September 21, 2010
Good morning. I thank the Chamber of Commerce for inviting me to speak today. The last time I was with you, the House of Representatives and the Senate Banking Committee had each passed Wall Street reform legislation. Now, six months later, we at the Commodity Futures Trading Commission (CFTC) are working to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act with regard to regulation of the swaps marketplace. Before I discuss the details of reform, I’d like to thank my fellow Commissioners and CFTC staff for all of their hard work on the Dodd-Frank Act and on its implementation.
There are three critical reforms of the derivatives markets included in the Dodd-Frank Act. First, the bill requires swap dealers to come under comprehensive regulation. Second, the bill moves the bulk of the swaps marketplace onto transparent trading facilities – either exchanges or swap execution facilities. Third, the bill requires clearing of standardized swaps by regulated clearinghouses to lower risk in the marketplace. Each of these three reforms will lower risk and improve transparency for your members.
Implementing the Dodd-Frank Act
The Dodd-Frank Act is very detailed, addressing all of the key policy issues regarding regulation of the swaps marketplace. The bill requires the CFTC and SEC to write rules generally within 360 days. For those of you keeping track, we have 297 days left. We have organized our effort around 30 teams who have been actively at work. We had our first meeting with the 30 team leads the day before the President signed the law.
Two principles are guiding 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 are consulting heavily with both other regulators and the broader public. We are working very closely with the Securities and Exchange Commission (SEC), the Federal Reserve and other prudential regulators. Within 24 hours of the President signing the Dodd-Frank Act, more than 20 of our rule-writing team leads were meeting at the SEC with their counterparts. Our staff was having similar meetings the following week with staff from the Federal Reserve.
In addition to working with our American counterparts, we have reached out to and are actively consulting with international regulators to harmonize our approach to swaps oversight. Next week, I will travel to Brussels to discuss United States derivatives reform efforts and to consult with the European Commission on theirs, which they released last week. Based upon their release and the Dodd-Frank Act, I am confident that we will bring strong and consistent regulation to the two largest swaps markets. Each of our rule-writing teams will be referring to these new proposals as we seek consistency in our regulatory approaches.
We also are soliciting broad public input into the rules. This began the day the President signed the Dodd-Frank Act when we listed the 30 rule-writing teams and set up mailboxes for the public to comment directly. We want to engage the public as broadly as possible even before publishing proposed rules.
In some circumstances, we are organizing roundtables with the SEC to hear specifically on particular subjects. We have had three days of meetings to date, which have been very beneficial. So far we have heard from investors, market participants, end-users, academics, exchanges and clearinghouses on key topics including governance and conflicts of interest, real time reporting, swap data recordkeeping and swap execution facilities. Based on how helpful these have been, we intend to have additional roundtables in the next month or two.
Additionally, many individuals have asked for meetings with either our staff or me to discuss swaps regulation. In the last 61 days, we have had at least 100 such meetings – that’s more than two per business day. And things are picking up. I had 11 meetings last week alone.
Just as we believe in bringing transparency to the swaps markets, we also have added additional transparency to our rule-writing efforts. We are now posting on our website a list of all of our meetings, as well as the participants, issues discussed and all materials given to us.
We plan to actively publish proposed rules in the fall, using weekly public Commission meetings for this purpose. Public meetings will allow us to propose rules in the open. Our first such meeting will be next Friday, October 1. Agenda items include an interim final rule relating to the time frame for reporting pre-enactment unexpired swaps to a swap data repository or to the Commission, proposed rules regarding systemically important clearing organizations and proposed rules regarding governance of clearinghouses, designated contract markets and swap execution facilities. With each proposed rulemaking, we will solicit public comments for a period not less than 30 days. Due to the tight statutory deadlines to complete the rules, it is not likely that we will extend public comment periods.
We already have published one final rulemaking regarding retail foreign exchange transactions. Further, with the SEC, we have published an advanced notice of proposed rulemaking seeking comments on the definitions of key terms in the Dodd-Frank Act.
Now I will address four broad areas that are particularly relevant to the Chamber’s members. The first is the end-user exemption. The statute on this issue is clear: those non-financial entities that are “using swaps to hedge or mitigate commercial risk” will be able to choose whether or not to bring their swaps to clearinghouses. Financial entities, however, such as swap dealers, hedge funds and insurance companies, will be required to use clearinghouses when entering into standardized transactions with other financial entities. This will lower the risk of their swaps transactions and to reduce interconnectedness in the financial system.
Clearinghouses have lowered risk in the futures marketplace for more than a century. The Dodd-Frank Act will bring these same risk-reducing features to the swaps marketplace.
Major Swap Participant
Many end-users have asked whether they would be considered major swap participants – a new category of registrants created by the Dodd-Frank Act – and thus be regulated like swap dealers. Though there is much work and consultation with my fellow Commissioners and with the SEC to be done, the statute is pretty specific.
There are three tests to determine whether an entity is a major swap participant, and they all relate back to whether the entity is substantial enough to be relevant to the economy or the financial system as a whole. Further, an entity can only be a major swap participant if it is not considered a swap dealer.
We anticipate that around 200 entities may register with the CFTC as swap dealers, so none of those 200 entities will be considered a major swap participant. So to be a major swap participant, you would have to not be a swap dealer and yet still be substantial enough to meet the requirements in the statute. Most end-users, therefore, are not likely to fall within the major swap participant category.
Real Time Reporting
One of the great benefits that the Dodd-Frank Act brings to the American public, the Chamber’s members and ultimately your customers is transparency. The bill accomplishes this in two important ways: first, by requiring standardized swaps to trade on exchanges or swap execution facilities (SEFs) and second, through mandatory real time reporting.
A swap execution facility is “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants.” This transparency brought about by this trading requirement should improve pricing for the Chamber’s member businesses. The more pre-trade transparency there is, the more likely there will be additional competition in the markets and tighter pricing for your transactions. Further, the statute says that one of the goals of swap execution facilities is “to promote pre-trade transparency in the swaps market,” though it appropriately authorizes the CFTC to write rules to facilitate block trades.
In addition to trading, Congress also has been very specific that market participants and end-users will benefit from real time reporting. Such post-trade transparency must be achieved “as soon as technologically practicable” after a swap is executed to enhance price discovery.
The Chamber’s member businesses will benefit from this transparency. Reporting on both transactions that come to trading platforms and those that are conducted bilaterally will enable businesses to see how the market prices swaps. As we write the rules on real time reporting, the statute mandates that we “ensure that such information does not identify the participants.” Thus we are required to both promote price discovery and protect market participant confidentiality.
Lastly, many market participants may be wondering how the implementation of each of our rules may affect them directly. How long, for example, will dealers, clearinghouses and exchanges have to implement changes in response to the Dodd-Frank Act?
The legislation generally gives regulators until July 15 of next year to write the rules. The statute also envisions a transition period after rule-writing to allow the marketplace to comply with the new rules. For example, swap dealers and swap execution facilities will need a transition period to register for the first time. Further, entities will need time to come into compliance with real time reporting requirements.
The statute outlines a minimum transition period of 60 days. Thus, I would imagine that the earliest that real time reporting would come into effect will be in September of next year. The Commission also will consider the transition needs of entities, as appropriate, that are currently regulated and those that will soon come under regulation. This will likely be addressed in public comments.
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 the public and interested parties such as the Chamber as we work to implement the Dodd-Frank Act.
Thank you, and I’d be happy to take questions.
Last Updated: January 18, 2011