THE NEW CHAIRMAN: An Interview with the CFTC’s Tim Massad

26 Futures Industry | www.fia.org

FI_MAG_V24N4_final_cc-r2_cc.indd 26 9/8/14 5:20 PM AS THE NEW CHAIRMAN of the Commodity Futures ing to Washington in 2009, he spent 25 years at the law Trading Commission, Tim Massad faces a diffi cult chal- fi r m of Cravath, Swaine and Moore, where he specialized lenge. Th e U.S. and the European Union are on a col- in advising corporations on securities off erings, bank fi - lision course regarding a key area of derivatives regula- nancings and other types of transactions. From 1998 to tion, and if they cannot reach an accord in the next few 2002 he was one of the fi rm’s top partners in , months, markets on both side of the Atlantic could be where he worked on transactions for clients throughout severely disrupted. Asia, including the Singapore Exchange’s initial public off ering. At the start of his career, he helped draft the The heart of the issue is how clearinghouses should be original International Swaps and Derivatives Association regulated outside their home jurisdictions. Most of the master agreement for over-the-counter swaps, an experi- world’s major fi nancial centers are implementing the G-20 ence that he says helped him understand the importance mandate to require clearing for over-the-counter deriva- of standardization then and now. tives, but there are diff erences in the details, and that has raised some questions about whether some sort of “mutual Massad also is no stranger to public service. When the recognition” would avoid duplicative regulation for clear- credit crisis hit in 2008 and 2009, he off ered to work pro inghouses that operate in more than one jurisdiction. bono for the Congressional Oversight Panel, the ad hoc group then chaired by Elizabeth Warren to oversee the The issue is particularly acute for clearinghouses in Treasury Department’s response to the crisis. He became Europe and the U.S., which account for the majority of an expert on the Troubled Asset Relief Program, the gov- global trading in OTC derivatives. EU offi cials have sig- ernment program that injected capital into more than 900 naled that they view several Asian countries as meeting banks, auto manufacturers and other companies. Th at led their standards for “equivalent” regulation, which would to a stint at the Treasury Department, where in a succes- allow clearinghouses in those countries to clear trades in sion of positions he oversaw the implementation and then the EU. But the offi cials are not yet ready to propose the the winding down of TARP. While TARP was hugely un- same for the U.S. until certain diff erences are resolved. If popular with voters, Massad succeeded in selling off the the EU does not reach an equivalence determination for government’s stakes at a substantial profi t. As then-Trea- the U.S. in the next several months, European banks that sury Secretary Tim Geithner commented, Massad turned are members of U.S. clearinghouses will face a punitive in- TARP from a “four letter word into a real success story.” crease in their capital requirements and some may reduce or even terminate their clearing operations. Massad was born in , the grandson of Lebanese immigrants who settled in Oklahoma. His father Going in the opposite direction, EU offi cials have served in the U.S. Navy during World War II, then went asked the CFTC to recognize their clearing regime as to work in the oil industry and rose to become president comparable and exempt European clearinghouses from of Mobil’s exploration and production division. Massad U.S. regulation. CFTC offi cials insist, however, that all was raised in Texas and and went to college foreign clearinghouses are subject to U.S. law if they clear at Harvard University. After working for consumer activ- swaps for U.S. customers. In eff ect, that would require ist , he returned to Harvard for a law degree, nearly every major international clearinghouse to register then joined Cravath in 1984. with the CFTC as a “designated clearing organization” and in many cases could set up a confl ict between CFTC In late July, Futures Industry interviewed Massad and rules and local requirements. asked him about his agenda as chairman and how his ex- perience as a corporate lawyer informs his views on the Despite more than a year of diffi cult negotiations on derivatives markets and the CFTC’s mission. Massad this issue, Massad is hopeful that it will be resolved soon. stressed the importance of listening to the concerns raised Since taking over the CFTC in June, he has made two by commercial end-users and others who use derivatives trips to Europe for talks with EU regulators on cross- and promised to apply some “fi ne-tuning” to the imple- border issues. In an interview with Futures Industry, mentation of Dodd-Frank. He also said he expects to work Massad said he recognizes how important it is to resolve closely with other U.S. policymakers, many of whom he this issue and stressed that each side will have to agree to knows personally from his time at Treasury. But he also give “appropriate deference” to the rules of the other. stressed the importance of restoring confi dence in the de- rivatives markets, not only in the sense of preventing an- While Massad is new to the regulation of derivatives, other crisis but also in restoring the public’s perception of he’s no stranger to international negotiations. Before com- the market’s fairness and integrity.

