October 21, 2010
Good morning. I thank the Institute of International Bankers for inviting me to speak today. I also thank Roger Blissett for that very kind introduction.
When I met with you this past March, it was at the height of the debate over regulatory reform of over-the-counter derivatives, or “swaps.” Seven months later, we at the Commodity Futures Trading Commission (CFTC) are working to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act, which brings comprehensive reform to the swaps marketplace. 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 in the Dodd-Frank Act that will enhance the derivatives markets. First, the bill lowers risk through comprehensive regulation of swap dealers. Second, the bill moves the bulk of the swaps marketplace onto transparent trading facilities – either exchanges or swap execution facilities (SEFs). Third, the bill requires clearing of standardized swaps by regulated clearinghouses to lower risk in the marketplace.
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. Generally, the bill requires the CFTC and the Securities and Exchange Commission (SEC) to write rules within 360 days. For those of you keeping track, we have 268 days left. Several rules have shorter deadlines. We have organized our effort around 30 teams who have been actively at work.
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 SEC, the Federal Reserve and other prudential regulators. Since the Dodd-Frank Act’s passage, we have had nearly 200 meetings at the staff and Chairman’s level with our fellow regulators.
In addition to working with our American counterparts, we are actively consulting with international regulators to harmonize our approach to swaps oversight. I recently traveled to Brussels to discuss United States derivatives reform efforts and to consult with the European Commission on theirs. As with Dodd-Frank, the E.C. proposed to cover the entire swaps marketplace – both bilateral and cleared – and the entire product suite, including interest rate swaps, currency swaps, commodity swaps, equity swaps and credit default swaps. It is clear that the partnership between the U.S. and Europe is bearing fruit. Though we have different political systems and different cultures, our coordination and cooperation on financial regulatory reform is leading to two largely consistent approaches.
We also are soliciting broad public input into the rules. In some circumstances, we are organizing public roundtables with the SEC to hear specifically on particular subjects. Including two roundtables that are scheduled for tomorrow, we will have had five such roundtable meetings, as well as two CFTC advisory committee meetings, on issues related to Dodd-Frank.
Additionally, many individuals have asked for meetings with either our staff or me to discuss swaps regulation. As of yesterday, we have had at least 257 such meetings, all of which are now posted on our website, as well as the meetings’ participants, issues discussed and materials given to us.
We have begun actively publishing proposed rules, using public Commission meetings for this purpose. So far, we have had two public meetings to vote on seven rules. We have another meeting scheduled on Tuesday during which we will consider rulemakings in six areas: anti-manipulation, disruptive trading practices, rule certification procedures, alternatives to credit ratings, associated revisions to rules regulating investment of customer funds and the process for reviewing swaps for clearing.
Our plan is to finish our proposed rule-writing agenda by mid-December; though, being human, it is always possible that some of our rules will slip. Rules will be open for comment for either 30 or 60 days, bringing us to mid-February. This will give us the needed time to review, summarize and, where appropriate, incorporate comments from the public before publishing final rules by the July 15 statutory deadline. Some have asked whether the CFTC is moving too quickly. The statute, however, has clear deadlines that we have been directed to meet. Further, the 2008 financial crisis exposed significant weaknesses in our markets and our regulations. It is essential that we work expeditiously to address those weaknesses to protect the American public. Lastly, finishing rules within the statutory deadline will best bring regulatory certainty to the marketplace.
Regulating the Dealers
Now I will address four broad areas that might be of particular interest to you. The first is the regulation of swap dealers.
Some of you may be wondering if your bank will be regulated in the U.S. as a swap dealer. The Dodd-Frank Act says that if an entity’s swap activities have “a direct and significant connection with the activities in, or effect on, commerce in the United States,” then the CFTC has jurisdiction. The statute also gives the Commission broad authority to “prevent the evasion of any provision” of the Dodd-Frank Act. So in essence, if your bank is doing business here in the U.S., offering swaps to U.S. counterparties, you may want to take a close look at the statute.
The Dodd-Frank Act has strong capital and margin requirements and explicitly authorizes the CFTC and the SEC to write business conduct standards to lower risk and promote market integrity. Though the European Commission has not explicitly taken up business conduct standards for derivative dealers in its proposal, it has recommended important risk mitigation techniques that are in line with key aspects of the U.S. approach. The E.C. proposal also includes increased capital requirements.
