March 14, 2012
Good morning. Thanks Jeff for that introduction, and I thank the Futures Industry Association (FIA) for inviting me.
Before getting starting, I’d like to thank Commissioners Sommers, Chilton, O’Malia and Wetjen for their hard work and dedication to improving the markets.
I also want to commend John Damgard on a remarkable career. He’s one of the few in this audience who took part in founding the modern futures industry. John, I’m not suggesting you were in Chicago in the 1860s. When John worked for the Department of Agriculture in the 1970s, he was instrumental in the creation of the Commodity Futures Trading Commission (CFTC). John later was asked to lead the FIA, and since then, the futures market has grown thirtyfold. And the swaps market, invented just one year prior to John joining the FIA, has grown to dwarf the futures market.
So, John’s career is bookended by the Commodity Futures Trading Commission Act in 1974 that created the CFTC and the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) in 2010, which brought swaps under the CFTC’s oversight. John, you can take a break now because futures and swaps are both under the Commission you helped create, and we’re building on futures market reforms that you did so much to promote. John and I share a view that derivatives markets – both futures and swaps – must be transparent, open and competitive to work best for the American people.
I also want to congratulate Walt Lukken, one of my predecessors at the CFTC, on becoming the next head of the FIA.
It is critical that the derivatives markets – both futures and swaps – work for the farmers, ranchers, producers and commercial companies in the real economy. Futures and swaps markets allow companies to manage risk and focus on what they do best – servicing customers, producing products and investing in our country’s future.
As it’s the real economy – the non-financial side – that provides 94 percent of private sector jobs, it’s all the more important that these markets work for this side of the economy.
The financial side of the economy also benefits from greater transparency and competition in the derivatives markets. Investors, retirees, homeowners and customers of pension funds, mutual funds, community banks and insurance companies all benefit from the lower costs and greater pricing information of more transparent markets.
In 2008, the financial system and the financial regulatory system failed America. Though there were many causes of the crisis, the unregulated swaps market helped concentrate risk in the financial system that spilled over to the real economy. The crisis led to eight million Americans losing their jobs, millions of families losing their homes, and thousands of small businesses closing their doors.
In 2010, Congress and the President came together to pass the historic Dodd-Frank Act, which brings much-needed reform to the swaps market. This reform borrowed from what has worked best in the futures industry to protect investors, consumers, retirees and businesses in America.
In short, three key goals of the law are:
• Bringing transparency and competition to the swaps market;
• Lowering the risks of the swaps market to the real economy; and
• Enhancing market integrity to best protect the public.
Last summer, the CFTC turned the corner on financial reform from our proposal phase and started finalizing rules. We’ve completed 28 with just over 20 to go. We are completing rules in a thoughtful, balanced way to get them right – not against a clock. And with 16 public roundtables, 3,000 comment letters before we proposed rules, 28,000 comments in response to proposals, and 1,400 meetings with the public to date, there’s a lot to consider.
Financial reform is more than just Dodd-Frank. In 2012, the CFTC also is looking at ideas to enhance futures and swaps customer protections and to adapt our oversight of these markets to accommodate an ever-changing market structure.
At about $300 trillion notional size, the U.S. swaps market represents the largest dark pool in our financial markets. The Dodd-Frank Act squarely addresses this by shining bright lights of transparency – to the public and to regulators – on this market for the benefit of investors, consumers, retirees and businesses in America.
It does so post-trade by providing the public information – in real time – on the pricing and volume of every transaction upon completion. It does so pre-trade by providing all market participants the opportunity to come together to transact on transparent and competitive trading platforms.
The public and swaps customers will benefit from daily valuations over the life of all swaps. The public gets to see daily valuations of cleared swaps, and counterparties get to see swap dealers’ valuations of uncleared swaps.
The CFTC has completed many of these key reforms to bring transparency to the swaps market. We have begun to receive position information for large traders in the swaps markets for agricultural, energy and metal products. Starting this summer, real-time reporting to the public and to regulators will begin on nearly every swap transaction. Later this year, market participants will benefit from the transparency of daily valuations over the life of their swaps.
By contrast, leading up to the 2008 crisis, the public and regulators had very limited swaps market data.
Looking forward, we have three remaining transparency rules to complete: block sizes, designated contract markets and swap execution facilities.
Lowering Risk to the Real Economy
Financial reform also means lowering the risk that the swaps market poses to investors, consumers, retirees and businesses in America. Dodd-Frank addresses 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.
For over a century, through good times and bad, central clearing in the futures market has lowered risk to the broader public. Dodd-Frank brings this effective model to the swaps market. Standard swaps between financial firms will move into central clearing, which will significantly lower the risks of the highly interconnected financial system.
The Commission has completed rules establishing new derivatives clearing organization risk management requirements and a rule on the process for clearinghouses to submit swaps that may be mandated for central clearing. In addition, the Commission adopted an important customer protection enhancement, the so-called “LSOC rule” (legal segregation with operational commingling) for swaps. It ensures customer money is protected individually all the way to the clearinghouse.
Moving forward, the Commission is working to complete three additional clearing rules. First, to further facilitate broad market access, we will address client clearing documentation, risk management, and so-called “straight-through processing,” or sending transactions immediately to the clearinghouse upon execution. Second, to fulfill Congress’ requirement, we will take up the end-user exception related to non-financial companies. And third, we will consider a final rule on the implementation phasing of the clearing mandate.
