We are delighted to feature a Q&A interview with Craig Phillips, Counselor to the Secretary, U.S. Department of the Treasury.
You joined Craig Donohue, OCC's Executive Chairman & CEO, in a Fireside Chat at WFE’s Clearing & Derivative conference in Chicago in April. Why did you make that event a priority?
I appreciated the invitation to speak to such an important, influential, and global group. Treasury has conducted wide ranging outreach, and had discussions with hundreds of market participants, including many US and international exchanges and clearing organisations, as part of our work to develop a series of reports in response to Executive Order 13772. President Trump issued the Executive Order directing the Treasury to identify statutes and regulations that inhibit the regulation of the U.S. financial system in a manner consistent with a set of Core Principles. The Fireside Chat was a great opportunity to present our thoughts on derivatives and clearing to the global group assembled at IOMA, all of which are focused on the important goals of global liquidity and market transparency.
Why are derivatives important to the U.S. economy? What are Treasury’s key reform initiatives?
Derivatives and clearinghouses play an incredibly important role in the financial system. Derivatives take many forms, including forward agreements, futures contracts, options, and swaps, and can be based on nearly any asset or commodity. As a class of financial instruments, derivatives allow financial and nonfinancial concerns to transfer, and thus better manage, a wide range of risks. When used properly, derivatives assist companies in their efforts to grow and create jobs, produce goods and services for the economy, and provide stable prices for consumers.
Overall we have found widespread support for mandated central clearing and platform trading of standardised derivatives, as well as trade reporting. However, there are also many areas where we’ve heard criticisms regarding how these market modifications have been implemented, and we think rules could be recalibrated.
For example, we recommend the CFTC and the SEC work together in the harmonisation of their respective rules, for swaps and securities based swaps for instance. In addition, Treasury believes U.S. rules should be applied to cross-border swaps in a manner that minimises regulatory conflicts and inefficiencies, and limits unnecessary operational costs and market fragmentation. Finally, Treasury has also advocated for revisiting capital treatment, including impact on leverage ratio requirements, for all swap related activities.
Since your remarks, Chris Giancarlo, Chairman of the CFTC has published his vision paper for Swaps 2.0. Any thoughts on the direction that he is proposing for his agency's approach to oversight?
The CFTC has been an excellent partner to Treasury in evaluating current problems and potential solutions regarding derivatives regulation. Treasury supports the Chairman’s White Paper on Swap Regulation Version 2.0, which is a critically important statement of principle of the next phase of swap market reform and steps for implementation. We agree that the swap market reforms can be tailored to maintain market “vibrancy, diversity and resilience.” Swap Data reporting was a critical objective of Dodd-Frank, but our global implementation requires adjustment and should incorporate the best technological approaches. And Treasury is very concerned about market structure considerations, treatment of end users, and the identification of appropriate thresholds in both trading and clearing.
Finally, the Chairman rightly focuses on the importance of regulation of CCPs, and most importantly, the creation of a predictable, sound regime for the potential of recovery, and if necessary, resolution. Many steps have been taken – but more remain. Treasury intends to work steadfastly with the CFTC, the FDIC, the Federal Reserve Board and international parties on this important mission.
You mentioned the importance of appropriate recognition of equivalence of regulation of CCPs globally. What are Treasury’s key objectives as Brexit approaches?
Last year, the EC and the ECB issued proposals that would bolster EU-level supervisory and regulatory authority over both European and non-EU CCPs. These proposals, if approved, would give EU authorities broad powers to determine to categorize or 'tier' a third-country CCP based on systemic importance. If adopted as proposed, Treasury believes that the regulatory framework could also affect clearinghouses in the U.S., since both the U.S. and UK are third countries.
While the United States has significant concerns with the proposal, and encourages outcomes-based equivalence determinations, we are supportive of finding a constructive and lasting solution on the issue of cross-border CCP supervision, and recognise the objectives of enhancing market supervision and financial stability in the European Union. We seek clarity on the criteria and timeline of the proposals for cross-border CCP supervision, and we encourage a proactive and constructive dialogue between the EU and United States on effective and efficient supervision of systemically important CCPs.