July 15, 2010
Good morning. I thank the Securities Industry and Financial Markets Association for inviting me to speak at your Post-Financial Reform Conference. I will say, however, that the title of this conference is somewhat premature. The Senate has not yet passed the financial reform Conference Report, though I am hopeful that the bill will reach the President’s desk shortly.
Even after the President signs the Wall Street reform bill, financial reform will be far from complete. The Securities and Exchange Commission, the Federal Reserve, the Federal Deposit Insurance Corporation, the Treasury Department and the Commodity Futures Trading Commission (CFTC), among others, will have a significant number of rules to write and implement to regulate the financial system.
Just at the CFTC, we have organized around 30 areas where we believe rules will be necessary. Some of these areas will require only one rule, while others may require more. We will be required to complete these rules generally in 360 days, though we will be required to complete some of them in 90, 180 or 270 days.
The financial reform conference report includes essential provisions to protect the American public.
The bill requires strong regulation of over-the-counter derivatives dealers for the first time. This includes both bank dealers on Wall Street and nonbank dealers, such as the next AIG. Dealers will be subject to capital and margin requirements for their derivatives books to lower risk. They also will be required to meet robust business conduct standards. This will promote market integrity by protecting against fraud, manipulation and other abuses. Business conduct standards also lower risk through uniform back office standards for netting, processing and documentation. Dealers will for the first time be required to meet recordkeeping and reporting requirements so that regulators can police the markets.
It is not enough, though, simply to promote transparency to the regulators. The financial reform package also makes the over-the-counter derivatives marketplace transparent to the public. Public market transparency greatly improves the functioning of existing securities and futures markets. With this legislation, we will be able to shine the same light on the over-the-counter derivatives markets.
The more transparent a marketplace, the more liquid it is, the more competitive it is and the lower the costs for corporations that use derivatives to hedge their risks. The bill accomplishes this by requiring standardized swaps to be traded on regulated exchanges or other trading facilities, called swap execution facilities. Such centralized trading venues also increase competition in the markets by encouraging market-making and the provision of liquidity by a greater number of participants.
To further lower risk in the system, the legislation requires that standardized derivatives be cleared through central clearinghouses. Centralized clearing has helped lower risk in the futures markets for decades in both calm markets and in the stormiest of markets, such as during the 2008 financial crisis. The Wall Street Reform bill will bring this important risk-reducing feature of the futures marketplace to the swaps marketplace and, critically, will lower interconnectedness in the financial system.
The CFTC has been the primary regulator of derivatives since its predecessor was created in the 1930s. The first derivatives – called futures – have traded since the Civil War, when grain merchants came together and created this new marketplace. It took nearly 60 years and the Great Depression until President Franklin Roosevelt and the Congress comprehensively regulated the futures markets.
The CFTC ensures that futures and commodity options exchanges have procedures to protect market participants and ensure fair and orderly trading, free from fraud, manipulation and other abuses. The CFTC also oversees futures clearinghouses to ensure that they have appropriate risk management standards.
The CFTC has wide-ranging transparency efforts designed to provide aggregate information about commodity futures markets and trading to the American public. The agency also has broad surveillance powers to police the markets for fraud, manipulation and other abuses.
If the financial reform conference report becomes law, the CFTC will have a full and busy agenda over the coming year. We have much experience regulating the on-exchange derivatives marketplace – we have done so for more than 70 years. The financial reform bill presents new responsibilities and authorities for the agency. Some will be consistent with our current authorities, such as overseeing exchanges and clearinghouses, but expanded to also oversee swaps. Some will be new responsibilities, such as regulating swap dealers and swap data repositories. The Commission looks forward to taking on these new responsibilities to lower risk, promote transparency and protect the American public.
We have begun preparing for the task of writing rules for the swaps marketplace. We started by identifying 30 topic areas where we have determined rule-writing to be necessary. Teams of staff within the agency have been assigned to each rule-writing area and will see the process through, from analyzing the statute’s requirements, to broad consultation, to recommending proposed rulemakings to publishing final rules. Team leaders for each of these 30 areas have been assigned, and we held our first group planning meeting earlier this week. My fellow Commissioners are fully engaged as well. I know that both the Commission and the staff look forward to hitting the ground running if and when the President signs the bill into law.
