May 29, 2014
Thank you, Dan, for that kind introduction. I am pleased to be here today. I wanted to spend a few minutes reviewing the recent work of the Commission while providing some insight into why decisions were made as they were, as well as discuss the remaining priorities for the Commission in the weeks and months ahead.
Continuing the Work of Dodd-Frank Implementation
Despite the Commission having only two commissioners for most of this year, it has been a busy and productive time at the Commission as it continues to oversee implementation of Dodd-Frank.
In a little less than five months, the Commission and its staff have taken nearly 100 actions. Many of these are enforcement related, and some are related to budgetary or administrative issues, but the majority of the remaining actions are related to Dodd-Frank implementation in some way.
The focus of these actions has been largely on implementing the Commission’s trading mandate, addressing market structure issues related to risk controls and FCM risk management, coordinating with domestic and international regulators on cross-border policies and information sharing, and making adjustments to rules that especially impacted end-users.
The list of recent actions, which includes interim final rules, rule proposals, a concept release on automated trading, among others, have been issued in a deliberative and methodical way, and intentionally without haste or lack of notice to those whom they affect.
This activity, of course, comes on the heels of implementing over 65 final rules, orders and guidance documents to shape the rules of the road for the derivatives industry as Congress directed. I have been involved in shaping, and supported, over 55 of these rules, working collaboratively with my fellow commissioners—both Democrats and Republicans—in the process.
As a result of these past efforts, and a few efforts to come, I am confident that we will have workable rules to govern an industry that operates with greater risk controls, transparency, and oversight.
My commitment has been to approach implementation in a way that best achieves the objectives Congress laid out, and to ensure an orderly transition to the new market structure. I will now turn to a few specifics.
Perhaps the most significant implementation effort this year was overseeing compliance with the Commission’s swap-trading mandate. Presumably, this audience is aware of the process by which swaps become subject to that mandate.
The mandate itself presented a few novel and complex legal, policy, and infrastructure challenges when applied to swaps executed as part of a package transaction, as frequently occurs in markets today. Accordingly, the agency took steps to ensure these transactions are treated appropriately as the marketplace moves toward greater SEF trading.
As of May 16, participants executing package transactions involving swaps subject to the trading mandate must do so on a SEF or DCM, and some preliminary data suggests that these efforts may actually be accelerating the move to both regulated and electronic trading.
This trend is encouraging and expected to continue. In fact, pursuant to the staff letter issued at the end of April, compliance for certain types of package transactions will be phased in over the summer and early fall.
The staff action builds on what I believe is the best approach to implementation: remain true to congressional intent to maximize transparency where appropriate, but work to ensure an orderly transition to what remains a historic market-structure shift for swaps.
FCM Risk Management
The Commission also has been in active discussions with market intermediaries for months about how best to comply with pre-execution risk-control requirements, particularly as they relate to block transactions. Again, these discussions involved important policy considerations that will have an impact on market structure and therefore deserved considerable attention. I expect the Commission to provide additional guidance on this topic very soon.
The Commission also has taken a number of less visible steps to further implement Dodd-Frank, including letters intended to address uncertainties related to inter-affiliate clearing and execution; negotiating with our Canadian counterparts about the level of detail and sufficiency of information required to be delivered to ensure meaningful risk disclosure; and negotiating MOUs and information-sharing arrangements with domestic and foreign regulators.
End User Issues
As we further implement Dodd-Frank, gauging potential impacts on end-users and effects on competition has been a focus in evaluating how best to proceed.
One of the basic tenets of Dodd-Frank is to minimize, to the greatest extent, impacts on end users who were not to blame for the financial crisis and yet depend on well working derivatives markets. In that vein, we have acted to mitigate costs imposed on end users, and avoid unintended consequences.
To ensure that we have the most accurate and complete information available, I have asked the CFTC staff to convene several roundtables, solicit formal public comment on initiatives we are considering, and in some cases, re-open comment periods on previous proposals. Again, adequate deliberation is important – I believe that a full and open discussion of issues will result in the best regulatory outcomes.
By the same token, these roundtables were not just for show – they resulted in action. Just last week, the Commission addressed the impact of the special entity de minimis threshold with a rule proposal to ensure that utility special entities can access liquidity to hedge risk.
