August 25, 2011
Good morning and welcome to the Commodity Futures Trading Commission (CFTC). It’s great to see economists from so many fine universities across the globe gathered here along with an impressive group of government experts. Thank you for graciously sharing your time to discuss the issues affecting commodity markets. Your insights should be helpful to our surveillance and enforcement efforts at this agency. I want to thank Andrei Kirilenko and the Office of the Chief Economist for putting this conference together and for their contributions to this agency. Before you get started, I’m going to give you an update about where we stand today with the CFTC’s response to the aftermath of the 2008 financial crisis.
Three years ago, our country’s largest financial institutions were trading swaps in the shadows and this marketplace contributed to and helped accelerate the financial system’s downward spiral. Though the crisis had many causes, it is clear that the swaps market played a central role. Swaps added leverage to the financial system – more risk was backed by less capital. There was a belief that certain financial institutions were not only too big to fail but too interconnected to fail. But when AIG, Lehman and others collapsed, it was the taxpayers who had to pick up the bill to prevent the economy from diving further into a depression. And it wasn’t just the financial system that failed. The regulatory system that was put in place to protect the public failed too.
The Dodd-Frank Act
Congress and the President came together and responded to this crisis by passing a historic law, the Dodd-Frank Wall Street Reform and Consumer Protection Act. The law includes many important provisions, but two overarching goals of reform include: bringing transparency to the swaps market and lowering the risks of this market to the overall economy. Both of these reforms protect taxpayers from again bearing the brunt of a crisis and lower costs for businesses and their customers.
The first overarching goal of reform will resonate well with the economists in this room. The law brings critical transparency to the derivatives marketplace. As you know, the more transparent a marketplace is, the more liquid it is, the more competitive it is and the lower the costs for hedgers, borrowers and their customers. In short, when markets are open and transparent, they are safer and sounder and, again, costs will be lower for companies and the people who buy their products.
The Dodd-Frank Act promotes both pre-trade and post-trade transparency. It moves certain standardized swaps transactions to exchanges or swap-execution facilities. This will allow buyers and sellers to meet in an open marketplace where prices are publicly available. It also requires real-time reporting of the price and volume of transactions, which ensures that everyone has this information. By minimizing what economists call “information asymmetry,” we reduce the advantages that Wall Street has over Main Street.
The second overarching goal of reform is equally as important. The law lowers risk to the overall economy by directly regulating dealers for their swaps activities and moving standardized swaps into central clearing, which will reduce interconnectedness in the swaps markets. Clearinghouses, which guarantee the obligations of both parties, have lowered risk for the public in the futures markets since the late-19th Century, and it’s time that we modernize the swaps market and provide the same protections for taxpayers.
Turning the Corner
This summer, we turned an important corner at the CFTC. We have now completed 11 final Dodd-Frank rules, and we have a robust schedule this fall to consider more final rules. We substantially completed the proposal phase this past spring. Starting next month, we are likely to take up rules relating to position limits, clearinghouse core principles, business conduct, entity definitions, trading, data reporting and the end-user exemption. It is important to point out that each of our final rules includes a careful consideration of costs and benefits completed with the involvement of the CFTC’s Office of the Chief Economist.
We’ve also reached out broadly on what we call “phasing of implementation,” which is the timeline that our rules will take effect for various market participants. This is critically important so that market participants can take the time now to plan for new oversight of this industry.
Next month, it is my hope that we vote on two proposed rulemakings seeking additional public comment on the implementation phasing of swap transaction compliance that would affect the broad array of market participants. The proposed rulemakings would provide the public an opportunity to comment on compliance schedules applying to core areas of Dodd-Frank reform, including the swap clearing and trading mandates, and the internal business conduct documentation requirements and margin rules for uncleared swaps. These proposed rules are designed to smooth the transition from an unregulated market structure to a safer market structure.
When all of our Dodd-Frank rules are completed, I believe that it is appropriate that the Commission take a step back at the right time in the future and carefully evaluate the new regulatory landscape as a whole – and how it is actually working. This is another example of our efforts to thoughtfully implement the reforms in the Dodd-Frank Act.
A year after the Dodd-Frank Act became law, there are those who would like to roll back its provisions and even return to the environment that led to the 2008 crisis. But as you know, economists have agreed for decades that transparency actually reduces costs. This law and our corresponding rules are about transparency.
In addition, until we complete our reforms, the public remains at risk. That’s why the CFTC is working so hard to think through the Dodd-Frank law’s swap-market reforms and implement them in a way that promotes more open and transparent markets, lowers costs for companies and their customers, and protects taxpayers.
Thank you, and welcome to the CFTC.
Last Updated: August 25, 2011