Statement Before the Financial Stability Oversight Council
Chairman Gary Gensler
July 18, 2011
Good morning. I thank Secretary Geithner for calling today’s meeting of the Financial Stability Oversight Council (FSOC). I also thank my fellow regulators and FSOC members for their coordination and consultation on the rule-writing process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Lastly, I want to thank the staffs of all the agencies – and particularly the Treasury staff – for their efforts in coordinating amongst eight agencies.
This week is the one-year anniversary of the Dodd-Frank Act. And on this anniversary, it is important to remember why the President and Congress came together to pass this historic law.
The 2008 financial crisis occurred because the financial system failed the American public. The financial regulatory system failed as well. When large financial firms, such as AIG and Lehman Brothers faltered, we all paid the price.
The Dodd-Frank Act includes critical swaps market reforms to protect the American people. The law brings much-needed transparency to this marketplace and lowers the risk of the swaps market to the overall economy. It lowers the possibility of taxpayers standing behind large financial institutions.
The Dodd-Frank Act also included the establishment of this Council, which is an opportunity for regulators – now and in the future – to ensure that the financial system works better for all Americans.
Though the crisis had many causes, it is clear that the swaps market played a central role. Swaps added leverage to the financial system with more risk being backed by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market and helped to accelerate the financial crisis. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail.
At the CFTC, working with our partners at the SEC, we have been working diligently to write rules to implement swaps provisions in the Dodd-Frank Act that will ensure swaps no longer operate in the shadows and financial institutions pose less risk to taxpayers. We have substantially completed the proposal phase of the rule-writing process and have now turned toward final rules. Tomorrow, we are holding the second public commission meeting to consider approving final rules, and in the coming months, we will continue considering final rules. But until the CFTC completes its rule-writing process and implements and enforces these new rules, the public remains unprotected.
Final Rulemaking on Designating Financial Market Utilities as Systemically Important
I support the final rulemaking on the Authority to Designate Financial Market Utilities as Systemically Important. This is a significant rulemaking that will enable the Financial Stability Oversight Council (FSOC) to identify and designate systemically important financial market utilities, including clearinghouses.
Comprehensive and robust regulatory oversight of clearinghouses, in particular their risk management activities, is essential to our country’s financial stability. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, standardized swaps between financial entities must be brought to clearinghouses.
The Commodity Futures Trading Commission (CFTC) has overseen clearinghouses for decades. The Dodd-Frank Act provides for enhanced oversight of these clearinghouses. In close consultation with our fellow domestic and international regulators, including the Federal Reserve Board and the Securities and Exchange Commission, the CFTC proposed rulemakings on risk management for clearinghouses. These rulemakings take into account relevant international standards, particularly those developed by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions (CPSS-IOSCO).
The Dodd-Frank Act gives both the Council and the Federal Reserve Board important roles in clearinghouse oversight by authorizing the Council to designate certain clearinghouses as systemically important and by permitting the Federal Reserve Board to recommend heightened prudential standards in certain circumstances.
The Council’s final rulemaking complements the CFTC’s rulemaking efforts and enhances the regulation of systemically important financial market utilities, which will mitigate systemic risk and promote financial stability.
Report to Congress on Secured Creditor Haircuts
I will vote to approve the Report to Congress on Secured Creditor Haircuts. The report appropriately addresses the arguments in favor of and against legislation to mandate secured creditor haircuts, and also provides a helpful analysis of the academic literature on this subject.
The report also covers the issues Congress specified, including a comparison of the relevant aspects of resolution under the Bankruptcy Code, Federal Deposit Insurance Act, and Dodd-Frank Title II Orderly Liquidation Authority. And it discusses other means to promote market discipline.
Last Updated: July 21, 2011