Under the congressionally directed process for determining which swaps will be subject to the clearing mandate, the Commission will have 90 days to review a clearinghouse’s submission and determine whether a swap or group of swaps is required to be cleared. Staff now is reviewing clearinghouse submissions and preparing recommendations. During the Commission’s review period, there will be a 30-day public comment period on a clearinghouse’s submission. I anticipate that the first such comment period will begin this spring. Thus, for market participants trying to plan for a possible start date for mandatory clearing – the so-called “T” of mandatory clearing determinations – though I don’t have a specific date, it could be as early as this summer.
The CFTC has begun finalizing reforms to, for the first time, regulate swap dealers and lower their risk to the rest of the economy. Based on completed registration rules, dealers will register after we finalize jointly with the SEC the further definition of key terms, such as swap dealer and swap. The two agencies are closer to finalizing entity definitions. We are taking into account all the public comments, and are paying particular attention to those from end-users and hedgers. We’ve also made great progress on product definitions. Not only are these further definition rules, which Congress required, critical to regulating swap dealers, but they also are pivotal to moving forward on the clearing mandate and position limits.
The CFTC also has completed business conduct standards for swap dealers addressing sales practices and risk management policies, which will protect customers and taxpayers.
Financial reform also means investors, consumers, retirees and businesses in America will benefit from enhanced market integrity. Congress provided the Commission with new tools to ensure market participants can have confidence in U.S. derivatives markets.
Rules the CFTC completed last summer close a significant gap in the agency’s enforcement authorities. The rules extended our enforcement authority to swaps and prohibited the reckless use of fraud-based manipulative or deceptive schemes. Also, the CFTC now can reward whistleblowers for their help in catching market misconduct.
Congress 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 to ensure no single speculator is able to obtain an overly concentrated aggregate position in the futures and swaps markets. The Commission’s final rules come into effect for the spot-month limits once the CFTC and SEC jointly adopt the rule to further define the term “swap,” and for other limits, following a year’s worth of large trader swap data. It is essential that the two Commissions move forward on the product definition rulemaking expeditiously so that the important position limits rule can go into effect.
Foreign regulators also are making progress on financial reform, including Japan, which passed a measure; Hong Kong, Singapore and Canada, which have made regulatory proposals; and the European Union, which is working toward putting European Market Infrastructure Regulation (EMIR) in place this year. The CFTC has been actively consulting and coordinating on financial reform with our international counterparts. CFTC staff has been sharing many of our comment summaries and drafts of final rules with the international community and has gotten constructive feedback. Just yesterday, we held a meeting with 42 foreign and domestic regulators. Last week, I was in Europe meeting counterparts in both Basel and Brussels. Commissioner Sommers has done great work as Chair of the CFTC’s Global Markets Advisory Committee and as the Commission's representative to the International Organization of Securities Commissions. Furthermore, I anticipate the Commission will explicitly seek public input this spring on the cross-border application of Title VII of the Dodd-Frank Act.
Financial reform also means giving investors, consumers, retirees and businesses in America confidence that their funds are protected. The CFTC already has taken a number of steps in this area. First, the completed amendments to rule 1.25 regarding the investment of funds bring customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005. Importantly, this prevents use of customer funds for in-house lending through repurchase agreements. Second, we completed the “LSOC rule” for swaps, as I mentioned earlier. And third, starting this November, clearinghouses will have to collect margin on a gross basis and futures commission merchants will no longer be able to offset one customer’s collateral against another and then send only the net to the clearinghouse.
Beyond these steps, Commissioners and staff are getting a lot of feedback from market participants on additional customer protection enhancements, including a package of ideas from the FIA. Staff also just finished a two-day, public roundtable on this topic, and is actively seeking further public input through our website and further meetings. To the extent constructive reforms emerge from this outreach and review, staff will put forward recommendations to the Commission for consideration.
Changing Market Structure
Financial reform also means the Commission must continue adapting our oversight to changing market structure, including emerging trends related to electronic trading. Commissioner O’Malia’s Technology Advisory Committee is focusing on this important issue.
I expect the Commission will consider putting out for comment a concept release concerning the testing and supervision of automated market participants. These concepts will be designed to address potential market disruptions that high frequency traders and others who have automated market access can cause.
The Commission also is looking to propose a rule on the reporting of ownership and control information for trading accounts. These rules would enhance the Commission’s surveillance capabilities and increase the transparency of trading to the Commission.
Investors, consumers, retirees and businesses in America also need a well-resourced CFTC with sufficient funding for both staff and technology. 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 and far more complex than the futures market.
A well-resourced CFTC also is important for many of you in this room. As the agency moves from rule writing to implementation, market participants will continue seeking guidance. Without sufficient funding, however, we cannot be as efficient and timely in our responses as you would like. In addition, your businesses depend on the credibility of well-regulated U.S. futures and swaps markets. Without sufficient funding, your businesses – and the nation - cannot be assured that this agency can adequately oversee the futures and swaps markets. Only with funding sufficient to meet a greatly expanded mission can market participants have the confidence – confidence that you all rely upon – in the CFTC’s oversight of transparent and open markets that are free of fraud, manipulation and other abuses.
The financial crisis was devastating for investors, consumers, retirees and businesses in America. Congress responded to the crisis with reforms that bring transparency and competition to the swaps market and lower its risk to the rest of the economy. Financial reform also benefits pension funds, mutual funds, insurance companies, and community banks – and everyone who relies on them.
Some have raised concerns that these reforms will raise costs. But there are far greater costs – 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 again for inviting me, and I’d be happy to take questions.
Last Updated: March 15, 2012