March 11, 2014
Good afternoon, I’d like to thank the Futures Industry Association for the invitation to speak today. Thank you, Walt, for that kind introduction. I’m pleased to be back at the conference this year. I see many familiar faces in the crowd.
Before I begin, I would like to thank my colleagues, Commissioners Bart Chilton and Scott O’Malia, for their partnership and dedication to the work of the Commodity Futures Trading Commission. I have appreciated greatly their insights and involvement in the rulemaking process during my time at the Commission.
Global Derivatives Markets Need a Harmonized Global Regulatory Regime
As everyone here well knows, the derivatives markets are critical to the efficient functioning of the global financial system and the economies of the world. The risk-management and price-discovery functions of these markets have become integral to businesses across the spectrum, from agricultural producers to global manufacturers.
Those businesses depend on derivatives markets that have significant global reach, with market participants in the U.S. and abroad relying on liquidity pools formed in financial centers around the world. In many cases, the firms providing liquidity to these markets are global in nature and rely on risk-management expertise that is specific to markets in every major continent.
To be effective, therefore, the approach to regulating these markets must always be cognizant of this reality, and appropriately harmonized across legal jurisdictions. The paramount objectives of derivatives regulations must be to support a global market structure that promotes open, transparent, and liquid markets and sound risk-management practices at the firms operating within those markets.
With these objectives in mind, I would like to emphasize briefly the importance of the Commission’s continued efforts to promote a harmonized, international regulatory framework.
The Substituted Compliance Framework has been Effective and Remains Essential to Global Harmonization Efforts
The Commission has recognized the importance of developing this type of framework for many decades. The Commission’s staff, in fact, has long held the view that global execution and clearing services should be open to U.S. persons, provided the trading venues offering such services—in this case, foreign boards of trade—are appropriately overseen by home regulators and remain subject to regulations that are comparable to, and as comprehensive as, U.S. law.
The continued use of this comparability standard for the swaps regulatory regime is not happenstance. The substituted-compliance framework was effectively endorsed by Dodd-Frank itself, both as the substantive basis for the FBOT registration regime, and as precedent for the mutual-recognition frameworks authorized for foreign swap execution facilities and foreign clearinghouses. Additionally, the CFTC, through staff, embraced a substituted-compliance framework in the futures space before applying and expanding that framework to the swaps markets under its cross-border guidance.
From a policy perspective, the substituted-compliance framework for swaps incentivizes foreign jurisdictions to harmonize their risk management, reporting, clearing, and execution standards with U.S. standards under Dodd-Frank. In doing so, it also better aligns the interests of firms operating in these jurisdictions with the regulatory interests of foreign regulators.
From a practical perspective, the comparability framework respects principles of international comity, the limits of U.S. law, and the resource constraints of U.S. and global regulators. For firms depending on and operating in these markets, it also facilitates compliance with strengthened and harmonized regulatory standards.
The Commission’s longstanding embrace of the substituted-compliance framework therefore should not be surprising. Indeed, as I will discuss, I am confident that an expanded comparability framework for global execution and clearing venues will translate, over time, into more competition and more open, transparent, and liquid derivatives markets.
I say “over time” because, today, virtually all of the G20 jurisdictions are still in the process of implementing derivatives reforms. Although tremendous progress has been made in recent months in certain areas, the CFTC’s staff must and will continue to engage with global regulators to facilitate progress on derivatives reforms and ensure that these reforms appropriately support the intended outcomes of the G20 commitments as well as Dodd-Frank.
I suspect that engagement will prove not too difficult if the Commission diligently continues along the current path. The CFTC was the first derivatives regulator to adopt a comprehensive regulatory regime to fulfill the G20 commitments, and for that reason alone, its embrace of the substituted compliance framework should mean that the regulatory outcomes sought by Dodd-Frank will be equally sought by legislators and regulators overseeing the most active derivatives markets globally.
Indeed, one theme from the Commission’s meeting with representatives from 12 countries and 21 regulators this morning is that there is a continued commitment to derivatives reform across the globe.
Substituted Compliance Must Be Granular Enough to Be Meaningful and General Enough to Be Workable
It is important to note that harmonizing regulations that do not themselves impose standards that achieve outcomes similar to those sought by the U.S. under Dodd-Frank could result in regulatory arbitrage and dislocations in the markets, as well as give false assurances to the public.
