Speech of Commissioner Bart Chilton Before SEFCON, New York, NY
November 13, 2012
Thanks for the invitation to speak about Self-Extinguishing Fabrics or SEFs. These modacrylics, these SEFs, while having been used for decades are under-appreciated for not only being flame-retardant, but resilient to other chemicals and solvents. And, they are wrinkle-free and stain resistant! Self-Extinguishing Fabrics—aren’t they the best? Plus SEFs, nowadays, can make you even look fly. Watch out fashionistas! SEFs are now used in fake furs, toupees and wigs. A little audience participation here: anyone here with a modacrylic fur, wig or toupee, anyone? What? It’s not an appropriate question? Ah, okay, wrong speech—my bad.
The point here is that not many people knew, or know, what a SEF really is, or what your important past has been, where you came from—Luke “…I am your father.” But that is changing.
It really is, seriously, great to be with you. It is hard to believe this is already your third year at this. Listen to me now and hear me later. This has been, and many of you individually have been, an extremely helpful and needed voice in our continuing conversation about SEFs (Swaps Execution Facilities).
I also want to say a few words about the previous panel’s moderator, my colleague, Commissioner Scott O’Malia. We are so very lucky to have Scott on the Commission. He’s made good, solid contributions that have made our rules and our work better. I particularly appreciate his thoughtful leadership on technology and energy issues—two things that are also of interest to me, which makes being on the Commission with Commissioner O’Malia so enjoyable. It is a pleasure to work with and know you, Scott.
I’m not going to confine my remarks, as you can already tell, to SEF-sole topics; although, I promise, no more SEF-related acronyms! With all the SEF-speak, you may even be a little SEF-deaf. But, don’t worry—these won’t be SEF-less remarks.
Bedrock: Stone Age & Space Age
You all remember Fred Flintstone, right? Of course you do. Yabba, dabba, doo—from the town of bedrock—“they’re a page right out of history.” As a kid, my family took a Winnebago road trip and we stopped at a place called Bedrock City in South Dakota. It’s a Flintstone-based theme park and camping place. I just loved it, because I really liked Fred Flintstone. He’s sort of the Stone Age version of Larry the Cable Guy. Fred’s a regular guy with a regular job at the Rock Quarry, regular wife, and a weird dog (well, actually, a dinosaur). Fred was ahead of his time. He wasn’t your average caveman, hanging around with just a club and a spear and a feeble fire to cook his mastodon. Nope, Fred had cool stuff.
Remember his “electric razor” which was a clam shell with a buzzing bee inside; a “camera” which was a box with a bird inside that, when you clicked the shutter, would peck out the “picture” on a stone tablet; a “vacuum cleaner” which was a baby wooly mammoth, held trunk-down to snoot up dirt; a cool shower head the “vacuum cleaner’s” momma, sticking her snout through the open bathroom window and spraying into the shower stall; a “phonograph,” a woodpecker bent over with its beak running in the groove of a stone disk and a ram’s horn for a speaker. But my favorite thing of all was the car.
Fred’s car had an “automatic window” in the back—powered by monkeys hanging off the outside—and a “horn” that you worked by squeezing the bird on the dashboard—brilliant! However, my favorite part of Fred’s car was—you guessed it—the feet. Remember those big feet moving fast, fast, fast underneath the car—going extra fast if Barney was in the passenger seat: four-foot-power instead of two—wow!
But, speed is relative, right? What seemed Flintstone fast to us as kids isn’t really all that fast anymore. Fred-speed is nothing compared to cheetah speed (some of you guys knew where I was going).
I love Fred’s stuff, but as much as I have a deep affection for them, and they’d be fun for a while, they really aren’t good enough for today. We don’t want to have to use a vacuum cleaner that requires feeding. We want a closer shave than we can get with a clam shell. And many of us like higher fidelity than a phono-pecker with a ram’s horn speaker. Guess modern times have spoiled us.
Just like we all want—and yes, need—modern technology in our homes, we need to have the most up-to-date technologies we can develop in our businesses and in our markets. I mean that not just for the industry, but for regulators, too.
We can’t afford to have Stone Age tools in these Space Age markets. We’ve seen the havoc that can be wrought by what I’ve called “feral cheetahs”—those superfast traders that can make massive market moves in milliseconds—one-one-thousandth of a second. If you are travelling at one hundred miles per hour, a millisecond is the time it takes you to travel, get this, two inches! That’s mind-boggling, right?
And so far, we don’t even require registration of these big cats! That’s called Tombstone Mentality, when you wait for a disaster or death before you take an action. We should have learned with the 2010 Flash Crash that we need to put some technology-related polices in place pronto.