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FI_MAG_V24N4_final_cc-r2_cc.indd 27 9/8/14 5:20 PM Timothy Massad

INTERVIEW

FI: Can you give us a sense of the trail of page bespoke agreements. Standardizing the nize the importance of fi nding a resolution events that led you to this job? forms gave this business the engine to grow and I’m hopeful that we can fi nd a resolu- MASSAD: I spent 25 years in private prac- to be a global industry. Now standardiza- tion soon. tice. When the fi nancial crisis happened, tion is really a principal driver of what we’re When you look at the substance of it, I volunteered to help the Congressional doing in terms of bringing transparency and while I generally agree that each country Oversight Committee. It was an opportu- oversight to this industry. We are requiring should have appropriate deference with re- nity to use my skills and experience to serve clearing of standardized swaps. We are re- spect to the laws of other jurisdictions, one my country. Th at led to me joining Trea- quiring transparent trading of standardized thing to keep in mind in clearing is that sury. I spent fi ve years there overseeing the swaps. So I have the historical perspective of we’ve had a regime of dual registration [for TARP. As I was fi nishing my work on TARP, seeing that evolution and seeing the impor- clearinghouses] and cooperative oversight I was asked whether I would be interested tance of standardization. for some time. Th at’s worked very well, par- in chairing this agency. I was honored to be I think the second thing it gives me is ticularly to ensure protection of U.S. cus- asked to do this. It was an opportunity to an appreciation of the wide variety of busi- tomer funds. address one of the causes of the crisis and nesses that rely on the derivatives markets, Now, in a lot of ways, we totally defer also to chair an agency which is really at the not just interest rate or currency swaps but to Europe in clearing. We don’t insist, fi rst forefront of regulating some of the most really the whole range of products that are of all, that clearing even take place in the interesting developments in the fi nancial used in these markets. I know these mar- U.S. Th ere are a lot of products that can be markets. As a lawyer in private practice, I kets seem esoteric to a lot of Americans. cleared without any involvement of U.S. had had a lot of experience in derivatives. But they really are fundamental to the law. But there are certain areas, swaps being I’d worked all over the world doing all sorts strength of our economy and to the many one because of what the law says, and also of diff erent fi nancial transactions. So I felt businesses that rely on them to hedge price futures that are traded on a U.S. exchange, that my background also gave me a good risk and currency risk and interest rate risk where the law basically requires that they be basis for this job. and so forth. done in a way that’s consistent with certain Finally it gives me an appreciation of the customer protection standards. FI: Can you give us some examples of the cross-border issues and the importance of derivatives transactions you worked on those. Th e drafting of those standard forms FI: Where does substituted compliance fi t when you were in private practice? was the fi rst exercise in trying to harmonize into this? MASSAD: I was one of a small handful the laws of diff erent jurisdictions. It’s inter- MASSAD: I think where we’ll get to is of lawyers who drafted the ISDA agree- esting that we are in a place today where a regime of appropriate deference. We’ve ments [in 1986-87]. I was an associate at people say we should harmonize everything. already done some things in that regard. Cravath and I was the scribe, basically, for Th at’s in part, of course, because this indus- We’re talking about that with our European the U.S. side. I literally spent about a year try grew up to be a global industry without counterparts. Th ere may be ways we can and a half of my life on that. We did a U.S. any regulations. Now we’re trying to bring clarify and formalize some of those things. form and a U.K. form. We also did a us- that regulation to bear. Of course there are At the same time, it’s very important that ers’ guide, which contained all of the defi ni- going to be some diff erences, but I think they recognize our clearinghouses as equiva- tions and all the other optional provisions we’ll ultimately get to a place where it’s rea- lent. Th ey’ve acknowledged they don’t have you could include. After that I continued to sonably consistent. any issues with respect to the governance be involved in derivatives. I oversaw all the of our clearinghouses. Our clearinghouses transactions that the fi rm did for clients for FI: You seem pretty sanguine about that. meet the international standards already a while, and then I went on to advise clients But there’s a lot of concern in the industry and they have for some time. So I think occasionally on their derivatives exposures that the U.S. and the EU are at an impasse the only issue on the table is this issue of and their hedging strategies as part of my on the issue of recognition of clearing. Th ere how we treat these dually registered clear- general corporate practice. are certain deadlines coming up in Decem- inghouses. We’re making clearing more im- ber, but people need to make business deci- portant in the global fi nancial system. Th at’s FI: How does that experience inform your sions now and there’s a lot of concern about why I think it’s important that we build on perspective on both the role that deriva- potential disruption. What’s your response what we’ve done in the past, in terms of this tives played in the fi nancial crisis and your to that? cooperative oversight arrangement, and not responsibilities now as head of the CFTC? MASSAD: The clearing issue is extremely dismantle it. MASSAD: I think it informs my perspec- important. I’ve been spending a lot of time tive in several ways. First is how the [de- on that. I made two trips to Europe in my FI: What do you think it’s going to take to rivatives] industry has been propelled by fi rst month in offi ce to meet with my in- persuade your counterparts in Europe to standardization. Before we did the standard ternational counterparts, and we spent a lot reach some sort of compromise? forms, we were literally doing swaps as 50- of time discussing those very issues. I recog- MASSAD: I think it’s a process of just

