December 1, 2010
I would like to echo the Chairman and Commissioner Dunn in my thanks for all the hard work the staff has put in on these proposed regulations. I do recognize that many months of hard work has gone into preparing these proposals, with a lot of that work taking place during late nights, weekends, and even over the Thanksgiving Holiday. You have all sacrificed a lot of your time and I appreciate your extraordinary efforts.
In the end, I am not supporting all of the proposed regulations we are considering today. My vote against any of these proposals has everything to do with basic policy differences among the five of us Commissioners, and nothing to do with the quality of the work product before us. Each team has done exemplary work and the quality of these documents is nothing short of excellent.
Today is the sixth Commission meeting to consider proposed regulations that the Commission has linked to Dodd-Frank. In each of our meetings we have all expressed great concern about Commission resources needed to perform our current responsibilities while keeping up this pace of proposing regulations, and the pace that will be required next spring, summer, and fall to attempt to finalize regulations. Our concerns remain.
I would be remiss if I did not point out that a number of the regulations that we have already considered, and a number of regulations that we are considering today, are not required by Dodd-Frank. Commission staff has spent months and months drafting proposed regulations that are purely voluntary, all the while with the Commission expressing grave concern about our level of resources. I suspect we will continue to spend months and months of our limited staff time proposing and attempting to finalize regulations that are not required by Dodd-Frank. This has been a mistake, and in my view, an unwise use of our limited staff resources.
Over the past few months I have been speaking publically about a little-discussed provision of Dodd-Frank which gives the Commission the authority to abandon its successful principles-based regulatory approach in favor of a prescriptive rules-based approach. I have said that I think such a move would be a mistake.
Today, with these proposals before us, the Commission is in large part abandoning principles-based regulation. There does not appear to be a reason, other than because we can. Principles-based regulation has worked very well in our industry and our industry has flourished because of it. Principles-based regulation did not cause or contribute to the financial crisis. Nonetheless, the Commission will be piling on regulations and restrictions in the wake of that crisis. This too is a mistake.
Some may say that all we are doing is codifying today’s best practices. Even if that is so, when markets evolve and innovate as quickly as our markets do, and when these very markets and market structures are drastically transforming and will continue to transform because of the requirements of Dodd-Frank, codifying today’s practices seems a bit premature.
I have voted against proposed regulations at prior meetings when I thought, among other things, that the proposed regulations were too broad or where I believed they amounted to the Commission over-reaching. Some of my votes today will be for those same reasons.
I have concerns about a number of these proposals, but I want to talk a little bit about the definitions proposal. In addition to my overall concern that the definition of swap dealer is too broad and will likely capture entities that do not functionally operate as dealers, I am struck by another provision of this proposed regulation that I think is bad policy and that I would like to publically address.
The preamble to this regulation states, “In connection with the registration requirement, market participants are in a position to assess their activities to determine whether they function in the manner described in the definitions.” That seems reasonable.
Dodd-Frank allows a person to be registered as a swap dealer or major swap participant for a single type or single class or category of swap or activities and not be considered a swap dealer or major swap participant for all classes or categories of swaps or activities. That seems reasonable as well.
These proposed regulations, however, state that a person who is swap dealer or major swap participant for any swap or activity, shall be deemed a swap dealer or major swap participant for all swaps it enters into. That does not seem reasonable, particularly in light of the statement from the preamble and the provision of Dodd-Frank I just mentioned.
The regulations do allow a swap dealer or major swap participant to apply for a limited designation as a swap dealer or major swap participant. However, while the Commission is considering the application to limit the designation of swap dealer or major swap participant (however long that takes), the swap dealer or major swap participant will essentially be held hostage and must comply with all regulatory requirements for all of its swaps. This approach is dead wrong.
If we believe that market participants can assess their own activity to determine whether they are a swap dealer or major swap participant (which we clearly do because we say it in the preamble), surely they can assess whether they are entitled to a limited designation. Our regulations should allow swap dealers and major swap participants to initially register in a limited capacity, and not require them to fully register and then hope that the Commission allows them to escape the full designation as a swap dealer or major swap participant. I fear the construct in the proposed regulation will needlessly impose onerous requirements on market participants, and I cannot support it.
Again, thank you to the teams who are presenting today and I look forward to your presentations.
Last Updated: January 18, 2011