Thursday, September 8, 2011
Good Morning. Thank you Mr. Chairman and thank you to the teams that worked on the implementation proposals before us today, and to the Office of International Affairs for their hard work on the IOSCO Principles for the Regulation and Supervision of Commodity Derivatives Markets. I appreciate all of your efforts and dedication to getting these proposals ready and before us today. The IOSCO Commodity Markets Task Force was created in 2008 and is co-chaired by the CFTC. Since then our staff has done an outstanding job of identifying issues, working with industry, and highlighting inconsistencies with our fellow regulators. International coordination of regulations and regulatory objectives is critical as we move forward. Without coordinated and consistent international regulatory approaches, we run the risk of doing great damage to U.S. futures, option and swap markets. This report goes a long way to avoid such an outcome.
As I have said many times, finalizing the many complex rule proposals before us will be a challenge I have advocated that the Commission inform the public of the order in which we plan to sequence the consideration of final rules, and publish a detailed implementation plan. I am pleased that the Commission is posting an outline of its Final Rule Planning through the end of the first quarter of 2012. This is a helpful first step that gives market participants a view into which final rules the Commission expects to consider in the fourth quarter of 2011 and in the first quarter of 2012. I am hopeful we will have a more detailed plan including meeting dates that we can publish in the near future.
Regarding the two implementation proposals before us today, I reluctantly support both of them. I support them because they give market participants some certainty about implementation deadlines. My reluctance stems from my view that these proposals represent a very narrow portion of what I expected to be included in an implementation plan. I believe we should have taken this opportunity to attempt to present a comprehensive plan and seek public comment on it. After all, four months ago we held a two-day roundtable on implementation issues, proposed thirteen concepts to be considered regarding implementation phasing, and asked a series of questions based on those concepts. Those thirteen concepts included issues such as market infrastructure and real-time reporting issues which we have chosen not to include today. Establishing an implementation and compliance schedule for all of the Dodd-Frank final rules will be very complicated and will be based on a series of assumptions about how swap markets operate and how they will evolve. Now is the time for us to attempt to craft a bold and comprehensive plan for public comment. The Commission and the public can only benefit from publically engaging in that exercise, and from challenging our assumptions and our approach to substantially increasing the regulatory oversight of futures, option, and swap markets. I hope we will take advantage of this important opportunity.
The process of considering these two proposals has made it clear to me that over the last year the Commission has failed to address a critical component of the trade execution requirement in Section 2(h)(8) of the Commodity Exchange Act. That is, what does it mean to “make a swap available to trade?”
Once the Commission determines that a swap must be cleared, all non-end users must execute that swap on a DCM or SEF, unless no DCM or SEF “makes the swap available to trade.” This is a very important provision because if a DCM or SEF makes the swap available to trade, a non-end user market participant that enters into that swap bilaterally will be violating the Commodity Exchange Act and will be subject to enforcement action.
In other Sections of the CEA, Congress used the phrases “list for trading” and “listing for trading.” By using the phrase “makes available for trading” in Section 2(h)(8), Congress must have meant something different than “list or listing for trading.” Unfortunately, our DCM proposal was completely silent on this matter, and our SEF proposal was ambiguous at best. The trade execution requirement is a critical component of the new regulatory regime. Allowing an exception to the trade execution requirement to remain vague and undefined, or worse yet, defined on an ad-hoc basis by market participants, would be irresponsible. I believe the Commission should clarify who makes the determination that a swap is “made available for trading” and how that decision will be made.
Before concluding my remarks, I must point out that since the Grain Futures Act of 1922, Congress has recognized the importance of maintaining the confidentiality of trader positions. The recent release of protected Section 8 material is a serious breach that could undermine the integrity of our markets and our ability to work closely with our international counterparts. I am disappointed that in the face of such a serious breach, this Commission has remained silent.
In 1947, the Secretary of Agriculture refused to disclose to Congress trader names and positions without a request from Congress in the form of a joint resolution. In 1975, the CFTC issued a Policy Statement that insisted that prior to complying with a Congressional request for confidential position information, the request must be put to a vote of the relevant Congressional Committee. I understand that the law requires us to furnish this information to committees of jurisdiction but I believe the time has come for this Commission to establish a process to better protect confidential Section 8 material.
Last Updated: September 30, 2011