The Global Markets Advisory Committee (“GMAC”) of the U.S. Commodity Futures Trading Commission (“CFTC”) issued on June 4, 2024, a report on cleared derivatives and recommendations for non-cleared derivatives that will be of interest to all derivatives markets participants (i.e., dealers and buy-side firms).

The report focused on the potential adverse impact of two recent bank regulatory proposals on the cleared derivatives markets, while the recommendations related to improvements to the efficiency of variation margin post-trade processes in the non-centrally cleared derivatives markets.

First, the GMAC’s report (The Impact of the US Bank Capital Proposals on End-Users that Rely on Cleared Derivatives Markets) focused on two recent federal bank regulatory proposals that would apply to global systemically important bank holding companies (“GSIB”):

1) The Basel III endgame proposal; and

2) A proposal from the Federal Reserve to adjust the calculation of the GSIB surcharge.

In particular, the report focused on what it describes as “the harmful impact of the pending proposals on the CFTC regulated derivatives markets.” The report identified the following harmful effects of the proposals:

• A reduction in the capacity of U.S. banks to offer clients access to derivatives markets;
• A reduction in liquidity in derivatives markets;
• Increased hedging costs, particularly for end users;
• Disproportionate harm to smaller end-users and non-public companies; and
• An increase of systemic risk.

Citing data collected by two leading derivatives markets trade associations, the report estimated that the proposals would result in a total net increase of $7.21 billion (or 80.5 percent) in capital requirements to support the derivatives clearing activities of the six largest U.S. banks. In support of its report, the GMAC highlighted excerpts from comment letters filed by a wide range of industry participants, including agriculture, energy, insurance, and pension funds, as well as derivatives exchanges and clearinghouses.

Second, the Technical Issues Subcommittee (the “TIS”) of the GMAC issued a recommendation (Global Markets Advisory Committee Technical Issues Subcommittee Recommendation) to streamline variation margin processes in the non-centrally cleared derivatives markets. Generally, the TIS recommended that the CFTC support recent recommendations of the Working Group on Margin Requirements of the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”). In sum, these recommendations consist of the following four items:

1) When opening customer trading accounts, dealer banks and market intermediaries should address operational and legal challenges that could potentially inhibit a seamless exchange of margin and collateral calls during periods of stress. The recommendations specifically identify the potential benefits of using online negotiation tools for legal documentation;

2) Non-cleared derivatives markets participants (“Firms”) should consider providing flexibility in bilaterally agreed acceptable forms of eligible collateral (i.e., beyond simply cash or cash and government securities), in order to relieve pressure on specific asset classes during periods of market stress (i.e., to avoid a “dash for cash”);

3) Firms should consider the advantages of standardization and automation of their non-centrally cleared margin processes, including through the use of industry-wide and standardized data standards; and

4) Firms should consider whether they have adequate, internal operational resources to carry out collateral management functions or, alternatively, whether they should rely on third-party collateral management services providers.

The GMAC report and the TIS recommendations can be accessed via the related CFTC Press Release.