On Oct. 6, the Treasury Department released its second report on regulatory reform, this time focusing on capital markets issues such as derivatives clearing. The report stems from an executive order issued by President Donald Trump in February and follows a report in June about regulatory changes for the banking sector.
The 200-page report calls for "recalibrating derivatives regulation" through more appropriate capital and margin treatment, allowing for innovation and flexibility in execution, and improving market infrastructure. The report also calls for improving cross-border cooperation among regulators, finalizing position limits rules, and ensuring "appropriate oversight" of clearinghouses by addressing certain systemic risk issues and finalizing a framework for recovery and resolution. The report also recommends reforms to the rulemaking process, such as recommending that the Commodity Futures Trading Commission and the Securities and Exchange Commission make their rulemaking processes more transparent and limit their ability to impose "substantive new requirements" through guidance or no-action letters.
Key derivatives-related recommendations include:
- The leverage ratio requirements should allow an offset for client initial margin on cleared derivatives.
- U.S. banking and market regulators should conduct "regular comprehensive assessments" of the impact of capital and liquidity rules on the incentives for clearing.
- Regulatory capital requirements should transition from the "CEM" methodology to an adjusted SA-CCR calculation that provides an offset for client initial margin and recognition of appropriate netting sets and hedged positions.
- The CFTC and SEC should better harmonize their rules under Title VII of Dodd-Frank, such as by making a clearer distinction between swaps and security-based swaps.
- The CFTC should take steps to simplify and formalize all outstanding staff guidance and no-action relief that has been used to smooth the implementation of the Dodd-Frank swaps regulatory framework.
- The CFTC and SEC should be "judicious" when applying their swaps rules to activities outside the U.S. and should permit entities, to the maximum extent practicable, to comply with comparable non-U.S. derivatives regulations in lieu of complying with U.S. regulations.
- Future CCP stress testing exercises should incorporate additional products, different stress scenarios, liquidity risk, and operational and cyber risks, and the CFTC and FDIC should continue to coordinate on the development of viable recovery wind-down plans for systemically important CCPs.
- The Federal Reserve should review what risks may be posed to U.S. financial stability by the lack of Federal Reserve Bank deposit account access for certain Financial Market Utilities with significant shares of U.S. clearing business, and an appropriate way to address any such risks.