February 23, 2012
Good morning. This meeting will come to order. This is a public meeting of the Commodity Futures Trading Commission (CFTC) to consider final and proposed rules under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). I’d like to welcome members of the public, market participants and members of the media, as well as those listening to the meeting on the phone or watching the webcast.
I would like to thank Commissioners Sommers, Chilton, O’Malia and Wetjen for their significant contributions to the rule-writing process. I also want to thank the CFTC’s hardworking and dedicated staff.
Lowering Risk and Increasing Transparency in the Economy
In 2008, swaps helped concentrate risk in the financial system that spilled over into the real economy, affecting businesses and consumers across the country. Eight million Americans lost their jobs and thousands of small businesses were lost as a result of the crisis.
The derivatives reforms in the Dodd-Frank Act, once implemented, will lead to significant benefits for the real economy – that which makes up over 94 percent of private sector jobs in America. The derivatives reforms also will bring significant benefit to all Americans who depend on pension funds, mutual funds, community banks and insurance companies.
They will benefit from lowering the risk of the swaps market and increasing transparency. Today is our 24th open meeting on Dodd-Frank reforms, and we will consider rules addressing both of these goals. To lower risk, we will consider business conduct standards for swap dealers and major swap participants – what we’ve come to call internal business conduct. To promote greater transparency, we will consider a proposal of the block rule.
Internal Business Conduct
Last month, the CFTC completed the first reforms to regulate dealers. First, the Commission is requiring registration so, for the first time, regulators are able to monitor swap dealers and major swap participants; and second, we are establishing and enforcing robust sales practices in the swaps market.
Today’s internal business conduct rule, a collection of five CFTC rule proposals, builds on this progress. It requires swap dealers and major swap participants to establish risk management policies to manage the risks of their swaps activities. It requires firewalls to protect against conflicts of interest between trading and research and between trading and clearing units of a financial firm. In addition, the rule establishes reporting, recordkeeping and daily trading record requirements to ensure an audit trail that details the full trading history. Lastly, swap dealers, major swap participants and futures commission merchants (FCMs) must put compliance officers in place to ensure compliance with the Commodity Exchange Act and Commission regulations.
Block Rule Proposal
In addition, today we are proposing the block rule. This proposal benefits from the comments we received on the real-time public reporting proposal, which included a block rule. The new methodology makes a number of significant changes from the earlier proposal. First, it is tailored so that it includes block sizes that vary by asset class and by underlying referenced product or rate. Second, it has been simplified, as it will no longer rely on a test, which included the so-called “social size multiple test” for setting minimum block sizes. Third, the proposal moves from being based on transaction counts to being based on the net notional amount of swaps within a category. Furthermore, this new proposal also benefits from a review of a significant amount of market data in the interest rate and credit swap markets.
As I’ve said all along, we are working to complete these rules in a thoughtful, balanced way – not against a clock.
The CFTC has finalized 27 Dodd-Frank rules, potentially 28 after today. We have made great progress on the congressionally mandated reforms to bring transparency and competition to the swaps market in a way that protects taxpayers and lowers the risks of this market to the rest of the economy. I have great confidence in the Commission and the CFTC staff that we will finish the remaining reforms this year for the benefit of investors, consumers and the broader public.
I’d also like to announce a two-day, public roundtable Wednesday and Thursday of next week, which will look at the critical issues surrounding further enhancements to customer protection. Segregation of customer funds is a core foundation of customer protection in both the futures and swaps markets. We’ve already taken a number of steps, such as enhancement of protections regarding investment of customer funds (through amendments to the rule 1.25) and the requirement for FCMs and derivatives clearing organizations to segregate customer collateral supporting cleared swaps -- ensuring customer money is protected individually all the way to the clearinghouse (so-called LSOC for swaps).
Panel topics will include alternative custodial arrangements for segregated funds; enhanced customer protections and transparency provisions for FCMs; additional protections for the collateral of futures customers; revisions to the bankruptcy rules for FCMs; protection of customer funds at FCMs to be traded on foreign futures markets; issues associated with entities dually registered with the CFTC as FCMs and the SEC as broker-dealers; and enhancing the self-regulatory structure.
Before we hear from the staff on the rules that we will consider today, I will recognize my fellow Commissioners for their opening statements.
Last Updated: February 23, 2012