May 2, 2012
Good morning, thank you Steve for that kind introduction. I’d also like to thank the International Swaps and Derivatives Association (ISDA) for inviting me to speak at your annual global derivatives conference on where we are internationally on swaps market reforms.
As you all know, with just the click of a mouse, risk can spread around the globe. We surely saw this as the financial system failed in 2008.
AIG Financial Products, though organized in Connecticut, was primarily run out of London. Sobering evidence, indeed, of the markets’ international interconnectedness.
Further, swaps – developed to help manage and lower risk for commercial companies – also concentrated and heightened risk in international financial institutions. When these entities began to fail, swaps quickly spread risk across borders and helped to nearly topple the U.S. economy. Taxpayers were asked to step in to support the financial system and to prevent our economy from going into free fall.
The ensuing financial crisis plunged the United States into the worst recession since the Great Depression with eight million Americans losing their jobs, millions of families losing their homes and thousands of small businesses closing their doors. The financial storms continue to reverberate with the debt crisis in Europe affecting the economic prospects of people around the globe.
Following the 2008 crisis, a new consensus formed internationally. Swaps, which were basically not regulated in Asia, Europe and the United States should now be brought into the light of regulation.
When President Obama brought together the G-20 leaders in Pittsburgh in 2009, they agreed that the swaps market needed to be reformed and that such reform should be completed by December 2012.
Despite different cultures, political systems and financial systems, we've made significant progress on a coordinated and harmonized international approach to reform. Of course, there will be some differences, but I would like to highlight the progress we’re making together.
In 2010, the U.S. Congress and the President came together and passed the historic Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). To date, the CFTC has completed 31 reforms to bring oversight to the unregulated swaps market. We are on track to complete the approximately 20 remaining reforms this year.
The United States, Europe, Japan and Canada together make up about 90 percent of the worldwide swaps marketplace.
Japan passed reform legislation in 2010, and has made real progress on the clearing mandate. Further, they have a proposal before their Diet on the use of trading platforms, as well as post-trade transparency. The European Parliament last month adopted the European Market Infrastructure Regulation (EMIR) that includes mandatory clearing, reporting, and risk mitigation for derivatives. And the European Commission has published proposals providing for both pre-trade and post-trade transparency.
Other major jurisdictions, including the largest provinces in Canada, have the legislative authority and have made progress on swaps reform.
Yesterday, regulators from nine major market jurisdictions met in Toronto for what was a very constructive dialogue in our continuing efforts to achieve consistent global swaps market reforms. Next week, at the invitation of Financial Stability Board (FSB) Chairman Mark Carney, I’ll join other U.S. regulators in Basel to meet with the FSB regarding swaps market oversight.
Before Steve gets to ask me questions, I’d like to turn to six important areas where we have made good progress but there is more work to be done.
First, is promoting greater transparency to the public in the swaps market. At more than $700 trillion, the global swaps market remains today the largest dark pool in our financial markets.
As the G-20 heads of state understood three years ago, promoting transparency to the public in the swaps market is critical to both lowering the risk of the financial system, as well as reducing costs to end-users around the globe.
The more transparent a marketplace is to the public, the more efficient it is, the more liquid it is, and the more competitive it is.
The U.S. has taken the important step forward and included such transparency in the Dodd-Frank Act. The Japanese and European transparency proposals, as well as initiatives well underway in other jurisdictions, will further align international reform efforts and benefit the public.
The CFTC has completed key rules on transparency. Starting this summer, real-time reporting to the public and to regulators will be a reality. We are working to complete final rules for both designated contract markets and swap execution facilities by this summer.
Building on newly available data to the Commission, the CFTC also plans to begin publishing aggregated swaps market data. The public has benefited for years from the Commitment of Traders futures data we publish. Our goal is to provide similar public transparency for the swaps market.
Some of your members may be concerned with global transparency initiatives. You've raised some questions about liquidity. But economists have noted that when information shifts to the broader market, end-users benefit from the greater competition this transparency unleashes.
Second, is data reporting to regulators. As the G-20 committed, the major market jurisdictions have aligned in requiring reporting of transactions to trade repositories.
Through the leadership of the FSB, we’ve also worked collaboratively on a global system for legal entity identifiers (LEI) to facilitate identifying each swap counterparty.
As an interim step until the global LEI is finalized, the CFTC established the CFTC Interim Compliant Identifier for reporting, which will be available shortly as a transition to the global LEI.
