Financial regulators in the US are continuing work on improving the system despite increased risk caused by heightened global instability and volatility.
Work continues at the agencies despite the distractions of Covid-19, heightened tensions from the presidential election, a lack of economic stimulus, and growing international issues such as Brexit and the trade war with China.
Speaking at the annual conference of the Securities Industry and Financial Markets Association (SIFMA), Commodity Futures Trading Commission (CFTC) chairman Heath Tarbert outlined the work his agency has been doing throughout the pandemic.
"The CFTC has probably had its busiest year in eight to 10 years… we've been very focused on getting a lot of things over the finish line," said Tarbert.
Members of the derivatives sector regulated by the CFTC have asked the agency to finalise its position on certain issues. These include capital requirements for swap dealers, the cross-border rule, and the final rule on position limits for physical commodity derivatives, which further adjusted the regulation to address the concerns of energy interests. "The good news is that a lot of the biggest ticket items are now behind us," he added.
The CFTC still has more open meetings planned though: the agency has not updated its bankruptcy provisions since 1983 and intends to do so this year.
"I'm not expecting a great deal of turmoil in the futures commission market space, and certainly not with clearinghouses, but I feel like it's our responsibility to make sure that our insolvency rules and customer protection laws are up to date," he said. "We will be finalising our bankruptcy rules and updating them for the first time in four decades."
Tarbert suggested that the CFTC also has plans to address risk principles for electronic trading, given the speed of trading on a number of exchanges, as well as changes to the Swaps Execution Facilities (SEFs), and finalising securities future margin rules with the Securities and Exchange Commission (SEC).
The SEC, too, has continued to legislate throughout the pandemic, and is pressing on with rule-making despite the upcoming presidential election in just under a fortnight.
"We moved very early to a remote environment. The health and safety of our people is paramount. Through all of that we had a great dialogue with the industry, including our critical market infrastructure," chair Jay Clayton told the SIFMA conference. "The water kept flowing through the pipes; things kept working."
Clayton continued to outline what the Commission has done over the past few months, drawing attention to work on the Consolidated Audit Trail (CAT), the Libor transition, market data fees, and Regulation Best Interest.
"We set our agenda each year and I expect that to happen again this year. The fact that we have stayed on track on our agenda during the pandemic is just a tribute to the folks at the SEC," he continued. "It's easy to just delay things, but we've been pursuing them."
One of the most hotly discussed topics in recent years is the CAT, an enormous project that the SEC and Financial Industry Regulatory Authority (FINRA) have been working on for some time. In March, the CAT was delayed until May 20 to allow broker-dealers extra time to handle the immediate backlash of the pandemic.
The Commission recently published proposed amendments with regard to privacy-related artificial intelligence, focused on access to client data, which has been an area of significant concern for the market.
"It's been a bit of a journey, but I think we've made progress; not just at the SEC but the whole industry. The purpose of the audit trail is to allow us to do forensic analysis of market events, and to allow a degree of market monitoring," he added.
"We've adjusted one of the principles of protection of customer information, personal information and trading information, as the landscape has changed. We've greatly reduced the amount of personally identifiable information (PII); we don't need it to actually do the job, so we're not going to take it," he said.
Clayton added that he sees the CAT improvements taking an iterative approach, focusing on those principles.
"It's going to get built; it's going to function well. Hopefully when my time here comes to an end, people are reasonably satisfied that we've reflected those principles," he said.
The Federal Reserve has been one of the most active of the US regulatory bodies during the pandemic, primarily in establishing the Main Street Lending Program to support lending to small and medium-sized businesses that required assistance because of the pandemic.
During this volatile period, one advantage the public sector had was the experience of the global financial crisis. This helped the market to act quickly and decisively to halt a further market shock.
"These interventions were unprecedented in scale and scope. Central banks around the world expanded their asset purchases, significantly increasing their balance sheets. Central banks also implemented liquidity support, including traditional operations to fund banks, but also through liquidity facilities to support other entities," Federal Reserve vice chair for supervision Randal Quarles said.
For example, the Federal Reserve established facilities to provide liquidity to dealers, commercial paper markets, money funds, nonfinancial corporates, and municipal bond markets.
"In an effort to support the global demand for US dollars, the Federal Reserve established swap lines with central banks all over the world to support international trade," he added.
"In addition, regulators and supervisors have strongly encouraged banks to deploy capital and liquidity buffers to support lending, made modifications to certain regulatory requirements, or delayed the implementation of new requirements. These decisive actions have succeeded in alleviating market strains to date."
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