28 Futures Industry | www.fia.org

FI_MAG_V24N4_final_cc-r2_cc.indd 28 9/8/14 5:20 PM building relations and talking through the Long Arm of the Law issues. Making it clear what we can do and what we can’t do. I’m optimistic that we The following clearinghouses have registered with the Commodity Futures Trading can work these issues out. It will take time. Commission as a “designated clearing organization” for the purpose of clearing Th ere will be diff erences. I’m not saying that swaps for U.S. customers or have received temporary relief pending registration or an it’s going to be exactly the same. But let’s exemption from CFTC rules. keep in mind that no one would expect that the laws that govern how companies sell se- Country curities should be the same in the U.S., Eu- Clearinghouse of Origin Products Status rope, Japan, Singapore and Hong Kong. No one would expect that the laws as to how ASX Clear (Futures) Australia Interest rate swaps Temporary No-Action companies secure a bank loan should be the Pty Limited denominated in Australian Relief Pending same in all those jurisdictions. But because dollars and New Zealand Exemption Request this industry grew up without any regula- dollars tion, because people have been able to do their deals across borders without worrying about that, people start from the premise Clearing Corporation of Interest rate swaps and Temporary No-Action that the regulation should be the same. India Ltd. non-deliverable forwards Relief Pending We’d like to get to where the regula- denominated in Indian Exemption Request tion is relatively consistent. We’ll work rupees very hard to do that. But people have to recognize that we’re bringing regulation, Eurex Clearing AG Germany Interest rate swaps, credit DCO Registration much needed regulation, to this industry. default swaps Pending And the vehicle for doing that is the na- tion state, and each one has diff erent tra- ditions, diff erent legal traditions, diff erent ICE Clear Europe U.K. Credit default swaps, Registered as a DCO customs, and diff erent politics. energy swaps, futures

FI: On the subject of clearing, one of the Japan Securities Japan Interest rate swaps DCO Registration basic premises of Dodd-Frank is that greater Clearing Corporation denominated in yen Pending use of clearing will reduce the overall level of systemic risk. But the more that people Korea Exchange Korea Interest rate swaps DCO Registration bring their contracts to clearinghouses, the denominated in won Pending more risk will end up in those clearing- houses. What sort of mechanisms have you developed to manage the risk in those clear- LCH.Clearnet Limited U.K. Interest rate swaps, Registered as a DCO inghouses, and what role does the Federal non-deliverable forwards, Reserve have in that process? energy swaps, futures MASSAD: You’re right that we have made clearinghouses more important in LCH.Clearnet SA France Credit default swaps Registered as a DCO the global fi nancial system. Th at makes oversight of these entities, particularly the OTC Clearing Hong Hong Kong Interest rate swaps, Temporary No-Action largest ones, very, very important. We are engaged very actively in that, and we are Kong Limited non-deliverable forwards Relief, Pending working very closely with the Fed on ex- Exemption Request aminations and oversight of these entities. Again, coming back to the European dis- Singapore Exchange Singapore Singapore dollar Registered as a DCO cussion, I think that’s why it’s so impor- Derivatives Clearing denominated interest rate tant to have cooperative oversight with our Limited swaps, non-deliverable international counterparts, particularly forwards, commodity when there are European clearinghouses swaps that have a large amount of their business with American customers. Source: CFTC

