AFR Statement: The CFTC must stand firm on derivatives margin rules

At today’s meeting, the Commodity Futures Trading Commission (CFTC) will rule on whether derivatives margin rules required by Japanese regulators are comparable to U.S. margin requirements.

Much is at stake in comparability determinations. The largest U.S. derivatives dealers operate in every major jurisdiction globally through the use of subsidiaries, and can easily route derivatives transactions through foreign subsidiaries. Therefore, in areas where foreign rules are found comparable to U.S. rules, major Wall Street banks could effectively substitute foreign rules for the rules of U.S. regulators.

This is the first ruling on the international comparability of margin rules for over-the-counter derivatives. Margin requirements are a vital area of systemic risk and end user protection. This ruling thus sets an important precedent for CFTC oversight of derivatives markets.

Japanese margin rules are significantly weaker than U.S. rules in several important areas. These include margin protections in case of the bankruptcy or failure of a foreign counterparty, and the types of non-cash margin accepted. Permitting U.S. firms to operate under these weaker rules would constitute an unacceptable back-door weakening of U.S. margin rules. We are concerned that such a comparability determination would set a precedent for permitting similar weakening in other jurisdictions and in other areas of derivatives oversight.

We are also concerned regarding the procedures followed by the CFTC in making this comparability determination. Despite the vital importance of margin rules to bank regulation, the CFTC has apparently not coordinated its comparability determination in this area with the actions of prudential banking regulators. Furthermore, the CFTC has not made its comparability determination available in advance to the public prior to voting on it.

We hope that the CFTC will protect derivatives markets and derivatives customers by preventing U.S. derivatives dealers from operating under weaker margin rules used in foreign jurisdictions.