Tuesday June 14, 2011
Today we are dealing with an issue of great importance to me, providing some certainty to swap market participants concerning the status of their swap transactions on July 16 – the general effective date of Dodd-Frank. First let me say that I intend to vote for this relief because I believe the markets need guidance from the Commission as soon as possible, but I do so reluctantly.
The legal certainty provisions added by the CFMA in 2000 were critical to market participants and I believe that by passing Dodd-Frank and repealing those provisions of the CFMA, Congress in no way intended to decrease the confidence in the markets. Yet that is what has happened. For months I have been talking about the legal uncertainty that would arise on July 16th, and have said that the Commission needed to act sooner rather than later. Market participants have said the same thing. Instead of acting sooner, we are acting later, even though we have all known for many months that despite our best efforts, regulations implementing the new regulatory regime would never be finalized and effective by July 16th.
As a result of waiting until the last minute, we have needlessly allowed uncertainty to mount among market participants. As an example, it has been reported to me that as a result of uncertainty surrounding the applicability of business conduct standards for swap dealers, some swap dealers have already informed their pension fund swap counterparties that as of July 16th they will no longer be able to act as counterparties to pension funds. DCO’s are wondering if they are required to have Chief Compliance Officers in place. This kind of ambiguity is not acceptable.
I recognize that because the Commission waited so long to issue this proposal, we have no time to spare. I am optimistic that the proposal we have before us today will answer all of the pending questions and concerns regarding how agreements will be treated after July 16. The objective should be to craft relief that is not confusing or convoluted, and that clearly allows swap market participants to continue operating as they are today and have been since 2000. If that is not what we have accomplished, then I fear we will be inundated with critical comment letters and the process of finalizing the exemptive relief will be very difficult for us to resolve in one month.
In my view, we should utilize the grandfather relief as Congress intended by grandfathering 2(h) and 5d markets for one year, and fill the remaining gaps with clear and concise 4(c) relief. Where 4(c) relief is not possible, my preference would be to issue some form of Commission action rather than no-action relief from staff.
The current approach, along with its expiration less than 6 months after July 16th, is not ideal. If we are intent on allowing this relief to expire on December 31st, we should commit now to a Commission meeting on Tuesday November 1st to propose whatever continuing relief is necessary so that we do not again rush to provide market certainty at the very last minute.
Before I conclude, I would like to address two additional issues:
First, legal uncertainty among market participants has not been limited to the issues surrounding July 16th. Legal uncertainty is mounting in the area of how the Commission views the extra-territorial application of its new authorities under Dodd-Frank. Despite many requests to clarify our view, we have said woefully little on the topic. The questions we ask in the registration proposal in my mind do not address many of the important questions. My office has been working internally to promote conducting a round table on extraterritoriality issues. Unfortunately, no date has been set yet. I am hopeful that this will be another topic that interested parties would be willing to participate in to share views and offer suggestions. I believe we have an obligation to address these important issues before the Commission begins to finalize our proposals implementing the Dodd/Frank Act.
Second, as we vote today to set meeting dates over the next several months, I again ask that we establish a schedule for finalizing rules that makes sense and that allows staff and the Commission to fully consider input from commenters and input from each other, and allows the Commission to fully consider the provisions of each final rule before we cast our votes. I believe it is irresponsible for us to calendar 5-7 final rules per meeting. We need the opportunity to consider every single issue included in each rule and think about the implications very carefully. If we do not, we will be doing a disservice to these critical markets, to market participants, and to the American public.
Thank you to the team in OGC for all of their hard work putting this together so quickly. I look forward to the discussion.
Last Updated: June 15, 2011