January 11, 2012
Thank you Mr. Chairman. And, as always, I thank the teams who have worked so diligently on the proposal and final rules we are considering today.
Today we are considering a Volker Rule proposal and final rules relating to registration of swap dealers and major swap participants, external business conduct standards, and segregation of collateral for cleared swaps. The Volker proposal and the external business conduct rules are lengthy and extremely complex and I do not think we have taken sufficient time to fully consider all of their implications. This is due in part to the fact that much of our time over the past few weeks has been taken up with considering a host of policy questions regarding how best to address segregation and bankruptcy issues for both futures and swaps, and whether we should forge ahead with final rules that fail to include futures. I am troubled that this is the path the Commission has chosen. I am also very concerned that in just two weeks we will again be voting on rules that are both massive in length and extremely complicated without taking sufficient time to consider all of their implications. I have been advised that on January 25th, the Commission and the SEC will vote to finalize joint rules defining the terms swap dealer and major swap participant, and that the CFTC will also vote on internal business conduct standards and final rules for CPOs and CTAs. I don’t think this schedule is workable, and if we go through with these votes two weeks from now, I think that will be ill-advised.
As we vote on the Volker Rule proposal today, I can’t help but question the timing of this vote and why the Commission did not join the other agencies in their proposal back in October. It certainly should not have come as a surprise to us last summer and early fall that the other agencies were getting close to being ready to issue their proposal. Moreover, we had a CFTC team dedicated to the Volker Rule, a team that hopefully was coordinating with the other agencies. Had we planned better, we could have joined the October proposal. Unfortunately, we are proposing rules that are virtually identical to the other agencies’ proposed rules well after they have been widely criticized and after many have called for those agencies to start over, including Paul Volker. What will we do if they re-propose their rules? Will we be prepared to withdraw our proposal and join a re-proposed Volker Rule with the other agencies? It seems as if we have put ourselves on a separate track, which I fear will needlessly complicate an already convoluted and likely unworkable set of rules.
Today we are also voting on registration rules for Swap Dealers and Major Swap Participants. I would have preferred to vote on registration rules along with entity definitions and comprehensive rules relating to the extraterritorial application of Dodd-Frank. Instead, we are continuing with a piecemeal approach, and while I and many market participants have been eager to take up the issue of extraterritoriality, that critical issue remains unaddressed.
As I have said many times over the last year, a logical plan for sequencing and implementing rules is critical if we expect the transition to this new regulatory regime to be smooth. We must consider comprehensively what sort of implementation and compliance schedule is truly realistic given the realities of the markets we regulate. We have already learned that the final rules we adopted for large trader reporting of swaps are unworkable, which required staff to issue broad, market-wide no-action relief. Market participants were telling us all along that our requirements and deadlines were not workable, but we went ahead nonetheless. I suggest we learn from that experience and pay closer attention to what market participants tell us about legitimate compliance challenges and obstacles.
The business conduct rules we are finalizing today contain serious flaws. It is clear that Congress intended for us to implement increased protections for special entities. However, shortly after our proposed rules were published, special entities began to tell us that the protections we proposed were not protections at all. We heard over and over again from special entities, right up until last week, that our rules would not provide additional protections, but would actually harm them by making it more difficult for them to enter into arms-length transactions with swap dealers. As I listened to these special entities tell me how our so-called protections would actually harm them, I could not help but think of President Reagan and his statement that "The nine most terrifying words in the English language are: 'I'm from the government and I'm here to help.'" I will be voting against the business conduct rules.
Finally, I am very concerned about voting today on the segregation rules. The final rules provide swap customers with protections from fellow customer risk, protections that do not apply to futures customers. During the discussions of this issue over the last year, we focused almost exclusively on the need to alleviate the risks that swap customers pose to their fellow swap customers with accounts at the same FCM. We did not focus on the risks customers face due to actions of the FCM. Given recent events, we need to re-think this approach so we can provide adequate protections, in a comprehensive and coherent way, to swaps customers and to futures customers. I do not favor a piecemeal approach to customer protection.
Thank you and I look forward to the discussion of these final rules.
Last Updated: January 11, 2012