Regulators and markets should be prepared for tail risks as they appear to be occurring more frequently.
“We have to be prepared for tail risk.” said Rostin Behnam, acting chair of the CFTC, while speaking at the year’s Isda AGM.
“We think they’re often not the most frequent events that are going to affect our markets. But given the dynamics and the global nature of our markets and the interconnectedness of the world as we move forward with technology. We have to appreciate and understand that these tail risks, although not necessarily probable seem to be happening more frequently.”
His remarks yesterday come as tech stock lead a global sell off. Fears of inflationary pressure saw the Nikkei close down more than three percent, the FTSE 100 nearly 2.5 percent. The Dow Jones was down by more than a percent during mid-day trading.
In response to the “once in a century” pandemic, the CFTC like many regulators delayed some financial regulation that were scheduled to go into effect in 2020. For example, the CFTC last year delayed initial margin requirements for one-year to help small unclear swap portfolios.
Although a number of the agency’s rules have been delayed due to the pandemic the CFTC will not moving forward on a number of issues.
“We need to make sure that we’re focused on the rules set that existed before the pandemic, we’re focused on the issues and the challenges of today, but also moving forward and implementing these rules that we had in sight before the pandemic,” he said.
“We should as always talk/engage make sure that we’re doing things thoughtfully and in a measured way, but ultimately I will always say that we have to make sure that we’re continuing to move the conversation forward.”
Behnam then spoke on climate risk, which has become a priority issue for the Biden administration. The CFTC had previously published a report outlining 53 recommendations to better manage climate risk, with a price on carbon being the first.
“[It’s] really all about incentives and that is how financial markets work, creating incentives for the allocation of capital,” he said. “If we can put a price on carbon, basic economics, allocation of capital will move away from it, consumers will move away from it and we can speed up the transition to a different renewable energy source.”
He also addressed the Libor transition and said Sofr liquidity was heading in the right direction but added “We’re obviously not where we need to be as we get closer to the end of this calendar year.”
As the deadline closes, Behnam said the CFTC will act if needed to help drive the transition to Sofr.
“We will do whatever we need to do from a CFTC perspective, to help create incentives to help move the market along, and to ultimately increase liquidity pools so that the larger economy can transition to Sofr as soon as possible.”
As the US emerges from the pandemic, Behnam said the recovery to be “unbalanced” and expects there will be some bump along the road. With new technology like cryptocurrencies becoming more mainstream, he said market resilience will be a priority when addressing these developments.