The Commission also has just completed proposed interpretative guidance regarding the application of Dodd-Frank indemnification provisions for swap data repositories (SDRs). The proposed guidance states that foreign regulators would not be subject to these provisions if the SDR also is regulated by foreign law and the data is reported under foreign law.
Lastly, international regulators have been working on a collaborative approach to the questions of what, when and to whom information stored in global data repositories will be available to regulators.
Third, is the important work on clearing and the clearing requirement. While our approaches are not identical, there is now a great deal of consistency among the major jurisdictions. Clearing of standardized swaps between financial firms will be required, significantly lowering the risks of the highly interconnected, international financial system. Dodd-Frank and the international legislative initiatives consistently ensure that non-financial end-users using swaps to hedge or mitigate commercial risk will not be required to bring swaps into central clearing.
Building upon this, last month, a new set of global standards for central clearing, including 24 principles, was finalized by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions (IOSCO).
Anticipating these international standards, the Commission completed rules last fall establishing new risk management requirements for clearinghouses, many of which become effective next week and others in November.
We also are collaborating internationally on clearing requirement determinations. CFTC staff are reviewing clearinghouse submissions received in February and are consulting with our international counterparts as they prepare recommendations for the Commission and for public comment. The Commission's first determinations are likely to occur this fall. This broadly aligns with both Japan and Europe. Japan is expected to publicly announce its determinations this summer to meet a clearing requirement by November. The Europeans already have begun seeking public comment on the criteria that should be used in making clearing determinations.
Fourth, the international community is closely coordinating on margin requirements for uncleared swaps. It is critical to have a consistent approach to margin. This will reduce the opportunity for regulatory arbitrage, and, where possible, promote consistent standards for competition among international swap dealers. We’re discussing details on initial as well as variation margin; who pays margin and when it is paid; methodologies for calculating margin; and where the margin is held for customer segregation purposes.
The CFTC’s proposed margin rule published last year excludes non-financial end-users from margin requirements for uncleared swaps. For all those non-financial end-users perhaps not invited to this ISDA conference, let me assure you I've been advocating with global regulators that we all adopt a consistent approach.
Fifth, there's been a lot of work internationally with regard to position limits. Now, I know that ISDA is one of the financial associations challenging this rule in court. And you know the CFTC is vigorously defending this rule because it's the law and because it promotes market integrity. Internationally, the G-20 leaders endorsed an IOSCO report last November noting that market regulators should use position management regimes, including position limits, to prevent market abuses. The European Commission has proposed such a position management regime to the European Parliament.
Sixth, the Commission is working with our international counterparts on the cross-border application of Dodd-Frank swaps market reforms.
The Dodd-Frank Act clearly states that those entities that are “making markets” in swaps or conducting a “regular business” in swaps with U.S. parties will be required to register as swap dealers. Based on completed registration rules and rules further defining the term “swap dealer,” a number of your members are now anticipating registering with us. This will be required on a provisional basis 60 days after we complete, with the Securities and Exchange Commission, the joint rule further defining the term “swap.”
The CFTC has had a long history of working with international regulators to coordinate oversight of entities dually registered here and abroad. We have entered into numerous memoranda of understanding on both information sharing and supervisory issues with our international counterparts. We have done so with regard to foreign clearinghouses and futures commission merchants. We also recently established a registration regime for foreign boards of trade.
We look forward to seeking public comment through a cross-border release, which will include interpretive guidance on the scope of the Dodd-Frank Act, aka section 722(d), as well as an approach to when substituted compliance may be appropriate for overseas swap dealers.
We also are considering an appropriate approach to phased-in compliance for certain requirements for cross-border swap dealers.
I cannot finish this speech without stating the obvious. The CFTC is an under-resourced agency. We’ve now been tasked with overseeing the $300 trillion U.S. swaps market - nearly eight times larger and far more complex than the futures market we’ve historically overseen. We’re barely larger, however, than we were before we were given these new responsibilities.
You may not have been enthusiastic about the passage of Dodd-Frank or its swaps market reforms. But as these reforms come to life, it’s critical that the public have confidence in a well-funded swaps market regulator. Further, it’s important for the swaps market, as well as your industry’s branding. It’s only with such confidence that end-users and market participants will fully use these markets. It’s only with a well-funded CFTC that market participants, including this association’s members will get timely reviews of applications and petitions and answers to your questions. Thank you, and now, Steve, take it away with your questions.
Last Updated: May 2, 2012