December 10, 2013
I support the final “Volcker Rule” before the Commission today. It achieves the important balance, as directed by Congress, of prohibiting banking entities from proprietary trading while at the same time allowing banking entities to engage in permitted activities, including market making and risk mitigating hedging.
Further, as directed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), the final rule strikes an appropriate balance regarding banking entities investment in hedge funds and private equity funds. As Congress directed – other than for de minimis investments – banking entities are prohibited from sponsoring, owning, and having certain relationships with hedge funds or private equity funds. The final rule focuses the prohibition on entities formed for investing or trading in securities or derivatives and that are typically offered to institutional investors and high-net-worth individuals. The final definition was tailored to exclude entities that are offered more broadly to retail investors or have a more general corporate purpose, such as loan securitizations.
The Commodity Futures Trading Commission (CFTC) consulted and coordinated with the Federal Reserve, the Federal Deposit Insurance Corporation, the Comptroller of the Currency and the Securities and Exchange Commission in developing this rule. Based on this collaboration, the CFTC’s final rule mirrors the language being adopted by the other financial regulators.
The CFTC authority to implement the Volcker Rule is for the banking entities for which we are the primary financial regulatory agency. As of today, the CFTC estimates that our authority primarily applies to approximately 110 registered swap dealers and futures commission merchants (FCMs) that would each individually be banking entities under the Volcker Rule. Grouped by corporate affiliation these represent about 45 different business enterprises.
As a foundation, the final Volcker Rule requires banking entities to have a robust compliance program, including defined limits on market making, underwriting and hedging activities as well as continuous monitoring and management of such activities. It also requires reporting to regulators on specific metrics and trading details. This transparency will enhance the CFTC’s ability to oversee swap dealers and FCMs.
Banking entities’ customers and counterparties will continue to be provided liquidity through the banking entities’ permitted market making. The banking entities are permitted to do so as long as each trading desk’s market-maker inventory is designed not to exceed, on an ongoing basis, the reasonably expected near-term demands of clients, customers or counterparties. The banking entities will be required to maintain an ongoing compliance program and follow the rule’s limits on market-maker inventory and financial exposure. For instance, banking entities would not be able to stockpile or accumulate positions over time that do not meet expected near-term customer demand.
The final Volcker Rule also permits hedging to reduce identified, specific risks from the banking entity’s individual or aggregated positions. Permitted hedging activity will be required to 1) be designed to and 2) demonstrably reduce or otherwise significantly mitigate one or more specific, identifiable risks. The final rule’s preamble further states that this activity is not intended to be hedging of generalized risks based on non-position specific modeling or other considerations. Hedging of the general assets and liabilities of the banking entity or a guess as to the direction of the economy will no longer be permitted.
Hedging strategies and positions are subject to analysis, including required correlation analysis, as well as an ongoing recalibration requirement to ensure it is not prohibited proprietary trading.
The Commission also has the legal authority to enforce the Volcker Rule. If the Commission believes there is a violation, Dodd-Frank Section 619 and the final rule state that it can, after providing an opportunity to respond, order the registrant to stop that activity. The Commission also can use existing authority to discipline registrants, including FCMs, swap dealers, and others. The CEA and Commission rules provide that we may restrict, suspend or revoke a registration for good cause. Depending on the facts and circumstances, violation of Dodd-Frank Section 619 may rise to that level.
The talented CFTC staff working along with my fellow Commissioners – Mike Dunn, Jill Sommers, Bart Chilton, Scott O’Malia and Mark Wetjen – really have delivered for the American public.
With this action, the staff of this small but remarkably effective agency will have completed 68 rulemakings, orders and guidances. Though lacking adequate resources, the CFTC staff has diligently sorted through nearly 60,000 public comment letters. They have met with members of the public more than 2,200 times to discuss reform.
These common-sense reforms have been truly transformative.
Bright lights of transparency now are shining on the $380 trillion swaps market. The public can see the price and volume of every transaction, like a modern-day tickertape. Transparent, regulated trading platforms are trading a quarter of a trillion dollars in swaps each day.
A majority of the swaps market is now being centrally cleared - lowering risk and bringing access to anyone wishing to compete.
Ninety-one swap dealers have registered and – for the first time – are being overseen for their swaps activity.
I couldn’t be more proud of this dedicated group of public servants.
I am honored to have served along with them during such a remarkable time in the history of this agency.
Last Updated: December 30, 2013