March 2, 2012
Good morning. I’d like to thank Professor Cunningham for that kind introduction and George Washington University Law School for inviting me. I’m pleased to be here for a discussion about financial reform and what it means for investors, consumers and businesses in America.
Let me start by saying what the Commodity Futures Trading Commission (CFTC) means for investors, consumers and businesses in America. At its core, the CFTC’s mission is to ensure the integrity and transparency of derivatives markets – both the futures and swaps markets. Each part of our economy relies on a well-functioning derivatives marketplace. Futures and swaps markets provide a way for farmers, producers, retailers and service companies to lock in a price or a rate and manage their risk. These markets are critical for commercial companies in the real economy – the non-banking or financial services side of the economy that provides 94 percent of private sector jobs. These markets allow companies to focus on what they do best – servicing their customers, producing products, innovating, and investing in our economy and our country.
The benefits of the derivatives markets go beyond companies in the real economy. Americans whose retirement security depends on pension funds or mutual funds, benefit. Americans who depend on community banks for their financial services needs, benefit. The pension funds, mutual funds, and insurance companies, upon which so many Americans rely, benefit from the lower costs and greater pricing information that would result from a more transparent and competitive swaps market.
Combined, the futures and swaps markets help users hedge or transfer nearly $340 trillion – representing $22 of risk for every dollar of goods and services produced in the U.S. economy. Now by any measure, that’s meaningful for investors, consumers and businesses in America.
Futures and swaps markets touch nearly every aspect of our economy from the food we eat, to the price at the pump, to our mortgages and credit cards, and to our retirement savings. Given how important these markets are to the American economy, it is essential that they are transparent, competitive and free of fraud and manipulation.
The CFTC has historically been charged with overseeing the commodity futures markets. But in 2008, the unregulated swaps market helped concentrate risk in the financial system that spilled over to the real economy, affecting businesses and consumers across America. Need I remind anyone of AIG? The crisis led to eight million Americans losing their jobs, millions of families losing their homes, and thousands of small businesses closing their doors. More than three years later, we still face a challenging economy.
In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which expanded the CFTC’s mission to also oversee the U.S. swaps marketplace, a market nearly eight times the size and far more complex than the futures market.
The three key goals of the law, put most simply:
• Bring transparency and competition to the swaps market;
• Protect against Wall Street’s risks from again spreading to the real economy; and
• Enhance market integrity to best protect the public.
Bringing greater transparency and competition to the swaps market lowers costs for investors, consumers and businesses in America. At nearly $300 trillion notional size, the U.S. swaps market, though, remains the largest dark pool in our financial markets. The Dodd-Frank Act squarely addresses this by shifting some of the information advantage from Wall Street to the commercial end-user community – to the companies across the country that use these markets.
It does so by providing the public information on the pricing and volume of every transaction upon completion. It does so by providing all market participants the opportunity to come together to transact on transparent and competitive trading platforms. These trading platforms will mean end-users, investors and speculators will benefit from seeing available bids and offers and gaining liquidity.
The law goes further by providing the public the daily valuation over the life of all cleared swaps. In addition, it provides even greater information on swaps transactions to regulators.
The CFTC has completed seven of nine key reforms to bring such transparency to the swaps market. The Commission already has begun to receive position information for large traders in the swaps markets for agricultural, energy and metal products. Starting this summer, light will shine for the first time on these markets with the reporting – in real-time – both to the public and to regulators of nearly every swap transaction.
By contrast, leading up to the 2008 crisis, the public and regulators had very limited swaps market data.
Lowering Risk to the Real Economy
Financial reform also means the lowering of risk that Wall Street poses to investors, consumers and businesses in America. Dodd-Frank reforms do this in three principal ways:
• Bringing transparency to the swaps market, as I just discussed;
• Mandating that standard swaps between financial entities move into central clearing; and
• Regulating swap dealers comprehensively.
Clearinghouses have lowered risk in the futures markets by standing between buyers and sellers of these contracts and guaranteeing each party against the failure of the other. Though clearinghouses must be overseen for comprehensive risk management, they have worked to lower risk to the broader public for over a century. This is in contrast over the same time period to the many bank failures, the 2008 financial crisis, and the Great Depression.
Dodd-Frank financial reforms mandate that standard swaps between financial firms move into central clearing. With approximately 90 percent of the notional value of the swaps market transacted between financial firms, this mandate will significantly lower the risks that come from the highly interconnected financial system.
Swaps entered into by non-financial companies represent approximately 10 percent of the market. It is important to note that consistent with congressional intent, the CFTC is working to finalize a rule ensuring that non-financial companies using swaps to hedge or mitigate commercial risk will not be required to bring swaps into central clearing. The Commission’s proposed rule on margin for swap dealers likewise provides that such non-financial companies will not have to post margin for uncleared swaps.
Investors, consumers and businesses in America also benefit from, for the first time, the comprehensive regulation and oversight of swap dealers. The CFTC has begun finalizing reforms to regulate swap dealers and lower their risk to end-users. First, swap dealers will have to register with the National Futures Association. Second, swap dealers must establish business conduct standards ensuring they deal fairly with customers, provide balanced communications and disclose conflicts of interest before entering into a swap. And third, swap dealers will have to establish policies to manage risk, as well as put in place firewalls between a dealer’s trading and research operations. Modeled after similar protections in the securities markets, this prevents swap dealers from influencing markets by trading ahead of the release of public research reports.
We’re going to further build on this progress later this year by finalizing capital and margin rules, as well as a rule on segregation for uncleared swaps.
Financial reform also means investors, consumers and businesses in America will benefit from enhanced market integrity. These reforms will protect end-users from fraud, manipulation and other abuses in the swaps market, as well as the burdens that may arise from excessive speculation.
The Dodd-Frank Act closed a significant gap in the CFTC’s enforcement authorities, as it 1) extended the authority to swaps, and 2) prohibited the reckless use of fraud-based manipulative schemes. It also enabled the CFTC to reward whistleblowers for their help in catching market misconduct.
The Dodd-Frank Act also directed the CFTC to establish aggregate position limits for both futures and swaps in energy and other physical commodities. In October 2011, the Commission completed final rules that will ensure no single speculator is able to obtain an overly concentrated derivatives position in the futures and swaps markets.
Full and effective implementation and enforcement of financial reform, however, depends on fully funding this agency for its expanded mission. At about 700 people, we are about 10 percent larger than our peak in the 1990s. Since then, the futures market has grown fivefold, and Congress added oversight of the swaps market, which is nearly eight times bigger than the futures market.
The CFTC will continue working hard to effectively oversee the futures market and implement reforms for the unregulated swaps market. This year, we will finish the rules of the road for the swaps market in a thoughtful and balanced way.
But without sufficient funding, the nation cannot be assured that this agency can oversee the futures and swaps markets and that end-users get the benefit of transparent markets, lower risk, and enhanced market integrity.
The financial crisis was devastating for investors, consumers and businesses in America. Dodd-Frank responded to the crisis with reforms that bring transparency and competition to the swaps market and lower its risk to all the end-users who use these markets to manage their businesses. Financial reform benefits companies in the real economy that provide 94 percent of private sector jobs. Financial reform also benefits pension funds, mutual funds, insurance companies, and small and community banks – and everyone who relies on them.
Some have raised concerns that these reforms will raise costs for end-users. But there are far greater costs – the eight million jobs lost, millions forced out of their homes, retirement savings that disappeared, shuttered businesses and the uncertainty throughout the economy that came from risk, which spilled over from Wall Street.
Thank you for inviting me today, and I’d be happy to take questions.
Last Updated: March 2, 2012