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SPEECHES & TESTIMONY

  • Statement on Support of the Dodd-Frank Rulemaking of Chairman Gary Gensler

    Statements for the record on each rule:

    Segregation

    I support the proposed rule on protection of cleared swaps customer contracts and collateral and the associated conforming amendments. The proposal carries out the Dodd-Frank Act’s mandate that futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) segregate customer collateral supporting cleared swaps. FCMs and DCOs must hold customer collateral in an account that is separate from that belonging to the FCMs or DCOs.

    Under the Dodd-Frank Act, an FCM or DCO must not use the collateral of one swaps customer to cover the obligations of another swaps customer or itself. Under the proposed rule, in the event that an FCM defaults simultaneously with one or more of its cleared swaps customers, the DCO may access the collateral of the FCM’s defaulting cleared swaps customers to cure the default, but not the collateral of the FCM’s non-defaulting cleared swaps customers. The proposal also asks a variety of questions regarding alternative means of implementing protection of customer collateral.

    This proposed rulemaking benefited from public input received during the CFTC staff roundtable on segregation and in other meetings and from the 32 comments received in response the Commission’s advanced notice of proposed rulemaking. I look forward to further hearing from the public on this proposed rulemaking.

    Capital

    I support the proposed rulemaking to establish capital requirements for nonbank swap dealers and major swap participants. The Dodd-Frank Act requires capital requirements to help ensure the safety and soundness of swap dealers and major swap participants. Capital rules help protect commercial end-users and other market participants by requiring that dealers have sufficient capital to stand behind their obligations with such end-users and market participants. The proposal fulfills the Dodd-Frank Act’s mandate in Section 731 to establish capital rules for all registered swap dealers and major swap participants that are not banks, including nonbank subsidiaries of bank holding companies.

    The proposed rule addresses capital requirements for swap dealers and major swap participants in three different categories: 1) if they are an futures commission merchants (FCMs); 2) if they are subsidiaries of bank holding companies or systemically important financial institutions; or 3) if they are neither.

    With regard to dealers that also are FCMs, generally speaking, the Commission’s existing capital rules for FCMs would apply. This is to ensure that FCMs have sufficient capital to continue to carry and clear customer swaps and futures transactions cleared by a DCO.

    The proposed rule would require dealers that are subsidiaries of bank holding companies or that have been designated as systemically important financial institutions by the Financial Stability Oversight Council (FSOC) to follow the rules set by the prudential regulators. For instance, a subsidiary of a U.S. bank holding company would have to comply with the capital requirements set by the Federal Reserve Board as if the subsidiary itself were a U.S. bank holding company. This is intended to prevent regulatory arbitrage and ensure consistency among capital regimes for those entities that are regulated by prudential regulators.

    For those swap dealers and major swap participants that are not regulated for capital by a prudential capital and not FCMs, part of a bank holding company or a systemically important financial institution, the proposed rule departs from bank capital rules. It takes into consideration that these dealers are likely to have different balance sheets from those financial institutions that traditionally have been subject to prudential supervision. Such entities would be required to maintain a minimum level of tangible net equity greater than $20 million plus a measurement for market risk and a measurement for credit risk. This market risk and credit risk would be scaled to the dealers’ activities and be measured based upon swaps activity and related hedges. The proposal would allow such firms to recognize as part of their capital fixed assets and other assets that traditionally have not been recognized by prudential regulators.

    I also support the proposed rulemaking’s financial condition reporting requirements that relate generally to capital and other matters. These reporting requirements are comparable to existing requirements for FCMs and will facilitate ongoing financial oversight of these entities.

    CFTC staff worked very closely with prudential regulators to establish these capital requirements that are comparable to the maximum extent practicable. Staff also consulted with the SEC and with international authorities. The rule benefited from the CFTC and SEC staff roundtable on capital and margin requirements where we received significant input from the public.

    Product Definitions

    I support the proposed rulemaking to implement the Dodd-Frank Act’s requirement to further define derivatives products that come under Title VII of the Act.

    The CFTC worked closely with the SEC, in consultation with the Federal Reserve, on this proposed rule to further define swaps, security-based swaps, mixed swaps and security-based swap agreements. The statutory definition of swap is very detailed. This rule is consistent with that detailed definition and Congressional intent. For example, interest rate swaps, currency swaps, commodity swaps, including energy, metals and agricultural swaps, and broad-based index swaps, such as index credit default swaps, are all swaps. Consistent with Congress’s definition of swaps, the rule also defines options as swaps.

    In preparing the proposed rule, staff worked to address the more than 80 comments that were submitted by the public in response to the joint advance notice of proposed rulemaking on product definitions. Many of the commenters asked that the Commissions specifically provide guidance on what is not a swap or security-based swap.

    For example, under the Commodity Exchange Act, the CFTC does not regulate forward contracts. Over the decades, there has been a series of orders, interpretations and cases that market participants have come to rely upon regarding the exception from futures regulation for forwards and forwards with embedded options. Consistent with that history, the Dodd-Frank Act excluded from the definition of swaps “any sale of a nonfinancial commodity or security for deferred shipment or delivery, so long as the transaction is intended to be physically settled.” The proposed rule interprets that exclusion in a manner that is consistent with the Commission’s previous history of the forward exclusion from futures regulation.

    Further, consistent with the Dodd-Frank Act, the proposed rule clarifies that state or federally regulated insurance products that are provided by regulated insurance companies will not be regulated under Title VII of the Act. Similarly, the proposal clarifies that certain consumer and commercial arrangements that historically have not been considered swaps, such as consumer mortgage rate locks, contracts to lock in the price of home heating oil and contracts relating to inventory or equipment, also will not be regulated under Title VII of the Act.

    Part 1

    I support the proposed rulemaking to adapt existing CFTC regulations to the new requirements of the Dodd-Frank Act. The Act expanded the scope of the Commodity Exchange Act to include swaps. In addition to rulemakings implementing specific provisions of the Act, conforming changes across the Commission’s existing regulations are needed to incorporate that expanded scope. Specifically, this proposed rulemaking would update the definitions of futures commission merchant (FCM) and introducing broker (IB) to fulfill the Dodd-Frank Act’s requirement to permit those entities to trade swaps on behalf of their customers. The proposal also would add swap execution facilities (SEFs) to the list of CFTC-regulated trading venues. The proposal includes recordkeeping requirements for FCMs, IBs and SEFs to ensure that similar records are kept for swaps as are currently kept for futures, among other protections that already exist in the futures markets. The rules for FCMs with regard to allocations of bunched orders for swaps will be consistent with those rules for futures.

    Last Updated: April 27, 2011



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