At the same time, the Commission extended temporary relief from compliance with certain recordkeeping requirements in order to avoid dis-incentivizing trading by end users on SEFs and DCMs. Based on feedback from market participants, we recognized that extending the compliance deadline and re-scoping applicability of the regulatory requirements would help avoid end users bearing unnecessary costs, and potential market disruption. We also reopened public comment on issues related to physical commodity hedging in order to accommodate discussion through another roundtable and to more fully develop the public record.
Cross Border Regulation and Progress
The cross-border application of commission rules has continued to be a major area of focus this year, with respect to both policy and implementation. In many respects the foundation of these efforts is the Path Forward statement issued jointly with the European Commission last year. That statement affirmed the shared objective of rigorous implementation of the G20 commitments, and the need for close coordination by global regulators.
In practical terms, this points to the importance of relying on substituted-compliance, or equivalency as described in Europe. Substituted compliance 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 interests of foreign regulators.
Qualified Multilateral Trading Facilities
Substituted compliance was at the heart of the Commission’s effort in March of this year when we announced relief from registration for qualified trading venues in Europe (QMTFs). This effort was the product of considerable work and collaboration with our European colleagues and represented progress on accomplishing the goals set out in the Path Forward.
The Commission provided time-limited, transitional relief to QMTFs that have sufficient pre- and post-trade price transparency requirements; and provide non-discriminatory access to market participants. The relief is also conditioned on foreign trading platforms meeting certain regulatory requirements of their home jurisdictions.
Some have suggested that the reason there is not a QMTF currently operating pursuant to this effort is because the conditions were not calibrated appropriately. I disagree. The most agile platforms were able to adopt standards to comply with these conditions within the extended time frame provided by the Commission, but either chose not to or pursued a different regulatory course.
A better explanation for the lack of uptake is that last year many global financial institutions restructured their operations in a way that made the relief less useful given its timing.
We continue to work with the FCA on resolving issues to improve the practical impact of the relief, but the Commission should not diminish its own SEF framework or its regulatory standards solely to ensure a trading venue overseas can attract liquidity from U.S. participants. To do so would potentially invite regulatory arbitrage that does not benefit the swaps marketplace in the long run, and could harm the competitive standing of the U.S.
Importantly, I also have directed Commission staff to develop a rulemaking to set out a process for foreign-based swap trading platforms to seek appropriate regulatory treatment under U.S. law. The Commission also should follow the IOSCO technical committee’s recommendations, where applicable, in developing that framework. Together with the QMTF relief, these actions exemplify putting into practice the comparability framework articulated in the Path Forward statement.
Similarly, and further to the goal of developing a comparability framework, I have directed CFTC staff to develop regulations to set forth a process for recognizing foreign clearinghouses under authority provided by Congress in Dodd-Frank.
As the last meeting of the Global Markets Advisory Committee made plain, there are important issues for the global regulatory community, to address and resolve in this context. In particular, balancing the desire for mutual recognition, with each country’s interest in its own customer-protection regime, will be perhaps the most critical policy decision. This is another topic that has been under active discussion with our European colleagues for many months, and another issue that deserves a heightened level of attention and care.
Europe and the US Must Lead the Way
As the CFTC moves forward with the reporting, clearing and swap-trading mandates in the United States, it must and will continue to work with its counterparts in Europe and elsewhere around the globe to meet the G20 commitments. At the same time, regulatory authorities in Europe and elsewhere must likewise continue to implement all G-20 commitments in a coordinated way. Toward that end, the Commission will continue to work closely to assist where appropriate with the European Commission’s own equivalency analyses, another topic of active discussion this year.
In conclusion, I expect continued focus on international coordination, especially with respect to treatment of foreign-based clearinghouses and execution facilities for swaps, in the coming weeks. The Commission has consistently demonstrated leadership in this regard. Market participants and policy makers around the globe rightly expect that leadership to continue — both in implementing rules to protect the integrity of the markets, as well as take actions to correct any inadvertent effects.
Thank you again inviting me and your interest in these important issues.
Last Updated: May 29, 2014