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CFTC Commissioner Says Industry Consolidation Heightening Risk

In a speech before the Federal Reserve bank in Chicago, CFTC Commissioner Brian Quintenz said regulators and derivatives clearing organizations (DCOs) must plan for extreme circumstances even though the probability that a DCO will fail is very remote. DCOs, among other things, conduct payment and settlement services in derivatives transactions. He noted that since 2002, the futures commission merchant marketplace has declined from 100 CFTC-registered entities to 55 at the beginning of 2017 and that there has been a precipitous drop of new entrants into the marketplace after Dodd-Frank. Quintenz warned: “The more a DCO’s clearing membership consolidates, the less the clearing system mutualizes risk and the more it interconnects firms’ exposures.” Meanwhile, Quintenz noted that the CFTC’s supervisory stress test across the five largest registered DCOs indicated that the DCOs could withstand extremely stressful market scenarios and that risk was sufficiently diversified across clearing members.A recent CFTC report focusing on DCO liquidity found that all DCOs covered by that exercise would have had sufficient liquidity to meet their settlement obligations in the required timeframes. Earlier in October in an interview with the Wall Street Journal, Quintenz said regulators must also focus on risks associated with automated trading systems.