March 28, 2012
Good morning, thank you David for that kind introduction. I’d also like to thank the Chamber of Commerce for inviting me to speak at your 6th Annual Capital Markets Summit.
The U.S. capital markets are the world’s largest and most vibrant. I believe our great economic success as a nation over many decades has been, in part, due to the important financial reforms of the 1930s. Companies, investors and hedgers have benefitted from reforms that brought transparency, openness and competition to the futures and securities markets and protected the public against fraud, manipulation and other abuses. These commonsense rules of the road have benefitted the public for decades.
But in 2008, the financial system and the financial regulatory system failed. The unregulated swaps market played a significant role in these failures. Eight million Americans lost their jobs, most of your businesses failed to make budget and there is still significant uncertainty in the economy.
Congress and the President responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), which, for the first time, tasked the Commodity Futures Trading Commission (CFTC) to oversee the U.S. swaps market.
Every one of the Chamber’s three million members relies on a well-functioning derivatives marketplace. Futures and swaps markets are critical to the economy because they allow companies to lock in a price and focus on what they do best – servicing customers, producing products and investing in our country’s future. Combined, the $37 trillion futures market and the $300 trillion swaps market represents $22 for every dollar of goods and services produced in our economy. Clearly, these are meaningful numbers, even for the U.S. Chamber of Commerce.
As it is producers and merchants in the real economy – the non-financial side – that provide 94 percent of private sector jobs, it’s all the more important that the futures and swaps markets work for America’s job providers.
Non-financial firms make up about 10 percent of the worldwide swaps marketplace and only modestly more as a percentage of the futures market. Though these end-users represent a small part of the overall markets, it is critical that the CFTC protect this slice.
So why aren’t we more aligned? We both say we want more transparency, openness and competition in these markets, which lowers costs for companies and their customers.
Just yesterday, the Chamber said it “supports efforts to bring transparency to the over-the-counter derivatives market,” in releasing the Financial Regulatory Reform 2012 Report Card.
In fact, this is the core of what the CFTC is doing to implement financial reform – bringing transparency, openness and competition to these markets so they will work for your members.
The benefits of transparent and open markets go beyond companies in the real economy to many in the financial sector. Pension funds, mutual funds, community banks and insurance companies using these markets to hedge risk and enhance investment returns for investors, retirees and consumers benefit as well.
Sometimes when you do express concerns, we’re actually not that far apart. Recently, a group from the Chamber came to the CFTC, including a company that thought it might be inadvertently caught up in registration rules. This company – clearly an end-user – had less than 2 percent of swaps exposure compared with the level that might have required it to register. For the record, let me tell you, this company is not a major swap participant. In fact, it’s not even a minor swap participant.
So now let me turn to some specifics on what we’re doing to promote transparency, openness and competition – or, if I might say, to shift some of the information advantage from Wall Street to businesses across America, ensuring they are on a level playing field with the big financial firms.
The U.S. swaps market, remains today the largest dark pool in our financial markets.
The Dodd-Frank Act squarely addresses this by providing the public, for the first time, information on the pricing and volume of every swap transaction upon completion. Furthermore, end-users, investors and speculators all will benefit from seeing available bids and offers and gaining liquidity on transparent and competitive trading platforms.
The pre-trade transparency required for trades between financial firms on these platforms is only for transactions standard enough to be mandatorily cleared and small enough not to be considered a block trade. These transactions will benefit all others in the market by providing a reference price. End-users will get to see the pricing and volume of swap transactions on platforms, but get to choose whether or not to use the platforms – a win-win for end-users. Furthermore, companies will continue to be able to rely on customized transactions to meet their particular needs, as well as to enter into large block trades.
The CFTC has completed key rules on transparency, including providing the daily valuation over the life of each swap – all cleared swaps to the public and uncleared swaps to each counterparty. Furthermore, 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. And the CFTC was mindful of end-users when completing these rules, giving them more time to do their reporting.
Transparency also helps lower risk of clearinghouses, which have operated in the futures market for over a century by standing between buyers and sellers and guaranteeing each party against the failure of the other. Clearinghouses work best when they are supported by transparent markets to value their open positions on a daily basis, and to sell or transfer positions of a failed clearing member.
The CFTC has completed reforms to help democratize the swaps market by providing market participants and trading platforms open access to clearing and clearinghouses. Furthermore, Dodd-Frank financial reforms mandate that standard swaps between financial firms move into central clearing. Central clearing amongst financial firms will facilitate moving from what currently is largely an opaque, bilateral marketplace into a more centralized, multilateral, competitive and open market. Taken together, these reforms will greatly benefit members of the Chamber.
