December 1, 2010
Good morning. This meeting will come to order. This is a public meeting of the Commodity Futures Trading Commission to consider issuance of the following proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act:
Before we hear from the staff, I’d like to thank Commissioners Mike Dunn, Jill Sommers, Bart Chilton and Scott O’Malia for all their thoughtful work to implement the Dodd-Frank Act. I’d also like to wish both Commissioner O’Malia and John Riley, our Director of Legislative Affairs, a happy birthday.
I’d like to welcome members of the public, market participants and members of the media to today’s meeting, as well as welcome those listening to the meeting on the phone or watching the live webcast.
This is the sixth public meeting to consider Dodd-Frank rulemakings. Before we turn to staff to provide their recommendations, I would like to lay out the agenda for the Commission as we consider the remaining rules under Dodd-Frank. We have two more meetings scheduled in December for the 9th and the 16th. In addition, we anticipate having at least two more meetings in January. We will announce the rulemaking proposals that the Commission will consider at least one week before the meeting.
In addition to the public Commission meetings, we have two staff roundtables scheduled to hear from the public on important issues. The first roundtable – on disruptive trading practices – will be held tomorrow.
The second roundtable, which is on capital and margin and will be coordinated with the Federal Reserve, the Securities and Exchange Commission (SEC) and other regulators, is scheduled for December 10. It is important that regulators hear from the public on issues relating to capital and margin. Under the Dodd-Frank Act, the Federal Reserve and prudential regulators will be responsible for setting capital and margin for bank swap dealers, while the SEC and the CFTC will be responsible for the nonbank swap dealers and major swap participants. I would like to highlight some particular areas on which it would be helpful to hear from the public during the roundtable.
As it relates to capital, how should requirements be set in the context of nonbanks, particularly those that are not part of financial institutions? Capital requirements have traditionally been set for banks and other financial institutions. As a result of the Dodd-Frank Act, though, there may be a number of nonbank entities offering swaps to the public that would be subject to regulation. I look forward to hearing from the public on how to account for the differences between bank swap dealers and nonbank swap dealers. For example, nonbanks generally have different assets than traditional financial institutions. Furthermore, current regulatory capital standards for banks and other financial institutions most likely are not directly applicable to nonbank entities.
As it relates to margin, the Dodd-Frank Act says that, “to offset the greater risk to the swap dealer… and the financial system from the use of swaps that are not cleared,” regulators shall “help ensure the safety and soundness of the swap dealer” and set margin requirements that are “appropriate for the risk associated with the non-cleared swaps.”
There are two areas with regard to margin that I would like to highlight for next week’s roundtable. First, what are the public’s views on the appropriate margin requirements both as it might relate to initial margin and as it might relate to variation margin between and amongst financial entities, including swap dealers, major swap participants and financial entity counterparties?
Second, though I cannot speak for the Federal Reserve and other prudential regulators, which will be responsible for setting margin for banks, the SEC or my fellow CFTC Commissioners, my view is that uncleared swaps entered into between financial entities pose more risk to the financial system than those where one of the parties is a non-financial entity.
Interconnectedness among financial entities allows one entity's failure to cause uncertainty and possible runs on the funding of other financial entities, which can spread risk and economic harm throughout the economy. We know from the AIG debacle that the interconnectedness of financial entities through their swap books raises the risks of bailouts. Transactions involving non-financial entities, however, do not present the same risk to the financial system as those solely between financial entities. The risk of a crisis spreading throughout the financial system is greater the more interconnected financial companies are to each other. I think that Congress also recognized the different levels of risk posed by transactions between financial entities and those that involve non-financial entities, as reflected in the non-financial end-user exception to clearing. Consistent with this, I believe that proposed rules on margin requirements should focus only on transactions between financial entities rather than those transactions that involve non-financial end-users. I’d be interested to hear views from the public on this issue.
I would like to thank the staff for all of the work that they have put into drafting the rulemakings we are considering today. I thank them for their thoughtful recommendations for how the Commission can best comply with its statutory obligations under the Dodd-Frank Act.
We look forward to receiving public comments on the proposed rules we are considering today. I will note that the Commission recently became aware of some comment letters that were fraudulently submitted in response to a proposed rulemaking. We have removed the identified letters from the comment files and have referred the matter to the Justice Department. We are working to ensure the integrity of the comment process.
Before we turn to staff presentations, would any of my fellow commissioners like to make opening statements?
Last Updated: January 18, 2011