Where we are today is simply not acceptable. We’d be negligent not to move quickly to make sure that our emergency systems are comprehensive and fully tested, and ready to roll—instead of getting rolled. I’m going to keep pushing for responsible and appropriate regulation of cheetah traders—including, at a minimum, registration and accountability requirements, wash blockers, kill switches, enforcement oversight with penalties by the seconds. If they can make or lose millions in seconds, they should be fined in seconds. I’ll go so far as to say it’s irresponsible for regulators not to be keeping up with the cheetahs, and working at the frontiers of technology systems in the financial marketplace. And again, I thank Commissioner O’Malia for his work on this and leadership as the Chair of our Technology Advisory Committee (TAC).
Just recently, we witnessed what a lack of appropriate readiness with regard to technologies and systems can cause. When Hurricane Sandy hit the East Coast a couple of weeks ago, she pounded us. “Frankenstorm” was like nothing else we’ve seen before, and the devastation was tremendous. It was even more concerning, in the aftermath of the storm, to learn that some financial market emergency contingency plans were not up to Space Age standards. I’m not saying they were Stone Age, but we should expect better.
Let me tell you why. First, some major firms hadn’t adequately tested their connections to emergency back-up electronic equities trading, so they headed into this storm unprepared. That’s Tombstone Mentality, yet again. Not only were some firms unsure about whether their galoshes were waterproof, they hadn’t even tried them on! So we stumbled through a few days of “late to the electronic party” mess. The securities markets got through it, but it impacted associated financial futures markets. All of these markets are inter-related and global. It never should have rolled that way.
Second, it wasn’t entirely clear during this emergency whether firms could send electronic equity orders directly to the exchange, which would then re-route them to the electronic trading system, or whether firms had to re-direct their trading themselves. For at least several hours, if not most of a day, folks thought they had to do the latter, which involved sending crews of programmers into unsafe environments—not acceptable. The point here is that there was insufficient preparation in advance for flipping the switch to electronic equities trading—it just hadn’t been tested adequately, and key decisions had not been made and conveyed appropriately.
Lastly, this led to a flurry of anxiety as to how, and whether, the transition to back-up equities trading would work, and that lack of confidence resulted in a hesitance to even attempt to use the back-up systems. Again, not acceptable. In fair weather and foul, we need to ensure that our financial markets can continue to provide the grease for our country’s economic engines. We got through Sandy, but it never should have—pun intended—gone down that way.
And by the way, it’s not a matter of if—it’s a matter of when the next tragedy occurs. In our post-9/11 world, it’s reckless not to have appropriate systems in place, tested to the max, and ready to go. The elements of our financial market “backbone”—exchanges, clearinghouses, and market utilities—were all asked to create sufficient geographic dispersal of business continuity/disaster recovery (BC/DR) resources—including both automated systems (hardware and software), and people (wetware) to be able to resume operations promptly in the event of a wide-scale disruption affecting their primary operations. One important lesson of Frankenstorm appears to be that major firms must also meet those same standards. In other words, it’s not good enough to “build it if they can’t come.”
Specifically, this would mean that major firms should have people at a high enough level, with necessary training and skills, living and working sufficiently distanced from the main entity site, so that they can continue firm operations if we experience something again like Sandy. And we will. Another key point is that financial regulators should join in requiring the whole financial sector to conduct sufficient testing of all aspects of BC/DR plans—that’s not universal now.
So, in that vein, today I’m calling for the creation of a panoptic, private/public sector “Financial Market Multi-Agency Command”—a MAC. This is used frequently in the military world, and it’s an effective mechanism to get people together to work across agencies on common problems. Securities, derivatives, and banking regulators need to work together with the industry, and spell out the systems and requirements that should be in place in the event—make that, eventuality—of an emergency. We need to give specific guidelines for systems, technologies, and human resources here to make sure we don’t leave any loopholes. And we might even want to think about timetable guidelines for recovery—to provide some “temporal structure” during a market emergency. We obviously can’t predict the future, but we can—and should—attempt to think of and plan for as many contingencies as possible.
Financial regulators already have FSOC’s Financial and Banking Information Infrastructure Committee (FBIIC), and the private sector has a parallel organization—the Financial Services Sector Coordinating Council (FSSCC). And that’s all good, but we can do better. Given the problems we saw with Sandy, we need a MAC-type organization, with a specific mandate, to make sure we don’t have this kind of floundering in an emergency again. We—regulators and markets alike—need to have our rain gear ready at the door, tested and ready to head out into the storm.
Now that we have this stark and frankly frightening example to work from, we’d be negligent not to move quickly to make sure that our emergency systems are comprehensive and fully tested, ready to roll. Let’s make sure we are all in the Space Age on this issue. As much fun as it might be in fair weather, let’s not use Fred Flintstone-type technology in the event of the next monstrous market storm.