Two core principles will guide us throughout the rule-writing process. First is the statute itself. We intend to comply fully with the statute’s provisions and Congressional intent to lower risk and bring transparency to these markets.
Second, we intend to consult heavily both with other regulators and with the broader public. We will work very closely with the Securities and Exchange Commission, the Federal Reserve and other prudential regulators. In some circumstances, we will write rules jointly with the SEC, such as establishing definitions of “swap,” “swap dealer,” “major swap participant” and similar terms on the security-based side. We also are directed to work jointly with the SEC on rules related to investment adviser reporting and mixed swaps.
This process will build off the close work the CFTC and SEC have done over the last year. We are currently working jointly to continue to review the unusual market volatility that took place on May 6. Last year, we jointly drafted a report with recommendations, many of which were included in the Dodd-Frank bill, to harmonize CFTC and SEC regulations in the best interest of the American public. I am confident that we will be able to work cooperatively and efficiently on joint rules as directed by Congress.
On the many rules that will not be written jointly, we will consult with the SEC to ensure for the greatest consistency and comparability to the extend possible among the agencies’ respective rules. We also will work closely with the Federal Reserve Board, the Federal Reserve Bank of New York and other prudential regulators to utilize their expertise and judgment on many of the rules we will write. Though consultation will extend through final rulemakings, we will put great emphasis on it in the next few months as we prepare proposed rules.
In addition to working with our American counterparts, we have just started reaching out to international regulators in an effort to harmonize our approach to swaps oversight with that of regulators around the world.
Further, we will solicit broad public input into the rules. We plan to build upon our experiences in the last year and have a series of public Commission meetings to hear from investors, market participants, end-users, exchanges and clearinghouses on key topics beginning in September. Beyond these public meetings, if members of the public have a view, we would like to hear from them.
We plan to actively publish proposed rules in the fall, using regular public Commission meetings for this purpose. With each proposed rulemaking, we will solicit comments through the public comment process lasting a minimum of 30 days. In the past, we have sometimes extended public comment periods to accommodate late submitters. We likely will not have this luxury because of tight statutory deadlines.
In addition to the broad rule-writing agenda that we will tackle in the coming months, the Dodd-Frank bill directs the CFTC to initiate roughly a dozen studies, reports and memoranda of understanding related to the legislation.
There is also the ongoing business of the CFTC. There are numerous rules that are outstanding that we will move to complete. With some rules, we will move forward and publish final rules. For example, the Commission in January published a proposed rulemaking to regulate the trading of retail foreign exchange transactions. The Dodd-Frank bill requires the CFTC to publish a final rule within 90 days of the bill’s enactment, or prohibition of certain retail off-exchange foreign currency transactions will take effect.
With other rules, the Commission will need to re-propose rules. For example, the financial reform bill requires that the CFTC enact a rule to set aggregate position limits across markets. In January, the Commission published a proposed rulemaking to set position limits in the regulated futures marketplace. Thus, should the bill become law, the CFTC will re-propose position limits based upon Congress’s direction across all markets.
The next year of rule writing will test the very talented staff of the CFTC. Our staff has significant expertise regulating the on-exchange derivatives markets that will translate well into regulating the over-the-counter swaps markets. Still, we need significant new resources.
The President’s budget called for $261 million for the CFTC for fiscal year 2011, which is a substantial boost in funding. The House of Representatives Appropriations Subcommittee that has jurisdiction over the CFTC met the President’s request. The $261 million request was based on the House-passed version of the bill last December. Congress requested an updated estimate given the additional requirements of the Conference Report, and we estimated that an additional $25 million would be appropriate.
The CFTC faces challenges in the months ahead, but we are prepared and geared up to meet those challenges. I look forward to continued dialogue with market participants and the public as we work to implement the Wall Street reform bill.
Thank you, and I’d be happy to take questions from the audience.
Last Updated: January 18, 2011