October 11, 2011
Good morning. I thank the Futures Industry Association (FIA) for inviting me to speak today and John Damgard for that kind introduction. This is the third year that I’ve spoken at FIA’s Chicago event, and it’s always a good opportunity to hear directly from the futures industry.
I would like to start by taking a moment to talk about what we’ve been up to at the Commodity Futures Trading Commission (CFTC) since I spoke with you at your Chicago conference last year and more recently at your event in Boca.
Before I do that, I’d like to thank and recognize each of my fellow Commissioners: Mike Dunn, Jill Sommers, Bart Chilton and Scott O’Malia for their dedication and significant contributions.
I would like to take a moment and say a special thanks to Commissioner Dunn as this may be one of his last FIA functions as a CFTC Commissioner. It has been a great honor to work with and learn from Commissioner Dunn over the last two and a half years.
Commissioner Dunn has served the Federal Government for more than 25 years, including six years as a CFTC commissioner as well as Acting Chairman. He has been confirmed by the Senate an astonishing six times. Mike is a trusted colleague who works incredibly hard in service to the American public at the CFTC. He has helped frame and improve all of the rules that the Commission proposed to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act. He is a trusted friend and an honorable public servant. And, perhaps most importantly, he is a member of the FIA Hall of Fame!
CFTC Rule Writing to Date
Since I last spoke to an FIA event in March, the CFTC has been hard at work. We now have substantially completed the proposal phase of the rule-writing process required by the Dodd-Frank Act. We held 19 public meetings and issued more than 50 proposed rules – on the many important areas of reform called for by the new law, including transparency, clearing and regulating swap dealers.
The CFTC has benefited from significant public input throughout this process. We have received more than 25,000 comment letters – John’s aware of this because he’s sent in so many letters on behalf of the FIA. CFTC staff and Commissioners have met more than 1,000 times with market participants and members of the public to discuss the rules. We’ve had nearly that many meetings with domestic and foreign regulators as well. We also have conducted 14 public roundtables on Dodd-Frank.
This summer, the agency turned the corner and began finalizing rules to make the swaps marketplace more open and transparent for participants and safer for taxpayers. To date, we have finalized 15 rules, and we have a full schedule of public meetings this fall and into next year.
The Financial Crisis
It is important to remember why these rules are so critical. Three years ago, our economy fell into a downward spiral when one large financial institution after another teetered on the brink of failure.
We’re still feeling the aftershocks of that financial crisis. More than eight million jobs were lost, and the unemployment rate remains stubbornly high. Millions of Americans lost their homes. Millions more live in homes that are worth less than their mortgages. And millions of Americans continue struggling each day to make ends meet.
While the crisis had many causes, it is evident that swaps played a central role. Swaps added leverage to the financial system with more risk being backed by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail. Swaps – developed to help manage and lower risk for end-users – also concentrated and heightened risk in the financial system and to the public.
Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives market – including both the regulated futures market and the heretofore unregulated swaps market – is essential so that producers, merchants and end-users can manage their risks and lock in prices for the future. Derivatives help entities focus on what they know best – innovation, investment and producing and selling goods and services – while finding others in a marketplace willing to bear the uncertain risks of changes in prices or rates.
The U.S. swaps and futures markets approximate $300 trillion and $40 trillion notional amount, respectively – that’s more than $22 of derivatives for every dollar of goods and services produced in the U.S. economy. That is why it is essential that we ensure that these markets work for the benefit of the American public; that they are transparent, open and competitive; and that they do not allow risk to spread through the economy.
CFTC’s Upcoming Agenda
The CFTC is focused on completing the rule-writing process to implement the Dodd-Frank Act. We are focused on considering these rules thoughtfully – not against a clock. In that context, I would like to mention some of the work that CFTC staff is nearest to bringing forward for Commission consideration.
Our next public meeting is scheduled for a week from today – on October 18. Next in the queue of staff recommendations are final rules related to clearinghouse core principles and position limits. In addition, we may consider staff recommendations providing further exemptive relief – consistent with the CFTC’s July 14th Exemptive Order – from certain provisions of Dodd-Frank’s Title VII requirements.