Okay, enough Stone Age and Space Age; let’s talk music. Many of you know Professor Elizabeth Ritter; she’s my Counsel and Chief of Staff. She loves country music. It’s actually a bit of a problem, because she cranks it up so loud in her office that I have to turn down the Verdi and Rachmaninoff—or maybe its rock—that I have playing in my office. But I have to admit, there’s a lot to like about country.
For instance, a couple years ago she came in and said, “Bart, you’ve got to listen to this song—it’s important.” I was a bit skeptical about the importance but I acquiesced. (After all, you can only listen to La traviata so many times, right?)
So that’s how I found myself listening to Ronnie Dunn’s “Cost of Living.” You may have heard it: it’s about a man out of work, applying for a job, trying to take care of his family. One line in the chorus goes like this:
“Three dollars and change at the pump, the cost of living’s high and going up.”
It’s actually a pretty moving ballad—because it’s real. That’s what people “out there” are feeling and saying. And we need to listen.
Here’s something interesting about that song. When Ronnie first saw the lyrics in early 2008, the salient line was:
“Two dollars and change at the pump, the cost of living’s high and going up.”
He liked the song, but after the financial crisis, he felt that it didn’t resonate sufficiently, and so he change the “two” to “three.” It debuted at the top of the charts in 2011, and took off. Real people out there heard it, felt it, and they were moved by it. It reflected the pain and anxiety that households all across America were, and still are, feeling. And you all know the genesis of this. In the summer of 2008, the great influx of Massive Passive trading in oil price markets helped push prices skyward, and what Americans were paying for gasoline went through the roof. And by the way, if you don’t agree, or you have been living in a hole in the ground, ask Goldman Sachs researchers, or those where I was last week at Rice, or ask those at the St. Louis Federal Reserve or MIT (the Massachusetts Institute of Technology) or read any of the other myriad studies. The point is that the effect of the Massive Passives was so deep and so widespread and so continuing, that it made a country songwriter, Ronnie Dunn, change his hit song: he made it reflect the ache real people feel every day.
And here’s an even more interesting “Cost of Living” tidbit. After the song became more and more popular, Ronnie recognized that, even with his edit, it was out of date. So in 2012, this year, he changed it again, this time to:
“Four dollars and change at the pump, the cost of living’s high and going up.”
Let me clue you in, when you go out of the big cities, outside our little biomes, and spin around the dial, you’re not finding mostly NPR and classical and talk radio—you find country music—and “four dollars and change” is what they’re hearing. Station after station around the dial, because that’s what people listen to. If this is the song that resonates with them, again, we need to listen. And we sure as heck need to think about what we can do to keep that “four” from changing to “five.”
That’s why I’ve been such a strident proponent of position limits. I know, people get tired of hearing about it, but it’s important—probably one of the most important initiatives during my tenure as a Commissioner. It’s important to keep ringing the bell, that excessive speculation in derivative markets has not yet been sufficiently addressed. Congress gave us a mandate in 2010, and so far, nothing is in place. Given all the negative push-back on this—actual and threatened lawsuits, de-funding bullying, cost-benefit analysis paralysis—all of that, every bit of it, just makes me even more determined to keep vigorously moving forward, to keep pushing.
So, as I’ve said before and will keep on saying, we need a position limits rule—now. I’ve pushed staff, my own and the Commission’s, to (in addition to appealing a bad decision) get a new rule proposal out there ASAP, one that will address all of the issues raised by the court. In addition, I want a short comment period—I mean, like, 15 days—and a turn-around on a final rule that will get a robust position limits system in place nationwide promptly. Heck we’ve had 13,000 comments on limits; we pretty much know what people think. America needs this. Folks, just listen to Ronnie Dunn. He’s preaching to the choir out there in our homeland, and we need to pay attention.
My Dog Apa
Most of you probably don’t know this, but I keep a pet in my office. A great little dog—his name is Apa. He’s probably one of the best pets I’ve ever had: loyal, easy to have around, and a great little watchdog. Yappy sometimes, but I can deal with that.
He’s getting kinda old now. He was born in 1946. We should probably call the Guinness World Record people. But he’s got great bloodlines; despite his age he’s still going strong. His breeders really knew what they were doing. I’m told that President Roosevelt wanted a dog just like him.
Alright, enough, I’ll stop now. Many of you know what I’m talking about. Apa or APA is Administrative Procedure Act, promulgated by Congress in 1946 at the behest of President Roosevelt, and after 10 years of study and debate. It is a foundational statute for us. We need it, perha ps now more than ever.
The APA, intended to provide guidelines for enactment of federal regulations governing private conduct, was born in a contentious political climate. We had anti-regulation types back then too, but in the 30s and 40s, they were railing against the New Deal. Now, they’re railing against financial reform, among other things. But time has proven Roosevelt right, both in the creation of needed independent regulatory agencies and also in the need to set up guidelines for agencies, to protect the balance between promulgation of needed regulations and, as one law professor put it, the avoidance of “dictatorship and central planning.”