Swap Dealers and Market Integrity
Commonsense rules of the road also mean regulating swap dealers to promote transparency, openness and competition. End-users and other market participants also need to be protected from fraud, manipulation and other abuses, as well as the burdens that may arise from excessive speculation.
The CFTC has begun finalizing reforms to regulate swap dealers and lower their risk to the rest of the economy. Swap dealers must establish sales practices ensuring they deal fairly with customers, provide balanced communications and disclose conflicts of interest before entering into a swap. In addition, they will have to establish policies to manage risk, as well as put in place firewalls between a dealer’s trading, clearing and research operations.
We are working with the Securities and Exchange Commission (SEC) to further define the terms “swap” and “swap dealer.” We’ve been taking into account the considerable public comments we’ve received on our proposals, and I believe we will be responsive. For instance, by providing greater clarity on what it means to be a market maker as well as adjusting the deminimus threshold, I believe we will significantly address the many comments from end-users with regard to the further definition of a “swap dealer.” In addition, by addressing the many helpful comments regarding forward transactions for physical commodities, I believe we will help provide greater clarity to end-users as we finalize the further definition of “swap.”
The Dodd-Frank Act also directed the CFTC to establish aggregate position limits for both futures and swaps in energy and other physical commodities, which the Commission completed in October 2011. Some of your members are part of financial associations that are challenging this rule in court. But other Chamber members believe, and I concur, that these rules help promote market integrity by ensuring that markets reflect a broad set of views and are not affected by the concentrated position of any single speculator.
In reading yesterday’s Chamber report card, I again asked myself – why aren’t the Chamber and the CFTC more aligned?
You say in the report card that you support transparent, open and competitive markets. And that’s what the CFTC’s work on financial reform will bring to end-users using the swaps market.
You suggest that we preserve the ability of commercial end-users to use customizable over-the-counter derivatives without margin requirements. Once again, that’s what the CFTC’s rules allow – end-users may continue to use customized transactions. And just as Congress intended, the CFTC’s margin and clearing proposals exclude end-users – non-financial companies – from margin and clearing requirements.
You’ve also suggested that we better coordinate on our rules, both domestically and internationally. But isn’t that what we’re doing? With literally hundreds of meetings with domestic and international regulators and sharing our draft work papers with them, this is an unprecedented coordination effort. The CFTC, SEC and Federal Reserve are meeting and talking nearly every day. Earlier this month, I once again went to Basel and Brussels to discuss swaps market reforms with international regulators. In fact, I’m told that tomorrow the European Union will complete the European Market Infrastructure Regulation (EMIR).
Maybe next year, as you prepare for your seventh annual summit, you will grade us on our efforts to bring transparency, openness and competition to the swaps markets. Though I don’t ever foresee an “A” from the Chamber, one day you might even be glad that we helped bring the benefits of transparency to your three million members.
Transparent markets also depend upon a well-funded regulator. Let’s admit it – without credible regulatory oversight, the public may quickly lose confidence in the markets.
The CFTC is a good investment of taxpayer dollars. This hardworking staff of 710 is just 10 percent more than what we had in the 1990s though the futures market has grown fivefold. The CFTC also will soon be responsible for the swaps market – eight times bigger and far more complex than the futures market.
Picture the NFL expanding eightfold to play more than 100 football games in a weekend, leaving just one referee per game, and, in some cases, no referee. Imagine the mayhem on the field, the resulting injuries to players, and the loss of confidence fans would have in the integrity of the game.
Market participants depend on the credibility and transparency of well-regulated U.S. futures and swaps markets. Without sufficient funding for the CFTC, the Chamber members – and the nation – cannot be assured that the agency can adequately oversee these markets.
Transparent and well-regulated markets are key to a growing and prosperous economy. The CFTC is working hard to bring transparency, openness and competition to the swaps market. These reforms look out for end-users – they put your members on a level playing field with Wall Street.
Some have raised concerns that these reforms will raise costs for businesses. But economists have agreed for decades that transparency actually reduces costs. The more transparent a marketplace is, the more liquid it is, and the more competitive it is – resulting in lower costs for Chamber companies and their customers.
Thank you for inviting me today, and I’d be happy to take questions.
Last Updated: March 28, 2012