April 18, 2012
Thank you Mr. Chairman. I would like to thank the rulemaking teams for their hard work and diligence in crafting these rules. We have before us a final rule on commodity options, an interim final rule establishing a trade option exemption, and the critical, and long-awaited final rules further defining Swap Dealer, Major Swap Participant, and Eligible Contract Participant. These entity definitions (along with the upcoming product definitions) are key components of the foundation upon which the new Dodd-Frank regulatory regime is built. All of the team members deserve our gratitude, but I would specifically like to recognize the entity definition teams from both here and the SEC that have worked together over the past 18 months through many policy challenges to get this rule in final form as well as being sensitive to the concerns of ten individual Commissioners. You have all done a tremendous job.
When compared with the December 2010 proposed rules, the final rules we consider today reflect substantial progress toward crafting sensible and reasonable rules that have built-in flexibility where appropriate, while at the same time providing much-needed certainty to market participants without being unnecessarily heavy-handed. Are these the rules I would have drafted if I held the pen from the beginning of this process? No. Nonetheless, I recognize that the final rules are much better than the proposed rules, and I am pleased that we have worked hard to try to build a consensus around these critical, foundational rules. Before I discuss specific elements of the rules we consider today, there is a footnote in the entities definition rules that particularly caught my eye. Footnote 421 states, in part,
[I]t does not appear possible to demonstrate empirically – let alone quantify – the increase or decrease in the possibility that a financial crisis would occur at a particular future time and with a particular intensity in the absence of financial regulation or as a result of varying levels or types of financial regulation….
This statement is an honest reflection of how we don’t know what impact, if any, either positive or negative, our new regulations will have relative to a future financial crisis, and we certainly have not truly considered the possibility that all of our regulatory activity here may not prevent a future financial crisis. It is clear from this footnote that we cannot say with any degree of certainty that the American public will be better protected after we complete this multi-year regulatory exercise. Two things are certain – we are not sure our regulations will result in tangible benefits, and we know the costs associated with our regulations will be great.
Embedded in the final entities rules is an interim final rule that excludes from swap dealing activity those swaps used for hedging. The definition of hedging in this interim final rule is consistent with, although not identical to, the definition of bona fide hedging in the position limits rule, and is not consistent with the definition in the end user exemption proposed rules and the MSP final rules. So we will have at least three different meanings for hedging in our new rules. It is still not clear to me why the hedging definition for swap dealers should be different than the hedging definition for MSPs and end users, or diverge from the SEC’s hedging definition for major security based swap participant. There are a series of questions associated with the interim final rule asking for comment on the impact of these inconsistent hedging definitions. I urge the public to comment on this interim final rule, and if we have it wrong tell us why we are wrong and provide specific examples and analysis.
Two other important issues addressed in the swap dealer definition are allowing insured depository institutions to exclude from swap dealing activity commodity swaps entered into in connection with loan origination, and the ability of proprietary traders who meet specific criteria to register as floor traders pursuant to CFTC Regulation 3.11 instead of registering as swap dealers. Allowing for registration as a floor trader recognizes the reality that certain proprietary traders with no customers, who do not negotiate swaps with counterparties, and who only interact with counterparties on a designated contract market or swap execution facility are traders, not dealers. Because the Commission has an interest in these traders and their market activity, requiring registration as a floor trader strikes the appropriate balance between our regulatory interests and the burdens associated with regulation.
I am also very supportive of the phase-in period for the de minimis level which will initially be set at $8 billion dollars. I think it is important for the Commissions to review the relevant data, issue the study, receive public feedback and then analyze the information before setting a final level. This data, which is not currently available to us, will be critical to the policy determination of how we define the appropriate amount of de minimis trading.
With regard to the commodity options final rule and trade option exemption interim final rule:
The commodity options final rule permits market participants to trade commodity options, which are now statutorily defined as swaps, subject to the same rules applicable to every other swap. This rule serves to clarify any inconsistency in the treatment of options in the pre Dodd-Frank commodity option rules and current Dodd-Frank Act provisions. It provides some certainty to market participants who rely on commodity options. While I support this rule, I would have preferred to address this issue once we have tackled the product definitions rulemaking and defined the term “swap.” It is my hope that the final product definition rules will sufficiently distinguish spot, forward and other transactions, which may have an aspect of optionality, from swaps.
With respect to the interim final rule, which sets out the trade option exemption, I must say that I am pleased the team took into account the public comments and incorporated a trade option exemption to ensure hedging opportunities for commercial entities regardless of their size or sophistication. Again, if market participants do not think this trade option exemption is broad enough, I encourage you to comment. That is the purpose of the interim final rule. The interim final rule places Part 45 reporting requirements on parties who are otherwise obligated to report under Part 45. For entities that do not have Part 45 reporting obligations, the interim final rule proposes some recordkeeping and annual filing requirements. I do not want to put unnecessary administrative burdens on hardworking Americans who are trying to hedge their commercial activity. I believe that these reporting requirements strike an appropriate balance between providing the Commission with the information it needs and reducing unnecessary burdens for commercial hedgers, but I welcome your input and comments on this interim final rule.
Again, I’d like to thank both rule teams and I look forward to the discussion.
Last Updated: April 18, 2012