Ensuring Robust Clearinghouse Protections
In addition to regulating the dealers, the Dodd-Frank Act requires that standardized derivatives be cleared through central clearinghouses. The Act also updated clearinghouse core principles, adding additional principles and making them more detailed.
Further, for the first time, some derivatives clearinghouses may be designated systemically important by the Financial Security Oversight Council. For those clearinghouses, there will be enhanced rules for financial resources, risk management and other prudential standards. In this regard, we are consulting very closely with the Federal Reserve and international regulators. We recognize the need for very robust risk management standards, particularly as more swaps are moved into central clearinghouses.
Swap Data Repositories
Moreover, the Dodd-Frank Act for the first time sets up a new registration category called swap data repositories (SDRs). The bill requires registrants – including swap dealers, major swap participants, SEFs and exchanges – to report each swap to an SDR or, if there is no SDR for that particular swap, to regulators. This requirement will allow regulators around the globe to see a transparent picture of the transactions and positions in this marketplace.
We anticipate writing rules that require data repositories to collect and maintain swaps data and make it directly and electronically available to regulators. We also anticipate rules governing how data must be maintained by registrants and sent to the data repositories. The Dodd-Frank Act says that information in data repositories that we regulate should be available to foreign regulators. It will be incumbent as we write rules that we ensure such global access.
Coordination Across Borders
As we write rules regarding the clearing and reporting, the CFTC is working very closely with regulators from around the world to ensure consistency. This includes the jurisdictions where many of your parent banks are based. We have shared term sheets and memos on potential proposed rules with regulators in Europe and Asia and asked them to comment in particular on our clearing and reporting requirements. We also are looking into how to best incorporate the newest draft CPSS-IOSCO standards for central counterparties into our rules.
The Dodd-Frank Act also authorizes the CFTC and SEC to negotiate appropriate information sharing and coordination arrangements with foreign regulators. The European proposal mandates such information sharing. This international coordination will prove essential.
Before I conclude, I will address two topics related to implementation. First, how long will the markets have to implement changes in response to the Dodd-Frank Act? Second, what resources will the CFTC need to oversee the swaps markets?
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, in many cases, your banks will need a transition period to register as swap dealers for the first time. Further, entities will need time to come into compliance with business conduct standards and real time reporting requirements, just to name two examples.
The statute outlines a minimum transition period of 60 days. Thus, for example, the earliest that real time reporting would come into effect will be in September of next year. The Commission 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.
Though the Commission has much experience regulating the on-exchange derivatives marketplace – having done so for more than 70 years – the Dodd-Frank Act presents new responsibilities and authorities. The futures marketplace that the CFTC currently oversees is a $33 trillion industry in notional amount. The swaps market that the Dodd-Frank Act tasks the CFTC with regulating has a far larger notional amount. The Office of the Comptroller of the Currency estimates that, as of the first quarter of 2010, swaps entered into by U.S. commercial banks have a notional amount of $217 trillion. Others estimate that the market could be as big as $300 trillion in the United States alone, or roughly nine times the size of the futures markets.
Some of the CFTC’s expanded authorities will be consistent with our current authorities but expanded to also include swaps. Some will be new responsibilities, such as regulating swap dealers, major swap participants, SEFs and data repositories.
The challenge before the agency is significant, but manageable, provided we have sufficient resources. Given the new responsibilities for the CFTC to regulate the swaps market, our current funding is far less than what is required to properly fulfill our significantly expanded role.
The President’s budget requested $261 million for the CFTC for fiscal year 2011. This included $216 million and 745 full-time employees for pre–Dodd-Frank authorities and $45 million in funding to provide half of the staff estimated at that time to implement Dodd-Frank. The House Appropriations Subcommittee with jurisdiction over the CFTC matched the President’s request. The Senate Appropriations Subcommittee with jurisdiction over the CFTC boosted that amount to $286 million, recognizing the heightened demands of the final bill. We hope our funding levels for the current fiscal year will be finalized when Congress returns after the election.
Though we have the resources to write the rules required by Dodd-Frank, we will need more staff to implement and enforce them in the years to come. To fully implement the Dodd-Frank reforms, the Commission will require approximately 400 additional staff over that which we need to fulfill our pre-Dodd-Frank mission.
The CFTC faces challenges in the months ahead, but we look forward to meeting those challenges. Thank you, and I’d be happy to take questions.
Last Updated: January 18, 2011