And it’s this last point that causes me great concern. There are bills floating around Congress now that, in effect, would gut the critically important purposes and goals of the APA. To require independent federal agencies to submit their rules to OMB (the Office of Management and Budget), or to require that agencies follow administration guidelines on rule promulgation, would consign the tried and true principles and procedures of the APA to the ash heap.
One of the things I like most about independent agencies like the CFTC is that we are not subject to the political whims of any particular Administration. It really does add important independence. It makes us less political and that is a very good thing. Senator Pat McCarran, the venerable statesman from Nevada during promulgation of the APA, called it “a bill of rights for the hundreds of thousands of Americans whose affairs are controlled or regulated” by the federal government. The Act, then and now, found the right balance between governmental authority and protection of individual rights. Let’s not tip that balance off its’ crucial fulcrum.
One last thing about the APA, before I leave the topic: I’ve spoken with many of you individually about particular rules, and about the SEF rule, specifically. However, I have a rule in my office—a pretty simple one. Adhere to the APA. By that I mean—and many of you, if not most, have already heard this from me—I don’t entertain what are supposed to be public comments in the post-comment period. That, to my mind, makes a mockery of the phrase “meaningful opportunity to comment.” I absolutely want and need to hear what you have to say; that’s crucial to getting our rules right, but at the same time, your commentary needs to be obtained during the public comment period—period. We can’t make rules that are tainted with improper procedures, or are hampered by not having a full and complete comment period. By that I mean, where ALL of the public—including those that listen to Ronnie Dunn—not just a few special interests that can afford last-minute lobbying campaigns, has the opportunity for “meaningful” comment.
And by the way, my dog is Apa. I try to avoid using the acronym “A’P’A” around him—don’t want that middle letter to give him any ideas. After all that’s a federal government carpet in my office.
I told you I’d get my SEF on. Well, here it is. First a disclaimer: I’m not pre-judging what the Commission will do on this rule. I can’t speak for the Commission. Heck, I can’t speak for Apa. I’m going to simply make comments about my preferences—which happen—surprise, surprise, Andy—to be guided by the plain language of Dodd-Frank. (I know, I know; a novel concept.)
The SEF challenge is different from just about anything we’ve ever done. Think about it. This isn’t like drafting statutes and regulations for the securities and futures markets—those entities were already well-established and registered when Congress spoke in the 30s and 70s. In this instance, while we had a robust swaps market in the U.S., prior to Dodd-Frank we did not have a system making the platforms registered entities, with concomitant regulatory responsibilities. And it’s been a challenge to design the right rules, to carry out the intent of Congress and to ensure that extant systems intended to be covered by the law are not over- or under-regulated.
One of the first challenges was to ensure that the “by any means” language—means something. When I first started parsing our proposals, I grew concerned that we had erred too far toward making SEFs (which, by the way, in the early drafting stages on Capitol Hill were called “ASEFS”—alternative swaps execution facilities) look too much like our existing contract markets. The fact that they were viewed as “alternative” means that there was recognition this was different. The “alternative” wasn’t dropped because these platforms were supposed to look like central limit order books; it was dropped because they would be the ONLY (not alternative) swaps trading facilities to become registered entities under the law. So ensuring that existing systems, like appropriate voice brokerage, could continue to be used in the SEF environment was crucial to me.
I also wanted to ensure that processors—those folks who were truly just facilitating trading, not actually hosting the trading—didn’t fall under the SEF umbrella. Again, that’s not what Congress intended.
We need to ensure that the “has the opportunity” and the “multiple to multiple” language of the statute also have the life in them that Congress intended. Again, that doesn’t mean copying the traditional contract market system. I’ve reiterated, time and again, that the statute’s sense of Congress on SEFs has two parts, not one. We are not only supposed to ensure pre-trade price transparency, but at the same time we are to promote the trading of swaps on SEFs. Neither goal outweighs the other.
Are there going to be pieces and parts of this that create heartburn? Of course. Is the rule going to be exactly the way any one sector—or Commissioner—wants it? Of course not. But let’s not, as they like to say in Washington, let the perfect be the enemy of the good. And remember, I think we’ve shown, oh let’s say, at the beginning of October, that we know how to be flexible, and to provide necessary relief as appropriate. So, I’m looking forward to getting this final rule out this year, and moving on from there.
Let me leave you with this: I know some might think we regulators are sort of like the weather; we don’t pay any attention to criticism. I don’t think that’s right. We now know your history. I think we do listen; it just takes us some time—sometimes—to act. We have stepped off the Flintstone hamster wheel when needed. We’ve taken notes when you’ve spoken. Plus, we’ve listened to some country and a few other things during our good and dog days.
Thanks for your attention. I wish you all a yabba, dabba, doo time and may the SEF be with you.
Last Updated: November 14, 2012