January 31, 2013
Welcome to the Commodity Futures Trading Commission (CFTC). Thank you, Rick, and thanks to the team for putting together this roundtable. This is the CFTC’s 21st public roundtable since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Next week, we'll be holding the 22nd roundtable, the third focused on customer protection.
Today’s roundtable is occurring at an historic time in the markets. The marketplace is increasingly shifting to implementation of common-sense rules of the road for the swaps market.
For the first time, the public will benefit from the greater access to the markets and the risk reduction that comes with central clearing. Required clearing of interest rate and credit index swaps between financial entities begins in March.
For the first time, the public is benefiting from seeing the price and volume of each swap transaction. This post-trade transparency builds upon what has worked for decades in the futures and securities markets. The new swaps market information is available free of charge on a website, like a modern-day ticker tape.
For the first time, the public will benefit from specific oversight of registered swap dealers. As of the end of this week, there will be 71 provisionally registered swap dealers. They are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation.
An earlier crisis led to similar common-sense rules of the road for the futures and securities markets. I believe these critical reforms of the 1930s have been at the foundation of our strong capital markets and many decades of economic growth.
In the 1980s, the swaps market emerged. Until now, though, it lacked the benefit of such rules to promote transparency, lower risk and protect investors. What followed was the 2008 financial crisis. Eight million American jobs were lost. In contrast, the futures market, supported by earlier reforms, weathered the financial crisis.
President Obama and Congress responded and crafted the swaps provisions of Dodd-Frank by borrowing from what has worked best in the futures market for decades: clearing, transparency and oversight of intermediaries.
Given that we have largely completed swaps market rulewriting, with 80 percent behind us, today is a good opportunity to hear from market participants on where we are and where we ought to go from here. As we have asked throughout this process, we'd like to hear from market participants today on what provisions for swaps should mirror those for futures and when is it appropriate for there to be differences. I would note that Congress included a number of provisions in Dodd-Frank recognizing appropriate differences. For instance, it is critical that farmers, ranchers, merchants and other end users continue to benefit from using customized swaps that are not cleared.
Now that the entire derivatives marketplace -- both futures and swaps – has comprehensive oversight, it's the natural order of things for some realignment to take place.
The notional open interest of the futures market ranges around $30 trillion. There are various estimates for the notional size of the U.S. swaps market, but it ranges around $250 trillion. Though the futures market trades more actively, just one-ninth or so of the combined open interest in the derivatives marketplace is futures. Approximately eight-ninths of the combined derivatives marketplace is swaps, which until recently were unregulated.
This roundtable also provides an opportunity to hear from market participants on the recent actions of the two largest exchanges. Last fall, IntercontinentalExchange converted power and natural gas-related swaps into futures contracts. In addition, the CME Group's ClearPort products, which were cleared as futures, including those that were executed bilaterally as swaps, are now being offered for trading on Globex or on the trading floor. CME also adopted new block trading rules for its ClearPort energy contracts, as well as began trading a futures contract where the underlying product is an interest rate swaps contract.
It’s important to note that whether one calls a product a standardized swap or a future, both markets now benefit from central clearing. Since the late 19th century, central clearing in the futures market has lowered risk for the public. It also has fostered access for farmers, ranchers, merchants, and other participants and allowed them to benefit from greater competition in the markets. In March, swap dealers and the largest hedge funds will be required, for the first time, to clear certain interest rate swaps and credit index swaps. Compliance will be phased in for other market participants throughout this year.
In addition, transparency has been a longstanding hallmark of the futures market –both pre-trade and post-trade. Now, for the first time, the swaps market is benefitting from post-trade transparency. On December 31, registered swap dealers began real-time reporting for interest rate and credit index swap transactions. Building on this, swap dealers will begin reporting swap transactions in equity, foreign exchange and other commodity asset classes on February 28. Other market participants will begin reporting April 10. The time delays for reporting currently range from 30 minutes to longer, but will generally be reduced to 15 minutes this October for interest rate and credit index swaps. For other asset classes, the time delay will be reduced next January. After the CFTC completes the block rule for swaps, trades smaller than a block will be reported as soon as technologically practicable.
Oversight of intermediaries and the protection of customer funds have long been integral parts of futures market regulation. Futures commission merchants, introducing brokers and commodity pool operators have been CFTC-registered intermediaries. Dodd-Frank extended oversight of these intermediaries to include their swaps activity, and to promote market integrity and lower risk to taxpayers, brought oversight to another category of intermediaries called swap dealers. The initial group of provisionally registered swap dealers includes the largest domestic and international financial institutions dealing in swaps with U.S. persons. It includes the 16 institutions commonly referred to as the G16 dealers. Reforms the CFTC has finalized to enhance the protection of customer funds, as well as proposed enhancements, consistently cover both futures and swaps.
Looking ahead, to further enhance liquidity and price competition, the CFTC must finish the pre-trade transparency rules for swap execution facilities, as well as the block rules for swaps. It is also critical that we preserve the pre-trade transparency that has been at the core of the futures market. In that context, I am looking forward to hearing from panelists today about recent actions by exchanges to lower their minimum block sizes for certain energy futures.
Thank you again for coming, and we look forward to your input.
Last Updated: January 31, 2013