The Commodity Futures Trading Commission’s (CFTC’s) Global Markets Advisory Committee (GMAC) has advanced two recommendations. The first looks at the impact of proposed US bank capital requirements, while the second discusses improvements to collateral and liquidity management for non-centrally cleared derivatives.
These recommendations were approved without objection at a meeting held in New York on June 4th.
The first recommendation considers the US Basel III endgame bank capital proposals, and provides suggestions to examine the impact of US bank capital proposals on end users, central clearing and derivatives markets more closely.
The Global Market Structure Subcommittee, which issued the recommendation, states that the proposals as they currently stand will reduce liquidity in derivatives markets, limit the capacity of US banks to offer clients access to derivatives markets and increase systemic risk.
Hedging costs will increase for end users, the subcommittee continued, subsequently increasing costs for customers. This will disproportionately harm smaller end users and non-public companies, it said, and will contribute to an unlevel playing field for market participants.
The second recommendation was presented by the Technical Issues Subcommittee, and considers variation margin processes in non-centrally cleared markets.
In light of exponential growth of margin call and settlement volumes, following the global implementation of margin requirements for non-cleared derivatives, the report recognises the importance of streamlining variation margin practices. It advises that the CFTC supports and facilitates the streamlining of variation margin practices, in line with recommendations from the Basel Committee on Banking Supervision and the International Organisation of Securities Commissions.
Following a review of margining practices and an assessment of market participants’ preparedness for high margin call and settlement volume during market volatility events, the two organisations published recommendations for the streamlining of variation margin practices in January 2024. The organisations suggested that firms consider the legal and operational challenges that could prevent seamless margin and collateral call exchange, and how they could increase flexibility in bilaterally agreed acceptable collateral. They also suggested that firms look at the advantages of standardisation, automation and third-party services in non-centrally cleared margin processes.
Commenting on the recommendations, Caroline Pham, CFTD commissioner and GMAC sponsor, said: “The GMAC continues to make great progress developing thoughtful recommendations and insightful work product to aid the CFTC, other policymakers, and participants in global markets.
“In less than a year, the GMAC has now adopted 13 recommendations on a broad array of issues to promote and bolster market integrity and resiliency. These recommendations continue to have a tangible impact, not only on rulemakings here at the CFTC, but also among our counterparts and international standard setters.”
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