Staff also is working very closely with Securities and Exchange Commission (SEC) staff on three important joint rulemakings: those related to further defining entities and products as well as those related to reporting for investment advisors. This work is furthest along regarding entity definitions, including swap dealer, major swap participant and eligible contract participant, as well as the investment advisor reporting rules. When the Commission considers the entity definition rule, we hope to also consider swap dealer registration rules.
Other final rules nearing Commission consideration include those on external business conduct standards, foreign boards of trade, and swap data reporting. In addition, in our queue are rules on designated contract markets, internal business conduct rules, real time reporting, segregation for cleared swaps, and the end-user exception.
In July, the CFTC finalized a rule on the process for review of swaps for mandatory clearing. Under this congressionally mandated process, the Commission has 90 days to review a clearinghouse’s submission and determine whether the swap is required to be cleared. Though clearinghouses will decide much of the timing, it is likely that they will not file submissions until later this fall or in the winter. If, therefore, clearinghouses were to file submissions towards the end of this year, a clearing mandate may take effect towards the beginning of the 2nd quarter of next year. Under recently proposed rules on implementation phasing, market participants would have an additional three, six or nine months to come into compliance with the clearing mandate, depending on the swap’s counterparties.
Twenty-first century finance knows no true geographic borders. Money and risk can move around the globe with a touch of a button. Sober evidence of this was AIG’s swaps affiliate, AIG Financial Products, which had its major operations in London. When it failed, the U.S. economy and taxpayers shouldered a tremendous burden.
The current debt crisis in Europe is but a stark reminder of our interconnectedness. Moreover, it is precisely during times of heightened market uncertainty that transparent pricing of risk is essential. While European leaders are working to avert a deepening crisis, it is critical that we implement the Dodd-Frank Act to protect the American public.
We are actively consulting and coordinating with international regulators to promote robust and consistent standards in swaps oversight. We are sharing many of our memos, term sheets and draft work product with international regulators. Building on these efforts, I will be traveling to London tomorrow to discuss derivatives reform as well as issues relating to high-frequency trading.
We also will work with international colleagues on memoranda of understanding for access to information and cooperative oversight. We also have a long history of recognizing foreign regulatory regimes. The Dodd-Frank Act authorizes the CFTC to recognize foreign regulatory frameworks that are comprehensive and comparable to U.S. oversight of the swaps markets in certain areas. We also anticipate seeking public input on the application of Section 722(d) of the Dodd-Frank Act, which says that the law doesn’t apply to activities outside the United States unless those activities have a direct and significant connection with activities in, or effect on, U.S. commerce.
In addition to finishing the rules, we need additional resources consistent with the CFTC’s significantly expanded mission and scope. The swaps market is seven times the size of the futures market that we currently oversee, and it is far more complex.
Moreover, we need additional resources to respond to regulatory inquiries from market participants after the rules are completed. No doubt, many of you will come to see us with questions or to register with the agency. Every swap execution facility and swap data repository will have to register with the CFTC, and we’ll need the staff to handle those registrations. Furthermore, though, as proposed, swap dealers will register with the National Futures Association, we anticipate that every group of registered entities will have questions directly for us. There is a great benefit to have people at the CFTC who will be able to sort through your questions and get you the responses you deserve.
In conclusion, the Dodd-Frank Act reforms are important to the economy and to the public. Only with reform can the public get the benefit of transparent, open and competitive markets. Reform is needed to lower the risk that taxpayers will be called upon again to bear the cost when a large financial institution fails in the future.
It has been just over a year since the Dodd-Frank reforms became law. There are those who might like to roll them back and put us back in the regulatory environment that preceded the crisis three years ago. But that regulatory system failed to protect the American public. Let us not forget about the 8 million lost jobs – the majority of which were lost by people who have never used derivatives. Let us not forget what the nation went through three years ago – and what the nation continues to recover from now.
Economists have agreed for decades that transparency in markets actually reduces costs. Furthermore, we’re hearing from a growing number of market participants – including people in this audience - who have said they would like to lower regulatory uncertainty and get going on reform.
Some have raised cost considerations about our rulemakings. We are going through those comments and they have been very helpful. But the greatest cost is having a public that is not protected from the risks of the swaps market and that does not get the benefits of transparent markets. It is essential that we finish implementing the Dodd Frank reforms.
Thank you and I’d be happy to take questions.
Last Updated: October 11, 2011