April 18, 2012
This morning we are considering two rules. While both are important, the final entities rule is a key component of our regulatory architecture. With this rule—along with the products definition rule when that is done (and I certainly hope that is soon)—we will finally have in place two of the most critically important pieces of the structure for the new regulatory regime of heretofore unregulated over-the-counter markets—markets that were part and parcel of the economic meltdown.
Most people who have spent any time in Washington, or who have taken the local tours, have heard what turns out to be an urban myth that “no building can be taller than 555 feet, the height of the Washington Monument.” If it were true, it would certainly be an arbitrary architectural constraint, and one without great tangible benefits.
In designing the “architecture” of our rules, we have tried hard to avoid anything like that—arbitrary constraints that would keep market participants from being “too tall” without valid regulatory rationales or sideboards. At the same time, we want markets and our economy to grow and flourish free from fraud, abuse and manipulation, and to provide sound and secure venues for risk management and to discover fair prices for consumers. And so we developed this entities rule so that the structure would give us the financial oversight and enforcement responsibilities we need to define and identify the most important players in the previously dark, unregulated over-the-counter swaps market, and allow us to have appropriate regulatory handholds on them.
The rule will define the terms “swap dealer,” “security-based swap dealer,” “major swap participant,” “security-based major swap participant,” and “eligible contract participant.” We’re also recognizing in this rule that there are market participants who may not fit squarely into any of these categories. For example, certain high frequency traders—cheetah traders—who trade only proprietary funds, only through cleared transactions, will need to be registered.
This structural rule will bring us one step closer to the registration of swap dealers and major swap participants and the requirements that will flow from that, e.g., clearing and trade execution requirements that enhance the safety and integrity of the swaps markets; record keeping and real-time reporting requirements that enhance the Commission’s ability to oversee the swaps markets; and increasing the accountability of these entities through business conduct standards. The rule is an important step toward realizing the Dodd-Frank Act’s goal of reducing systemic risk, increasing transparency, and protecting the integrity of the financial markets.
With regard to the Commodity Options Final Rule and Interim Final Rule, I hope we adopt the Commission’s proposal to generally permit market participants to trade commodity options, which are defined as swaps, subject to the same rules applicable to every other swap. The interim final rule being put out for comment includes a trade option exemption for physically delivered commodity options involving commercial users (“trade options”) subject to certain conditions intended to ensure the Commission has adequate visibility in these trade options markets.
We have devised some very detailed blue prints and they are becoming our architectural regulatory structure. I thank the Chairman, my colleagues, the staff and the public for their efforts in this important regard.
Last Updated: April 18, 2012