July 18, 2012
Good afternoon. With this week's anniversary of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), it is critical that we remember why President Obama and Congress came together to pass this historic law.
The 2008 financial crisis occurred because the financial system and financial regulatory system failed the American public. When large financial firms, such as AIG and Lehman Brothers, took on excessive risk and ultimately collapsed, we all paid the price. The results of the financial crisis are clear: eight million Americans lost their jobs, millions of families lost their homes and thousands of businesses shuttered.
The President and Congress tasked the Commodities Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) with bringing common-sense rules of the road to the swaps market that will bring transparency to the market and lower its risk to the public.
With 35 rules completed, we are increasingly moving from the rule-writing process to the implementation of these reforms. This month, the CFTC and SEC finalized a foundational rule to further define the terms “swap” and “security-based swap.”
As a result, light will begin to shine on the previously shadowy swaps market as soon as this fall when:
As we move to complete reform, it is important that we bear in mind the lessons of the crisis and how modern finance works.
Financial transactions executed offshore by U.S. financial institutions often send risk straight back to our country. It was true with the London and Cayman Islands affiliates of AIG, Lehman Brothers, Citigroup and Bear Stearns. A decade earlier, it was true with Long-Term Capital Management.
The recent events of JPMorgan Chase, where it executed swaps through its London branch, are a stark reminder of this reality of modern finance.
Though the Financial Stability Oversight Council (FSOC) members have made significant progress on implementing swaps market reform for the American public to gain the benefit of transparency and lower risk, we must complete the remaining rules of the road and ensure market regulators are adequately funded for our much-expanded missions.
I am pleased that the FSOC’s annual report discusses LIBOR, the index at the center of the capital markets for both borrowings and derivatives contracts. Hundreds of trillions of dollars of transactions, here and abroad, are based on LIBOR.
If these key benchmarks are based on observable transactions, borrowers, lenders and derivatives users around the globe all benefit.
If these key benchmarks are not based on observable transactions, I believe their integrity will continue to be subject to question.
And if these key benchmarks are not based on honest submissions, we all lose.
The CFTC stands ready to work with regulators here and abroad to best assure that LIBOR, or any alternative benchmark that might emerge, is not susceptible to attempted manipulation or false reporting – put simply that it is reliable and honest.
I thank Secretary Geithner for calling today’s FSOC meeting and my fellow regulators and other FSOC members for their coordination and consultation on the rule-writing process.
Last Updated: July 18, 2012