"Over the past several years, we’ve seen several unexpected events that have shocked global commodity markets. The COVID-19 related shutdowns and Russia’s invasion of Ukraine have each caused significant global disruptions in the supply and demand of commodities.
"We are fortunate our derivatives markets showed resiliency throughout these events. There is perhaps no greater testament to the importance of well-regulated, professional, and liquid derivatives markets than their continued operation during times of significant market stress.
"Yet, the strength of our derivatives markets should not be taken for granted. Building deep, liquid, and safe derivatives markets is the result of informed trade-offs and negotiated compromises between the needs of different market participants. It takes constant work to uncover, understand, and manage the risks that can develop.
"Widespread clearing is one reason for the success of our derivatives markets, despite the recent turmoil. Clearing provides access to essential risk management tools for hedgers and creates a safer financial system for all Americans.
"Our cleared markets perform so well due to the public servants and professionals who work every day to understand and manage market risks, both at the Commodity Futures Trading Commission and across the derivatives industry, including our five witnesses.
"Clearing manages risk by spreading it through multiple layers of market participants, recalibrating risk levels daily, and putting money aside in the form of initial margin and the default fund. This system is well understood and has proven resilient time and time again.
"But, after all that work, residual risks remain. One risk is the timely cash margin payments demanded by the clearing system will not be made on time and in full. This risk is remote, but also expected. There is no way to completely eliminate risk from derivatives markets, only ways to better manage it.
"As clearing continues to grow in size and importance, the need for this Committee to better understand its value and its mechanics, especially under times of extreme stress, grows, too.
"I want to thank our witnesses for joining us today. Each of them is an expert in cleared markets and I am looking forward to hearing the discussion today."
Source: House Committee on Agriculture
