P.R.I.M.E. Finance Panel of Recognized International Market Experts in Finance Expert Input in US Regulatory Rulemaking Presentation by Dr. Sharon Brown-Hruska 2016 P.R.I.M.E. Finance Annual Conference 25 & 26 January, Peace Palace, The Hague

US Federal Regulatory Advisory Committees Provisional committees of industry and subject matter experts advising regulators Often consulted on proposed rules and regulations Authorized by the 1972 Federal Advisory Committee Act Required to maintain transparent, publicly accessible records

Financial Regulators Make Extensive Use of Advisory Committees Both the CFTC and SEC are among the agencies with multiple long-standing advisory committees registered Both regularly create new advisory committees as needed

Examples of Advisory Committees

Advisory Committees and Rulemaking Financial regulators often ask advisory committees to propose changes to existing rules in response to events The regulators’ staff then typically prepare regulatory actions based on committees’ formal recommendations The formal recommendations and subsequent proposed rules are then subject to public comment periods

Example: CFTC Energy and Environmental Markets Advisory Committee (EEMAC) P.R.I.M.E. Finance Expert and Tulane Energy Institute Professor Sharon Brown-Hruska Named to EEMAC in January 2015

Example: EEMAC’s Role in CFTC Position Limits Rulemaking In 2015, EEMAC convened to question guest panellists on proposed position limits to prevent “excessive speculation, Positions limits had been the subject of 2012 judicial challenge previously by ISDA and SIFMA –ISDA and SIFMA argued that the CFTC had a statutory requirement to make a finding that position limits are “necessary” before imposing them –The judge vacated the rulemaking to the CFTC for failing to demonstrate the necessity of the rule to prevent excess speculation The CFTC turned to its advisory committee and experts for industry expertise, analysis, and comment

Cost-Benefit Analysis and Advisory Committees Much of the impetus for financial regulators to maintain advisory committees is in seeking expert opinion on possible costs and benefits of proposed regulations In discussing position limits on EEMAC, for instance, many of the members presented their thoughts on likely costs and benefits of proposed rules and suggested modifications The guest panellists likewise often presented analysis or commentary on potential impacts of rules The discussion between the members elucidated to the CFTC alternative approaches to estimating costs and benefits based on different assumptions

Expert Input Outside of Advisory Committees: Comment Letters Advisory committees are just one way experts such as P.R.I.M.E. Finance can influence regulatory rulemaking Outside experts are invited to submit comment letters in response to proposed rules or advisory committee recommendations, with particular attention paid to quantitative analysis the regulator can analyse in detail Among the most effective comment letters are cost- benefit analyses submitted that propose realistic, actionable adjustments to proposed rules

Case Study: CFTC Proposed Rule Requiring Margin on Uncleared Swaps

Regulator Seeks Cost-Benefit Analysis CFTC Commissioner Giancarlo sought analysis on a proposed rule requiring Margin on Uncleared Swaps in 2014 While many industry groups and public interest groups had submitted comment letters on the rule, none had included a cost-benefit analysis the CFTC could use to evaluate individual proposed requirements From my experience as a former CFTC Commissioner and Acting Chairman, this meant the CFTC was missing a key input to the rulemaking process

Analysing the Proposed Rule The proposed rule requiring Margin on Uncleared Swaps was intended to reduce systemic risk by requiring covered swap entities to post initial and variation margin However, we identified numerous provisions of the proposed rule that seemed to raise costs without meaningfully reducing systemic risk One particular provision, a “cash only” requirement for variation margin, seemed to have the potential to actually increase systemic risk during a market crisis by not allowing firms to post margin with liquid, readily marketable securities like Treasuries

Making Expert Recommendations We submitted a comment letter and analysis recommending that the CFTC: –Harmonize its “material swaps exposure” threshold with international norms –Remove the “cash only” variation margin requirement –Exempt inter-affiliate swaps from initial margin requirements

Outcome: Final Rule Adjusted to Incorporate Expert Recommendations The CFTC announced its final rule in December 2015 In the rule, the CFTC cited NERA cost-benefit analysis as the only comment letter presenting new data for the regulator to take into account The final rule likewise cited NERA quantitative analysis as a major factor in deciding to raise the threshold for “material swaps exposure” and remove the pro-cyclical “cash only” variation margin requirement Commissioner Giancarlo cited our analysis as the deciding factor in exempting inter-affiliate swaps from initial margin requirements, since we demonstrated that inter-affiliate swaps did not add to systemic risk

Cost-Benefit Analysis Grows in Importance A bipartisan group of US Senators has proposed a bill to expand the role of cost-benefit analysis in federal rulemaking If enacted, agencies would need to estimate both the potential costs and benefits of a proposed rule, including those impacts that might be indirect or hard to quantify Such hard-to-quantify and indirect impacts usually require expert analysis to estimate, and provide fertile ground for an expanded role for expert comment letters Cost-benefit analysis is one of the most effective ways for industry groups concerned about specific provisions of a new rule to overturn such provisions Regulators may change proposed rules in response to such analysis, and if they do not, lawsuits alleging that a proposed rule fails a cost-benefit analysis can be effective

Key Takeaways US financial regulators regularly seek out the input of industry experts Experts can provide input regarding pending rulemaking by joining advisory committees or presenting to them Experts can also submit public comments containing cost-benefit analysis, which regulators usually value If the proposal to expand the role of cost-benefit analysis is enacted, the role of experts in analysing and evaluating new financial regulatory proposals will substantially expand as well.

P.R.I.M.E. Finance Panel of Recognized International Market Experts in Finance 2016 P.R.I.M.E. Finance Annual Conference 25 & 26 January, Peace Palace, The Hague