July 10, 2012
Thank you Mr. Chairman, and thank you to the rulemaking teams for the hard work and diligence in crafting these rules. We have before us today the long-awaited final rules relating to the further definition of “Swap,” the End-User Exception to the Clearing Requirement for Swaps, and the proposed rules relating to the Clearing Exemption for Certain Swaps Entered into by Cooperatives.
In my view, the primary goal in crafting these final and proposed rules has been to provide clarity to market participants regarding what instruments are not swaps, and therefore are not subject to comprehensive regulation by the Commission, and what transactions are not subject to the mandatory clearing requirement. An overly-broad interpretation of the term “swap” or an overly-narrow interpretation of the clearing exception would lead to unnecessary regulation of transactions that did not cause or contribute to the financial crisis, and that do not lead to the accumulation of risk that would be of systemic significance. Such an approach would not be wise.
It appears to me that in large part, we have made the correct determinations. I have questions about whether we have sufficiently addressed the concerns of the captive finance entities so they do not needlessly get swept into the definition of financial entity. I also have questions about whether we have taken the correct approach with non-deliverable foreign exchange forwards and whether they should be regulated as swaps, particularly if Treasury exempts foreign exchange forwards from regulation. If Treasury issues such an exemption, we would be hard pressed to explain how the functional nature of deliverable and non-deliverable foreign exchange forwards, and the risks posed by each, are so different that they deserve such different regulatory treatment. I am also concerned that the way we have defined NDF’s in this final rule is inconsistent with other major financial regulators and could lead to regulatory arbitrage.
I am supportive of the important additions to the end user exception final rule which includes the exemptions for small financial institutions from the financial entity definition. Although I do not believe that Congress expressed a clear intent that $10 billion total assets threshold was the only level we could consider, I am encouraged that we are also proposing to use our 4(c) authority to allow relief from the clearing mandate for cooperatives meeting certain conditions.
I will end my statement by pointing out the obvious – the significance of this vote on the further definition of swap cannot be overstated. Many market participants are now “off to the races” and need to quickly register and come into compliance with vast new regulatory requirements. During the 60 days after these rules are published in the Federal Register, glitches and cracks may quickly become evident, as they did when market participants attempted to comply with the Part 20 reporting requirements. Staff and the Commission must be ready to quickly respond to and fix glitches pointed out by market participants to ease the transition into this new, highly-regulated environment. We will all benefit from an efficient, non-disruptive transition if we keep in mind that a request for relief does not equal an attempt to evade. I have long supported the approach being taken by the SEC to not require registration until the substantive portion of the swap dealer rules has been finalized. The more we can coordinate with them on substance and in timing, the better it will be for the markets.
Thanks again to the teams for these rules. I look forward to the presentations.
Last Updated: July 17, 2012