Commodity Futures Trading Commission Chairman Timothy Massad believes central clearing has been “transformative” for derivatives markets and will continue to play a role in the development of sound markets.
Amid much discussion about the technical issues associated with regulatory reform, Massad reminded the audience at CME Group’s 8th Annual Global Financial Leadership Conference that it is important to not lose sight of overarching priorities. In his speech, Massad detailed the three elements that he deems critical to a healthy and sound central clearing landscape:
- Daily Risk Management: “We must remember that clearinghouse resiliency is primarily about daily risk management. … The daily margining practices, the stress and back testing, the oversight and ongoing risk surveillance are critically important. … No recovery plan — and no set of rules that kick in when there is a problem – can take the place of these everyday activities.”
- Continuity of function in the event of a default: “Our contingency planning must account for different scenarios. These include, what happens if a clearing member that is critical to the provision of settlement services defaults? Or perhaps even more fundamental, in the event of a default, it is difficult to conduct an auction or to transfer positions unless the price discovery process continues. And the price discovery process cannot continue unless clearing continues. … We must remember that a clearinghouse is part of a system, and continuity of these key functions is critical.”
- Robust Clearing Member Industry: “The importance of a robust clearing member industry is obvious when we think about what happens if there is a default by a clearing member. For example, when firms like Lehman Brothers and MF Global collapsed, clearinghouses were able to run successful auctions and transfer customers’ positions to other FCMs.”
In a follow-up discussion with CME Group Executive Chairman and President Terry Duffy, Massad also touched on the issue of high-frequency trading (HFT). While being careful not to comment on specific legal cases, Massad noted that intent is becoming an all-important word when it comes to enforcement actions related to high-frequency trading.
“‘Intent’ has been a key aspect of law for years,” Massad explained. “Linking intent to HFT is a matter of law catching up with the markets.”
Watch the video of more highlights from Massad’s appearance at the Global Financial Leadership Conference.