resolution planning, and interdependencies among clearinghouses and clearing members.
All of this work highlights the importance of focusing on the relationships between clearinghouses and their clearing members. The robustness of the clearing member industry is critical to the success of central clearing and to the health of clearinghouses, and we must keep this in mind particularly when it comes to recovery and resolution planning.
The report also highlights the importance of the adoption this past year of rules setting margin requirements for uncleared swap transactions. This is a critical complement of the effort to mandate clearing for standardized swaps. I am pleased that we, along with the prudential regulators, were able to finalize these rules and harmonize them with one another and with international standards.
Conclusion
I look forward to continued collaboration on these and other issues with the FSOC agencies.
Let me conclude with a special thanks to Deputy Assistant Secretary Patrick Pinschmidt. Patrick, it’s been a pleasure working with you. Thank you for your service – and I wish you all the best in the future.
