Wednesday April 27, 2011
Good morning. Thank you Mr. Chairman and thank you to all the teams for their hard work on the proposals we consider today. A number of these proposals are critical lynchpins to the new regulatory structure we are creating. I know the public, the industry, end users, and members of Congress have been anxiously awaiting some of these proposals.
Before moving to the specific proposals before us today, I would like to focus on the Dodd/Frank repeal of certain provisions of the Commodity Exchange Act that were added by the Commodity Futures Modernization Act of 2000 (CFMA) to provide legal certainty for the over-the-counter (OTC) markets, namely Sections 2(d), 2(e), 2(g), 2(h), and 5d. These provisions will be rescinded on July 16th, less than three months from now, even though the new regulatory framework for trading and clearing swaps will most certainly not be operational by that date.
Last September, the Commission issued an Order outlining a process for grandfather relief for Exempt Commercial Markets operating pursuant to Section 2(h)(3), and Exempt Boards of Trade operating pursuant to Section 5d. Pursuant to the Commission Order, in order to be entitled to grandfather relief, among other things, the ECM or EBOT must have filed a SEF or DCM application within 60 days after the effective date of final regulations implementing Sections 733 or 734 of Dodd-Frank, and the SEF or DCM application must be currently pending before the Commission.
The wording of these requirements clearly presumed that final regulations implementing Sections 733 and 734 would be issued before July 16th, and may not make sense in the absence of final regulations. I believe the Commission should readdress its Order to ensure that it provides market participant with sufficient certainty as to the status of ECMs and EBOTs on July 16th and thereafter, particularly in light of the fact that it will likely be impossible for an ECM or EBOT to have a SEF application “currently pending” on July 16th.
At the same time the Commission issued its Order outlining a process for granting grandfather relief to ECMs and EBOTs, the Commission declined to grant grandfather relief to market participants transacting swaps in reliance on Section 2(h)(1), and said nothing about Sections 2(d), 2(e), and 2(g). With the Dodd-Frank effective date looming, and no grandfather relief or no-action relief process yet announced for market participants transacting in reliance on these critical provisions, the level of uncertainty in these markets is mounting. Again, I think it is imperative that the Commission publicly announce, as soon as possible, how it intends to address the legal uncertainty that will be reintroduced into the OTC swap markets on July 16th when the Section 2 provisions are repealed, and the certainty provided by the CFMA goes away. It is my hope that the Commission will issue specific guidance to market participants as soon as possible to clarify for them what happens to these markets on Monday, July 18.
I would also like to take a moment to discuss the next phase for rulemaking. Although I completely understand interested parties anxiety regarding the implementation phase or the staggering of effective dates for final rules, I am actually more concerned about our internal process for moving forward with issuing final rules. The process for issuing proposed rules was rushed, and in my view, was guided by meeting the tight deadlines set by the statute. There was often insufficient time to fully consider the implications of all aspects of some proposals, particularly when we were getting revisions the night before a vote, and sometimes the morning of a vote. I would have preferred that the Commission spend more time on many of the proposals to get the proposals in a state as close to final as possible. We often did not do that. On the contrary, we have issued a number of proposals in which at least three Commissioners have voiced concerns regarding the possibility of unintended consequences.
While there is room for error when issuing proposed rules, there is no room for error when issuing final rules which is why I believe our internal process for finalizing rules is vitally important. We must ensure that we have sufficient time to analyze each and every final rule, that final rules changed at the last minute are not called up for a vote, that we set a meeting schedule that allows sufficient time between meetings for serious internal consideration by all of us of the views of staff, the views of commenters, and most importantly, the views of each other. I am of course looking forward to the guidance from the joint roundtable next week on implementation but also look forward to finalizing the specific process we will operate under internally to ensure that we move forward in an orderly fashion guided by policy not by deadlines.
Finally, before I address the proposals before us today, I would like to say that I wholeheartedly agree with extending or re-opening the comment periods for most of the proposals we have issued. However, I am objecting to it since we did not receive it until late last night and the document has changed again even this morning. Additionally, given the number and complexity of the proposals we are extending or re-opening, however, I question whether 30 days is sufficient time to comment on over 32 different releases.
The agenda before us today represent months of very hard work on the part of staff. While I have a number of concerns, my votes in no way express dissatisfaction with the quality of the work that has been done to get these proposals ready for today’s vote.
Regarding the product definitions proposal, I am pleased that we are finally able to vote on this critical proposal. As been my practice throughout the rule proposal process, I have voted against proposals that I thought were over-reading our mandate or simply overreaching. I think the proposed anti-evasion provisions within this document do just that. I agree that Section 721(c) directs the Commission to modify certain definitions to include products or entities that may be structured to evade the requirements of Dodd-Frank. However, I don’t agree that being directed to modify definitions equates to being directed to propose broad anti-evasion provisions. I think that is an overreach.
I am also troubled that this proposal does not discuss issues raised by multi-lateral development organizations such as the World Bank, the Bank for International Settlements, the International Bank for Reconstruction and Development, the International Finance Corporation, and others. The draft proposal I received two weeks ago included a discussion of their issues and contained a number of questions for the public to comment on. All of that has been omitted from this document before us today. I think that is a mistake. These entities have legitimate issues and I do not see the harm in highlighting them and asking questions. I don’t recall us highlighting their issues in any other proposal, so why not here? Not raising the issues at all in this proposal because we think these entities will comment anyway may cause others not directly impacted, but with helpful information, to not comment on these issues. As a result, in my dissenting statement, I will include the discussion and questions, as written by staff, that staff provided in their earlier draft. I hope the public will comment on the issues raised.
With regard to the Segregation and Bankruptcy proposal, I have a number of reservations because I think it mistakenly fails to retain sufficient optionality for FCMs and DCOs to implement different models based upon the needs of their customers. The proposal clearly favors adopting the Complete Legal Segregation Model, as providing the best balance between benefits and costs. I am not convinced of that and welcome comments on the bankruptcy rules and other issues surrounding optionality. I also believe that the contrast between Sections 4(d)(b) and 4d(f)(6) of the CEA, namely, the use of the term “customers” in the former and “customer” in the latter, is suggestive of nothing more than a drafting error.
Finally, I also have strong objections to including two important substantive provisions within the conforming amendments, one governing bunched orders, and the other requiring new duties with respect to creating and maintaining audio files of all oral communications leading to the execution of a transaction in a commodity interest or cash commodity. I believe these significant issues should be addressed separately and do not belong in a conforming amendments document. I encourage the public to read these conforming amendments very closely and to comment as appropriate.
Thank you and I look forward to the presentations on these proposals.
Last Updated: April 28, 2011