July 10, 2012
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.
Today is the 28th open meeting on Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) reforms.
We will consider two key final rules, each of which are at the foundation of swaps market reform:
• The joint rule with the Securities and Exchange Commission (SEC) on further defining the terms “swap” and other products that come under swaps market reform; and
• The end-user exception to clearing.
And we will consider one related proposal:
• An exemption from clearing for cooperatives acting on behalf of their member end users.
I would like to thank Commissioners Sommers, Chilton, O’Malia and Wetjen for their significant contributions to the rule-writing process and the CFTC’s hardworking and dedicated staff.
The CFTC is working to complete commonsense rules of the road for the swaps market. With today’s two final rules, we will have finished 35 swaps market reforms, with just over 15 to go.
The CFTC and SEC already completed in April the first joint rule further defining the terms “swap dealer” and “security-based swap dealer.” Now following the SEC’s unanimous approval announced yesterday, with the CFTC’s anticipated action today further defining “swap,” swap dealers, for the first time, will be required to register and come under comprehensive regulation. This includes implementing already completed external and internal business conduct standards that will lower their risk to the economy. Staff will shortly provide to commissioners for final consideration recommendations on swap relationship documentation and confirmations.
Furthermore, with the completion of these further product definitions, many other critical swaps market reforms already completed by the Commission will come to life.
This rule means that two months after the rule is published, light will begin to shine on the swaps market for the first time. Initially, likely by September, swaps price and volume information will be reported in real time to the public for interest rate and credit default swap (CDS) indices. Three months subsequently, such real-time reporting will begin for energy and other physical commodity swaps.
Swap data repositories (SDRs) will receive data on all swaps transactions, giving regulators their first window into these markets. One SDR has already successfully registered with the Commission, and we have at least four other parties working on their applications.
Today’s rule is especially meaningful for the implementation of position limits. For the first time, limits will apply to the aggregate spot-month positions, including both futures and swaps. Spot-month limits protect the markets against corners, squeezes and the burdens that may come from excessive speculation.
We also will consider today another key rule: the end-user exception to clearing. Consistent with congressional intent, this rule ensures that end-users using swaps to hedge or mitigate commercial risk will not be required to bring swaps into central clearing.
After today, the foundational rules bringing oversight to the swaps market will have been completed. The next major reforms we are set to consider relate to the required clearing of swaps between financial firms.
For over a century, through good times and bad, central clearing in the futures market has lowered risk to the broader public. Dodd-Frank financial reform brings this effective model to the swaps market. Clearing significantly lowers the risks of the highly interconnected financial system, which is particularly critical given the current economic uncertainty in Europe and recent ratings downgrades of many of the world’s leading banks.
We have completed rules establishing derivatives clearing organization risk management requirements, the bulk of which went into effect in May. The remainder will become effective on November 8, including important customer protection enhancements requiring clearinghouses to collect margin on a gross basis and the so-called “LSOC rule” (legal segregation with operational comingling) for swaps.
Commissioners now are reviewing staff recommendations on clearing requirement determinations. I expect we will consider the first determinations later this month. The staff recommendations are based upon clearinghouse submissions on swaps they already clear. They begin with standard interest rate swaps in U.S. dollars, Euros, British pounds and Japanese yen, as well as a number of CDS indices, including North American and European corporate names.
Thus, based upon the Dodd-Frank 90-day clock for making such determinations, the first clearing determinations may be completed in October just before the gross margin and LSOC rules go into effect.
Commissioners are also reviewing the staff recommendation on the final rule on the implementation phasing of the clearing requirement.
The CFTC also has received substantial public input on the treatment of swaps among affiliates of the same financial entity. A staff recommendation on this issue is also before commissioners, and I expect we will consider it soon along with the remaining clearing rules.
Staff also will shortly provide to commissioners recommendations in two other areas. First, with regard to proposed exemptions for certain transactions in the electricity markets. In particular, possible exemptive orders for certain transactions executed on regional transmission organizations, as well as between and amongst rural electric cooperatives and municipal public power providers. Secondly, now that we’ve made significant progress on swaps market reforms, the Commission will consider completing a number of conforming rules.
We then will look to finish the remaining transparency rules: the block rule and swap execution facilities (SEFs). It’s important that we fulfill these Dodd-Frank reforms that bring pre-trade transparency to the swaps marketplace.
The 2008 crisis led to eight million jobs lost, millions of families losing their homes and thousands of businesses shuttering. Four years after the crisis and two years after Congress laid out swaps market reform in Dodd-Frank, the CFTC is well on the way to bringing those reforms to life. It’s critical that we finish the job to protect the public and promote more transparent, healthier markets.
Beyond these swaps market reforms, I think it’s also crucial that the Commission continue to build upon customer protection regulation for both futures and swaps market participants. The Commission has already adopted important amendments to rule 1.25 regarding the investment of customer funds, as well as the LSOC and gross margining provisions. We should now move to approving the National Futures Association proposal for greater controls for segregation of customer funds.
We also should take up staff recommendations to further enhance segregation of customer funds. CFTC staff is working on recommendations on enhanced internal controls and transparency regarding futures commission merchants’ handling of customer funds.
I’d like to close by thanking the Division of Enforcement for their hard work on the London Interbank Offered Rate (LIBOR) case against Barclays. People taking out small business loans, credit cards and mortgages, as well as big companies involved in complex transactions, all rely on the honesty of benchmark rates like LIBOR for the cost of their borrowings. Banks must not attempt to influence LIBOR or other indices based upon concerns about their reputation or the profitability of their trading positions.
The CFTC has and will continue vigorously to use our enforcement and regulatory authorities to protect the public, promote market integrity, and ensure that these indices and other benchmarks are free of manipulative conduct and false information.
Last Updated: July 10, 2012