September 12, 2013
I want to thank all the participants of this Advisory Committee for your participation today. Your advice to us comes to us at a very interesting time in the swaps market.
I want to thank Commissioner Scott O’Malia for his thoughtful leadership of this committee – not only bringing it back to life, Scott, but I think you've brought the best of market participants’ advice to this Commission. I say that thinking about something from this week, this Concept Release we’ve put out was very informed. We put out 124 questions so I know it seems like your work has just begun.
I also want thank my fellow Commissioners Bart Chilton and Mark Wetjen who put a remarkable amount of time and effort into the Concept Release.
I look forward to each of the three panels that Scott reviewed.
In terms of data, it's a remarkable time. The public and regulators are now benefitting from new market transparency. The public -- starting December 31 and through a series of implementation dates that ran through August 19 -- now can see the price and volume of each swap transaction as it occurs. Sometimes with some time delay. And sometimes as soon as technologically practicable. With most of these compliance dates behind us, there is approximately $410 trillion notional value of swaps reporting into the data repositories, with no double counting. This means that real-time reporting is happening on these swaps as well -- and for the first time, the public is getting to see them.
There is another compliance date on September 30. These are for the transactions for far-flung affiliates of U.S. persons, the so-called guaranteed affiliates, that will come in on September 30. But by in large, that’s a pretty big data set.
Now, there is still work to be done, as this committee will advise us, as others will advise us. John Rogers is working closely with the three registered swap data repositories (SDRs), and our friends from the Treasury’s Office of Financial Research are helping us. To me, at the core, it’s about making sure that the data that’s in the data warehouses is 1) reliable and 2) accessible. That regulators can access it, that there is a way to sort it, filter it, come to some judgments, whether it’s by counterparty, whether it’s by trade date, whether it’s by product. That’s going to be a journey. We might be nine months into this, but there is still work to be done.
Second, I’m looking forward to hearing from you on the Concept Release.
The release is a thoughtful set of questions intended to stir public debate. The goal of the CFTC is to best to protect the functioning of markets for the benefit of farmers, ranchers, merchants and other end-users who rely on the markets to hedge risk.
But we have witnessed a fundamental shift in markets from human-based trading to highly automated trading. Automated trading systems, including high frequency traders, enter the market and execute trades in a matter of milliseconds without human involvement. Electronic trading makes up over 91 percent of the futures market. As we move to swap execution facilities, and as we move to centrally cleared swaps, one could expect similar ratios, in time, in the swaps market as well.
In our oversight of these derivatives markets, both futures and swaps, the CFTC must look continually to adapt our regulations in these changing times. Our mission to promote transparency, ensure for market integrity and prohibit abuses is just as important in the fast-moving, electronic world as it is when it’s by phone, in a pit or on the trading floor.
We’ve already taken a number of steps. You’re familiar with them. You’ve debated them. We’ve been trying to keep abreast of the rapidly changing environment in the 21st-century. We have adopted rules on pre-trade risk filters. We’ve adopted rules on designated contract markets and swap execution facilities.
I don’t think our work is done, and that's why we've put out this Concept Release to get public feedback in this ever-changing world.
As sure as computers and programs have had technical glitches in the past, I believe there will be glitches in the future. That’s just the nature of the reality we’re in, and thus, I think we have to look to risk controls and system safeguards to protect markets when such glitches inevitably occur again. It’s a matter of making sure that clearinghouses, trading venues, and data repositories are robust and resilient enough so that when somebody has a glitch or fails that we ensure that the central functioning of the markets continue.
Commissioner O'Malia was good enough to put on a SEF panel. With SEFs, we will have additional transparency in the market for pre-trade transparency. In essence, all market participants will be able to have access because the two core features of SEFs – impartial access and there is an orderbook where someone can leave a live, executable bid or offer. They may choose not to use it. They might go the RFQ route or another route, but there will be impartial access.
The key compliance date of October 2 is 20 days away. We have three SEFs registered, and I think, overall, we have 17 applications.
What does this mean? In October – given that all of these platforms will have impartial access and orderbooks – anyone who wants to come into the marketplace and compete with these new tools will be able to do so.
This is truly a paradigm shift. We understand that there are going to be issues that arise. Just as we have for the clearing mandate, just as we have for swap dealer registration that started nine months ago, just as we continue to do with the three swap data repositories -- we want to work with market participants to smooth this transition.
Once the SEFs become live, there are going to be some data reporting changes. The traditional reporting of the last nine months from the dealers, some of that will shift to the SEFs. So we’re going to need to work through that. We want to hear from you, and if you have an issue, contact David Van Wagner and Nancy Markowitz.
Before I close, I want to do a bit of a shout-out both to market participants and the CFTC about central clearing. We’ve worked together over four plus years on bringing a central clearing mandate together -- Congress, the President, and the international community. The European Union and Japan also have clearing mandates.
Our clearing mandate had three key implementation dates. The last and final one passed September 9 of this year. So for the interest rate market and credit index market, by in large, we’ve implemented these mandates.
The four interest rate curves represent approximately 90 percent of the interest rate curves. When we look at the data repositories today, about half of the interest rate market in our jurisdiction is cleared. Of the $410 trillion in the data repositories, between $360 and $370 trillion is interest rate swaps. About half of that is cleared. In 2008, looking at data on the ISDA website, 21 percent of the interest rate market was cleared. Five years later, it’s half.
We have one additional compliance date. It’s October 9 -- when the far-flung operations of U.S. enterprises, their guaranteed affiliates and branches, will come into central clearing. In addition, the P.O. Box hedge funds will come into central clearing -- this is basically the entities with a principal place of business in the U.S. but happen to be incorporated in the Cayman Islands.
I would anticipate that as we move into 2014, you will see closer to two-thirds of the interest rate market being in central clearing.
Note: this transcript was edited slightly for clarity.
Last Updated: September 12, 2013