Ronald Filler, Professor of Law, NEW YORK LAW SCHOOL
Risk: Can you start by giving an overview of your panel in Risk Derivatives Clearing conference?
R.F: Mandatory clearing of OTC derivatives is now the common standard following the 2008 financial crisis. This panel will discuss and analyse the various reforms that have been made in the US and globally regarding the clearing of OTC derivatives and what issues still lie ahead. In particular, this panel will focus on the financial resources requirements imposed on CCPs, recovery and resolution concerns if a large clearing member defaults, leverage ratios that are now imposed on clearing member firms, acceptable collateral, the end-user exemption from the mandatory clearing requirement, and how the global regulatory agencies are or are not harmonizing their regulatory reforms in this field. This panel will discuss these various financial resources issues.
Risk: Capital charges such as the supplementary leverage ratio (SLR) are challenging the economics of clearing - how do you expect the clearing landscape to change between now and the introduction of the SLR in 2018?
R.F: The leverage ratio imposed by the US FED and other US agencies may have a huge impact on the financial regulatory capital imposed on clearing member firms. There is considerable debate whether the ratio should or should not include assets held by a clearing member firm that are segregated from the assets of the firm, as required by CFTC Part 22 Regulations. Recent speeches by senior US regulators have expressed different views on this issue. These ratios must be in place by January 2107. The panel will discuss these theories and whether regulatory changes are still needed.
Risk: How has the clearing mandate affected the back-office operations and processing of OTC derivatives? What processes need reviewing?
R.F: Operations and technology drive the business and impact the ability of firms to comply with the various regulations. The CFTC has issued over a hundred no-action letters that have extended the effective date of many of its new regulations. Outside the US, global regulators seem to better recognize the need for the Firms to establish the requisite operations and technology to comply with their new regulations and often give 1-2 years before the respective effective date shall take place. This panel will address these differences in the regulatory models and approaches taken by various global regulators.
Risk: What are the key difficulties in managing reporting and derivatives related operations across different jurisdictions? Different margin segregation regimes? Regulatory recognition of CCPs in different jurisdictions?
R.F: These are critical issues facing the derivatives industry. There is such a demand if not an open pleading for more and better harmonized regulatory models across multiple jurisdictions. Even in the US, with the division of jurisdiction between the CFTC for swaps and the SEC for security-based swaps, these two agencies need to work effectively together to have an harmonized approach as to how these financial products are to be regulated by both agencies. This panel will discuss the\is need for greater harmonization.
Risk: Clearing members have been complaining about a lack of CCP "skin in the game" high up in clearing house default waterfall - what are CCPs doing to address these complaints?
R.F: As noted above, the financial resources at the CCP should include capital contributed directly by the CCP (e.g., their skin in the game). The issues are: (i) how much capital should be directly by the CCP; (ii) whether the CCP's capital should be at the top of the CCP's waterfall; and (iii) whether the CCP should be assessed for additional capital if, for any reason, its direct capital contribution was applied toward a default. One approach used by CCPs is to purchase insurance to meet its skin in the game requirements. This panel will discuss this issue.
Risk: Non-swap dealers such as hedge funds are getting into the swap market making business. How long with FCM's continue to clear trades for entities competing for OTC execution business? 2014 say three FCMs leave the OTC clearing business - are you anticipating more retrenchment in the next 12 months?
R.F: The number of registered FCMs has declined significantly over the past several years. Much of this decrease has resulted from the lack of revenues being received by the FCM industry and the increase in regulatory capital to hold customer assets. A few FCMs have gotten out of the cleared swap business and others have reduced their presence in this area. The big concern is whether we are creating another major systemic issues, that is, the clearing of both futures and OTC derivatives by just a few FCMs. Is this creating a new concentration of risk issue? This panel will discuss the concentration of risks issues facing the industry.
Risk: Like-for-like comparisons between the risk management processes in place between CCPs are very difficult to obtain. What can be done to increase transparency and comparability between CCP default fund contributions and risk parameters?
R.F: There is a major regulatory push to require greater disclosure/transparency by CCPs regarding these matters. It will be interesting to see what the adopted regulations will be. This panel will discuss this issue.
Risk: In your opinion, have regulators achieved what they wanted in the 2009 G20 commitments? What would be on your wish list for regulators?
R.F: Great question. I am a big believer that clearing can and will reduce systemic risks so my answer to your question is a "yes". However, I also believe that there has been a rush to establish final regulations without a proper reflection of whether the regulations adopted were effective and thus would achieve the results that were intended by them. The greatest example is the Cross Border Guidance adopted by the CFTC in July 2013. It appears that the current CFTC Chair is taking a measured approach on what changes, if any, are now needed, an approach that I highly support.