September 14, 2009
Good morning. It is a pleasure to be with you today. Thank you to the New Republic and International Securities Exchange for hosting this event and inviting me to participate. Also, thank you to Noam Scheiber for asking me to be here.
One year ago, the financial regulatory system failed the American public. There were gaps in our regulatory structure that left the nation unprepared and unable to respond quickly to changing market environments.
The Administration has sent legislation to Capitol Hill to address some of the causes of the financial crisis. It is essential that we take action to bolster consumer protection in financial products, such as mortgage sales practices; establish a plan that would help unwind nonbank entities that are on the brink of collapse; address systemic risk; and regulate financial products and dealers that have for decades gone unregulated. Today I will spend my time with you addressing unregulated over-the-counter derivatives, which is an area of particular importance to the Commodity Futures Trading Commission.
As we move forward with regulatory reform, we do so with the full knowledge of the failures of our financial regulatory system. The last decade, and particularly the last 24 months, has taught us much about the new realities of our financial markets. We have learned the limits of foresight and the need for candor about the risks we face. We have learned that transparency and accountability are essential. Only through strong, intelligent regulation can we fully protect the American people and keep our economy strong.
We have all felt the effects of the failures of our regulatory system. Every single person in this room had to put money into a company that most Americans had never even heard of. $180 billion of the tax dollars that you and I paid went into AIG to keep its collapse from further harming the economy. We must ensure that this never happens again. We cannot afford any more billion-dollar bailouts.
The need for reform of our financial system today has many similarities to the situation facing the country in the 1930s. In 1934, President Roosevelt boldly proposed to the Congress “the enactment of legislation providing for the regulation by the Federal Government of the operation of exchanges dealing in securities and commodities for the protection of investors, for the safeguarding of values, and so far as it may be possible, for the elimination of unnecessary, unwise, and destructive speculation.” The Congress swiftly responded to the clear need for reform by enacting the Securities Act of 1933, the Securities Exchange Act of 1934 and the Commodity Exchange Act of 1936.
It is clear that we need the same type of comprehensive regulatory reform today. Last month, the Obama Administration, through the Treasury Department, took a crucial step of submitting legislation to Congress to apply regulation to the over-the-counter derivatives markets. The proposal is a very important step toward comprehensive regulation of both derivative dealers and the markets on which derivatives are traded. This is vital for the future of our economy and the welfare of the American people.
The Administration’s proposal will lower risk by requiring capital and margin on dealers and mandatory clearing of all standardized products. It will enhance market integrity by protecting against fraud, manipulation and other abuses and establishing new authorities to set aggregate position limits. It will promote transparency and market efficiency by requiring record-keeping and reporting for all derivatives and requiring that standardized derivatives be traded on transparent exchanges or other regulated trading platforms. As we move forward, working with Congress, to comprehensively regulate the OTC markets, we should ensure that the law covers the entire marketplace without exception.
I believe that comprehensive regulation of the OTC derivatives markets will require two complementary regimes – one for regulation of the dealers, or the actors, and one for regulation of the market, or stage.
For dealers, we should set capital standards and margin requirements to help lower risk. We should also set business conduct standards to guard against fraud, manipulation and other market abuses. We should mandate recordkeeping and reporting to promote transparency. This will cover all OTC derivatives, both standardized and customized.
This must cover all of the different products, including interest rate swaps, currency swaps, commodity swaps, equity swaps and credit default swaps, as well as the derivative products that we have not yet thought of.
We should also regulate the market functions. We should require that all derivatives that can be moved into central clearing have a requirement to be cleared through regulated central clearing houses to further lower risk. To further promote transparency, we should require that standardized OTC derivatives come onto regulated exchanges or regulated transparent trading systems.
Requiring clearing and trading on exchanges or regulated transparent electronic trading systems will promote transparency and market integrity and lower systemic risks. Through clearing, firms, rather than having exposures to each other, would have a clearinghouse that provides for broader risk-taking and that subjects participants to the daily discipline of mark-to-market valuations and the daily posting of collateral.
Tens of thousands of end users will benefit from the transparency brought by moving standardized swaps onto exchanges or regulated trading platforms. This transparency should give end users better pricing on both standard products and even on customized products, as customized products would be priced in relation to the standard products traded on exchanges. While some have raised a concern that this might limit commercial risk management or even innovation in the markets, I believe that this will enhance the ability of end users to effectively manage their risk.
To fully regulate OTC derivatives, we must work with Congress to enact both of these complementary regimes. Regulating both the traders and the trades will ensure that we cover both the actors and the actions that may create significant risks.
To do this requires cooperation on the parts of the CFTC and the Securities Exchange Commission. We are fortunate to have a great partner in SEC Chairman Mary Schapiro. Our mutual understanding, dedicated staffs and respective Commission support gives me great confidence that we will be able to get the job done.
The CFTC and the SEC have been working to provide recommendations to Congress and the President on how to best tailor our regulations in the best interest of the American public. We recently held two unprecedented joint hearings to, in part, discuss ways to effectively close the gaps in our regulatory structures. As we work with Congress to regulate OTC derivatives, we have a real opportunity to establish a consistent, comprehensive regulatory framework from the outset.
I look forward to working with the Congress and other federal regulators to apply comprehensive regulation to both derivatives dealers and the markets in which they are traded. The United States thrives in a regulated market economy. This requires innovation, competition and regulation to ensure that our markets are fair and orderly. We have a tough job ahead of us, but it is essential that we get it done to protect the American public.
Thank you, and I’d be happy to take questions.
Last Updated: June 11, 2010