House Agriculture Committee Hearing - The Role of Creidt Derivatives in the U.S. Economy
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REP. TIM HOLDEN (D-PA): Thank you, Mr. Chairman.
Mr. Sirri, so you stated that the review process will be completed in mid-December?
MR. SIRRI: Those are our goals, yes.
REP. HOLDEN: And operations, I assume, would be able to take effect shortly thereafter?
MR. SIRRI: (No audible response.)
REP. HOLDEN: Will this clearinghouse be required to meet certain standards and be prepared to continue operating during the stresses related to a natural or man-made disaster? And who will decide how much margin should be reserved for these products; and at what level this margin should be set? And, can you describe the guaranty fund process and how much funds will be held in the fund?
MR. SIRRI: Sure. So, that was a -- multiple parts to your question. Let me start with each one.
The first point you raised, I think, was natural disasters, something we would group, generally, in the issue of business continuity. Business continuity -- the ability to withstand the various kinds of shocks from natural disasters, power outages, retention of data, all sorts of things, are a standard part of robustness in planning that go through oversight of a central counterparty or clearing process.
I think we -- all three of these agencies, working together, understand how important that is. So, as we speak today, we're working with the various applicants who've come to us to ask for the ability to operate a central counterparty for a number of risk management issues. You've raised an operational risk management issue, and that's one of the ones that we're dealing with.
The second portions of your question related to margin, and to the size of a central counterparty, are subjects of active discussion. All three of our agencies sent staff to Chicago several weeks ago to meet with each of these prospective central counterparties. We went in; we examined them; we looked at their financial, their risk models; reports have come back. We're working now to establish just those kinds of parameters you're talking about.
What are the appropriate levels of margin? What are the appropriate sizes for the clearing fund? And those two quantities interact, depending on their risk management, depending on their margin, and that's going to affect the size of the clearing fund, and so forth. So, those I don't have firm answers for those because those are actively the things that we're discussing.
But, those are core to the point of this question, because central counterparty's purpose -- or, one of their primary purposes for us is to reduce systemic risk. So, getting business continuity right, getting financial risk management right is right at the heart of what we're after.
REP. HOLDEN: Mr. Radhakrishnan or Mr. Parkinson, do you want to add anything to that?
MR. RADHAKRISHNAN: I would agree with Mr. Sirri. In the core principles that we have, we do have specific core principles to take care of (system ?) -- (inaudible) -- issues. We do have a core principle that looks at financial resources, and we do have a core principle that requires our clearinghouses to have risk management systems to adequately manage the risk of the risk they're taking.
The CFTC's approach has always been to review the proposal that a clearinghouse has to set margin and to create the guaranty fund. In other words, we don't have a proscriptive prescriptive regime. And we believe that that's what Congress intended when it passed the CFMA, and it's worked well so far.
So, our job is to look at the proposal that a clearinghouse would have, to set the margin, and then determine whether it is reasonable. And in the case of this particular initiative, we are requiring each of the participants to get a validation of their margining model. And, as far as the guaranty fund is concerned, usually in the futures world, the guaranty fund is a function of the amount of risk. So, the more risk that you have -- the more risk the clearinghouse takes, the larger the guaranty fund will be. And that makes sense as well.
REP. HOLDEN: Mr. Parkinson?
MR. PARKINSON: Thanks. I think I agree with everything that's been said by Eric and Ananda. And I would just note that those standards we apply -- the Recommendations for Central Counterparties address both the business continuity issues, the margin issues, and the issues relating to the size of the guaranty fund. Thank you.
REP. HOLDEN: Mr. Parkinson's testimony states that the President's Working Group is calling for a record of all credit default swaps that are not cleared to be retained in the Depository Trust Clearing Corporation Trade Information Warehouse. Should there be a mandatory reporting requirement for CDS, and/or other over-the- counter derivatives that market participants might elect not to clear? Is there danger of such disclosure requirement driving transactions to a less transparent (insurer ?)?
MR. PARKINSON: I think what we called for was not that it all necessarily be in the Depository Trust and Clearing Corporation's repository, but, in general, for all the OTC derivatives markets, not just the CDS markets; that OTC trades be recorded in a trade repository and that regulators have access to the information in those repositories.
REP. HOLDEN: Anyone else care to comment at all?
MR. DINALLO: I would only comment that I think that after what we've gone through, regulators in Congress should not be shy about demanding some sort of accountability around these instruments; and that there's not a tremendous amount of "off exchange" -- to just use a quick phrase, off-exchange activity here. I mean, there's certain bespoke transactions that might be so complicated that they have to be off-exchange, but those could receive "no action," so to speak, moments in safe harbors.
But, I think it's not the right way to go to just, sort of, any longer be afraid of off-shore activity when we just went through what we did largely through the decision of what we chose not to regulate.
REP. HOLDEN: Thank you, Mr. Chairman.