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INTERVIEW

FI: How do you manage your priorities organizations, or otherwise. Th e fact that we tions designed for the fi nancial institutions within the limited resources you have? Are now are working with the Fed, for example, that were at the heart of the fi nancial crisis. you looking for any ways to change how on oversight of two of the clearinghouses is Can you talk a bit more about that and how the agency functions that would free up re- very helpful and important. that guides your philosophy? sources in some way? MASSAD: All the things that we’re doing MASSAD: Unfortunately, we don’t have FI: Going back to something you said at the under our expanded responsibilities are, in the budget I would like to have to really beginning of this interview, what is it about my mind, a great benefi t to those end-users. make sure we can be doing all that we this agency and the markets it regulates that We want to make sure that we don’t have should be doing. We’ve got to rely on the you fi nd so interesting and exciting? unintended consequences and inappropri- industry to regulate itself, in many respects. MASSAD: First of all, you look at the ate burdens on these nonfi nancial compa- I think the main thing I’m looking for is just growth of these markets over the last 20 nies because of the way we’re trying to bring encouraging people to take a fresh look at years. It’s really quite incredible in terms of oversight to the industry. Given the agency’s how we can be most effi cient with the re- the expansion of products that are traded. mandate to develop rules to cover oversight, sources that we have. It’s also the fact that you have both futures reporting, trade execution, and clearing over Th is agency has gone through a very and swaps components. It’s the fact that it a very compressed timetable, inevitably there intensive rule-writing phase. It was an in- is cross-border. It’s the relationship of these are issues where you say, oh, gee, I didn’t real- credible amount of work and a credit to all markets to the cash markets, which I think ize it would cause that eff ect. Th ose are the the people in this agency. Now that we’ve is very interesting. And it’s the fact that kinds of things where we may need to go gotten most of the rules done, we’re more more and more businesses use these mar- back and try to fi ne-tune it as best we can. focused on compliance with those rules, kets. I don’t think 20 or 30 years ago you with enforcement, and with our examina- saw the same depth and diversity of usage FI: What’s the process for doing that fi ne- tion and review activities. I’m encouraging that you see today. All of that is what makes tuning? people to think about the proper allocation it interesting. MASSAD: It’s a mix of things. We use the of resources, given what we have in terms of tools at our disposal. Th e agency has already responsibilities and budget, and how we can FI: You’ve spoken about the need to protect done some of those, whether it’s no-action leverage other resources, the self-regulatory end-users from getting caught up in regula- letters or the proposed rule we have out there on the treatment of special entities. It’s not a wholesale review or revision of the rules. It’s really more just a matter of being mindful of those issues, like bona fi de hedging, making sure we get that right. Congress mandated that we develop position limits for a wide range of commodities. But in doing so, we want to make sure that businesses that rely on these markets can continue to engage in bona fi de hedging. Another example is that Congress is very clear that end- users should be treated diff erently when it comes to margining and things like that. So it’s those sorts of issues.

FI: One of the pillars of Dodd-Frank is the creation of swap execution facilities. Th ere was a lot of excitement when these were launched, but there hasn’t been much vol- ume so far. One factor may be that there is a whole cadre of people who are famil- iar with quoting prices in futures or FX or other markets who are not yet part of the SEFs. What are you doing to get these non- traditional liquidity providers into the SEF world so that the SEFs start to look like a Photos by John Rizzo place where you can get better prices than elsewhere in the market?