It would be misguided for global regulators to harmonize the lowest common denominator in regulatory standards or to harmonize solely for harmonization’s sake. Fortunately, the substituted-compliance framework effectively ensures that this will not be the case for those markets accessed by U.S. persons, and for those markets that otherwise have a direct and significant nexus to U.S. commerce or the U.S. financial system.
Global regulators can and should remain faithful to the outcomes-based approach described in the CFTC’s cross-border guidance, avoiding an insistence on the exact language of U.S. regulations to the precise letter and comma. But the details will often matter, too. Regulators across the globe cannot know before implementation whether regulations will achieve anticipated outcomes, and so, even in an outcomes-based framework, they often must agree in some amount of detail on the specific means for achieving those ends.
The Path Forward Statement, and Related Staff Actions, Should Lead to a More Formal Mutual Recognition Framework for Execution and Clearing
One example of striking this balance is the recent Commission staff action granting conditional relief to registered multilateral trading facilities, following through on the agency’s commitments in the Path Forward statement last year. The CFTC staff’s relief was conditioned on foreign trading platforms meeting not only the regulatory requirements of their home jurisdictions but also fundamental access and pre-trade transparency requirements applicable under U.S. law to swap execution facilities.
MTFs relying upon the staff relief must, for example, offer their participants an order book, provide impartial access to the platform, support mandatory clearing, and facilitate post-trade reporting to U.S. registered swap data repositories. This approach accordingly promotes harmonized access and pre-trade transparency requirements in the swaps markets.
I am confident that the U.S. and E.U. will continue to make progress towards a longer-term, mutual recognition framework in the coming weeks, and the CFTC and its staff are taking certain steps now to encourage that development. In the meantime, the MTF solution, I believe, demonstrates the commitment of the United States and the European Union to ongoing coordination and provides one model for other jurisdictions to follow as they continue to make progress towards implementing G20 commitments.
In another example of its efforts to harmonize reforms, the CFTC staff last week issued letters intended to address uncertainties related to inter-affiliate clearing and execution. Those letters extended the availability of alternative compliance under the Commission’s inter-affiliate clearing rulemaking in order to incentivize jurisdictions to adopt clearing regulations akin to U.S. law by the end of this year.
It is my hope and belief that a further extension will not be necessary.
The CFTC Must Establish a Mutual Recognition Framework for Foreign Swap Execution Facilities and Foreign Derivatives Clearing Organizations
In continued pursuit of more open, transparent, and liquid derivatives markets, I have directed staff to develop regulations to set forth a process for recognizing foreign clearinghouses and foreign trading venues under authority provided by Congress in Dodd-Frank.
With respect to the former proposal, the Commission may consider a rulemaking next month that will set forth certain standards for, and a process to permit, some types of clearing arrangements through foreign clearinghouses. The policy judgments in that proposal were in some respects simplified by the widespread adoption of the Principles for Financial Market Infrastructures and the international dialogue on clearing. The PFMIs appear to reflect a consensus view on certain aspects of clearing regulation, and in general, stand in contrast to the more varied views on swap execution across the globe.
Unfortunately, the companion trade-execution proposal will not have the benefit of an advanced international dialogue on execution issues. The proposal must therefore rely in the first instance on the standards developed under the Commission’s SEF rulemaking and re-affirmed more recently in the MTF letter, which again will encourage other jurisdictions to develop principles for pre-trade transparency and impartial access in accord with U.S. standards.
By giving effect to Congress’ intent and providing the blueprint for a mutual-recognition framework in these areas, I am confident that the CFTC will encourage other countries to follow its lead and adopt comparable and comprehensive reforms.
The Substituted Compliance Framework Respects the Resource Constraints of U.S. and Global Regulators
As a final note, global coordination and cooperation are all the more critical for the Commission as it operates under inadequate funding. With a current funding level of $215 million, and a staff of approximately 644, the Commission must leverage all of its regulatory partnerships in order to fulfill its mission.
The complexities of the derivatives markets, and perhaps the pace of rulemaking in the United States, have required the CFTC to make a few adjustments over the past two years. The Commission has consistently demonstrated leadership, though, by acting decisively when the circumstances called for it, and I believe that market participants and policy makers around the globe rightly expect leadership from this agency—both in implementing rules to protect the integrity of the markets, as well as take actions to correct any inadvertent effects.
Moving ahead, the CFTC will continue to lead in promoting harmonized regulation, doing what it can to avoid incentivizing personnel decisions, inter-affiliate relationships, and corporate structures that will make financial firms only more difficult to manage, understand, and unwind during a period of market distress.
Thank you again for today’s invitation.
Last Updated: March 11, 2014