May 16, 2013
Good morning. This meeting will come to order. This is a public meeting of the Commodity Futures Trading Commission (CFTC). 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.
We will consider three Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) rules that together bring transparency to the swaps market before transactions take place.
In addition, we will consider:
I would like to thank Commissioners Sommers, Chilton, O’Malia and Wetjen for their contributions to the rule-writing process and the CFTC’s hardworking and dedicated staff. I also want to express my condolences to Bart and all of this family for the loss of his step-father, Ron.
Today the CFTC is voting on reforms that will make public transparency in the swaps market a reality. These reforms will make a trade execution requirement come to life. Though many of the 52 rules we have completed before today have brought transparency to the once opaque swaps market, today we take a significant step to open up this market.
I want to underscore that the significance of these three rules together. When light shines on a market, the economy and public benefit.
These three rules taken together will provide the public with information trade by trade that it didn’t have before.
These three rules taken together will provide the public with the price and volume of every transaction in real time – and I mean in real time.
These three rules take together mean that anyone in the market can compete and offer to buy or a sell a swap and communicate that to the rest of the public.
With these three rules today, no longer will this be a closed, dark market.
The 2008 financial crisis, caused in part by the unregulated, opaque swaps market, led to eight million American jobs lost and millions forced out of their homes. In the aftermath of the crisis, President Obama, along with the other G20 leaders, committed during the Pittsburgh meeting of 2009 to bring needed transparency and oversight to the swaps marketplace.
The leaders of the world’s largest economies agreed that “All standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate.”
Congress fulfilled this commitment by including a trade execution requirement in the Dodd-Frank Act.
This means that swaps subject to mandatory clearing and made available to trade will move to transparent trading platforms. Market participants will benefit from the price competition that comes from trading platforms where multiple participants have the ability to trade swaps by accepting bids and offers made by multiple participants. Congress also said that market participants must have impartial access to these platforms.
In addition, Congress mandated that the public benefit from seeing the price and volume of swap transactions smaller than a block in real time – as soon as technologically practicable – after a trade is executed.
Farmers, ranchers, producers and commercial companies that want to hedge a risk by locking in a future price or rate will get the benefit of the competition and transparency that trading platforms, both SEFs and DCMs, will provide.
These transparent platforms will give everyone looking to compete in the marketplace the ability to see the prices of available bids and offers prior to making a decision on a transaction. By the end of this year, a significant portion of interest rate and credit derivative index swaps will be in full view to the marketplace before transactions occur. This is a significant shift toward market transparency from the status quo.
Such common-sense transparency has existed in the securities and futures markets since the historic reforms of the 1930s. Transparency lowers costs for investors, businesses and consumers, as it shifts information from dealers to the broader public. It promotes competition and increases liquidity.
As Congress made clear in the law, trading on SEFs and DCMs will be required only when financial institutions transact with financial institutions. End-users will benefit from access to the information on these platforms, but will not be required to use them.
Further, companies will be able to continue relying on customized transactions – those not required to be cleared – to meet their particular needs, as well as to enter into large block trades.
Consistent with Congress’ directive that multiple parties have the ability to trade with multiple parties on these transparent platforms, these reforms require that market participants trade through an order book, and provide the flexibility as well to seek requests for quotes.
To be a registered SEF, the trading platform will be required to provide an order book to all its market participants. This is significant, as for the first time, the broad public will be able to gain access and compete in this market with the assurance that their bids or offers will be communicated to the rest of the market. This provision alone will significantly enhance transparency and competition in the market.
SEFs also will have the flexibility to offer trading through requests for quotes. The rule provides that such requests would have to go out to a minimum of three unaffiliated market participants before a swap that is cleared, made available to trade and less than a block could be executed. There will be an initial phase-in period with a minimum of two participants to smooth the transition.
As long as the minimum functionality is met, as detailed in the rule, and the SEF complies with these rules and the core principles, the SEF can conduct business through any means of interstate commerce, such as the Internet, telephone or even the mail. Thus, today’s rule is technology neutral.
Under these transparency reforms, the trade execution requirement will be phased in for market participants, giving them time to comply.
Today’s reforms also fulfill the congressional mandate for the CFTC to set appropriate minimum block sizes. Trades smaller than a block will be reported as soon as technologically practicable, enhancing transparency to the public. This will build upon the public reporting that began December 31.
With today’s trade execution reforms, all of the major building blocks of swaps market reform will be complete: transparency, clearing and swaps dealer oversight.
Looking forward, with over 90 percent of our rules behind us, it’s a priority that the Commission finalizes guidance on the cross-border application of swaps market reform, ensuring it appropriately covers the risk of U.S. affiliates operating offshore.
The Commission also is pursuing an appeal of the district court’s adverse position limits ruling. I also have directed the staff to prepare a new proposed rule for the Commission’s consideration to implement the speculative position limits required by the Dodd-Frank Act.
Last Updated: May 16, 2013