30 Futures Industry | www.fia.org

FI_MAG_V24N4_final_cc-r2_cc.indd 30 9/8/14 5:20 PM MASSAD: We’re certainly interested in Th ere are three types of issues we’ll ad- this. I’m going to lift up the phone and call those issues and those concerns. I think the dress. Th ere are some things that we can somebody if there’s an issue that aff ects both important thing to keep in mind here is improve, in terms of our rules and bring- of our interests. we’re just months into this. It’s important ing greater clarity to what we expect. Th ere for people to step back a little and recognize are some things that the SDRs need to work FI: Last question—what keeps you up at that we’re really bringing dramatic change on, in terms of how they report data and night? to this industry. Yes, it may take more than making it easier for us to aggregate. Finally MASSAD: What I’m most concerned a few months to get there. But think back there are some things that participants in about is more of a broader issue than on securities reform and what people said the market will need to improve, taking any particular thing that we’ve touched about that. When the Securities Exchange their obligations seriously, and making sure on, and that’s the importance of restor- Act was passed in 1934, there were people that they report the data properly. I’ve seen ing confi dence in our fi nancial markets.

Our job is to do all we can to help restore confi dence in the integrity of the markets.

like the president of the New York Stock some data from the SDRs on the quality Most Americans don’t really know any- Exchange who said this will be the death of of diff erent fi rms reporting, and that’s very thing about these markets and they don’t American business. So the swap reforms are interesting data. We’re going to be talking engage in these markets. But the level of all still kind of new and it may take time to participants who we feel are not focusing confi dence that the public has in our fi - before they seem as commonplace as the enough on their data reporting obligations. nancial markets has taken a hit. I believe requirement that public companies fi le an- we have the best fi nancial markets in the nual and quarterly reports. Th ere’s going to FI: On a specifi c matter, are you consider- world. Th ey’re the most dynamic, the most be kinks to work out. Th ere’s going to be ing extending the clearing mandate to in- innovative, the most transparent. We need issues to address, and we’ll do our best to clude FX products? to do all we can to keep them that way, address them. MASSAD: We’re looking at that, but we and part of that is making sure we main- don’t have a fi nal timetable on that. tain confi dence in those markets. FI: One of the other key goals of Dodd- Frank was to make these swap markets FI: Is that something where Treasury will be FI: From an industry perspective, we tend more transparent, both to the public and to more involved than it would in other areas, to focus on systemic risk issues, such as regulators. On the other hand, the quality just because Treasury historically has had preventing another collapse or protecting of data that is being collected now makes it such a strong interest in currency markets? the market in case of a default. Is that what very diffi cult to analyze. Where does that fi t MASSAD: My attitude is I’m going to you mean when you talk about confi dence into your list of priorities? work closely with all my fellow regulators in the markets? MASSAD: Very high. We can’t have true and agencies. I’ve got a great relationship MASSAD: Believe me, that’s an equal oversight and proper regulation of this mar- with Mary Jo White. We’ve known each concern. We’re going to do everything we ket unless we have a good picture of what’s other for decades. [Federal Reserve Gover- can with the resources that we have to pre- going on. Now, it’s a big challenge. We’re nor] Jay Powell is going to be focusing on vent failures and market disruptions. But I talking about coming up with rules of the clearing and he and I know one another think it’s more than that. Th ere’s a public road, if you will, or standards for the re- and have had a few discussions about this. I trust that’s involved. Our job is to do all porting of data by a lot of diff erent market know Tom Curry [Comptroller of the Cur- we can to help restore confi dence in the in- participants on a wide range of products. rency] and Marty Gruenberg [FDIC Chair- tegrity of the markets in terms of both the But I’m very committed to that. I’ve talked man] and expect to work closely with them. reality and people’s perception that they with our staff a lot about that, and I’ve been And similarly with [Treasury] Secretary operate fairly and transparently. talking with outside groups, whether it’s the [Jack] Lew and others at Treasury. Look, swap data repositories or fi rms that have an most Americans expect one part of the gov- ...... obligation to report as well as other partici- ernment to talk to the other part. I kind This interview was conducted by Will Acworth, pants in the market, to get more ideas. of have a common sense attitude toward editor of Futures Industry.

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