May 10, 2012
Thank you, Chairman Gensler. Thank you also to the other Commissioners and the professional staff for your engagement throughout the rulemaking process. I will be supporting the staff’s recommendations.
The final rules before us today codify and interpret the core principles applicable to designated contract markets (“DCMs”). As with so many of our rules, today’s recommendations are intended to protect the public and ensure fair competition between exchanges and markets.
The recommendations seek to accomplish these objectives in multiple ways. They require, for example, risk controls and safeguards for trading on regulated exchanges, which better ensure that our markets remain transparent and stable. They also ensure that DCMs, as self-regulatory organizations, are capable of detecting and preventing position-limit violations, disruptive trading practices, and manipulation.
In addition, the rules protect the efficiency of our markets both by ensuring the integrity of listed contracts and by ensuring that participants have appropriate clearing arrangements, thereby mitigating counterparty credit concerns that could impede liquidity. And the rules set forth a number of additional requirements that will enable DCMs to transition from trading venues solely for futures contracts, and options on such contracts, to venues facilitating trading in swaps as well.
It is important to acknowledge, as we consider these rules, that the Commodity Exchange Act’s principles-based regulatory regime was retained in large part by the Dodd-Frank Act. Indeed, Congress determined not only to retain the DCM regulatory regime but also to expand it to new registered entities, such as swap data repositories and swap execution facilities (“SEFs”).
But it is equally important to acknowledge that the Dodd-Frank Act did not merely restate the existing regulatory responsibilities of DCMs. It expanded those responsibilities by authorizing DCMs to facilitate trading in swaps, and to facilitate such trading between retail market participants. These swap-related functions and responsibilities, and the evolution of the futures markets over the past decade, informed Congress’ decision to add several new core principles to the DCM regime and to provide the Commission new authority to specify the particular means by which DCMs may comply with these and other core principles.
It is important, however, for the Commission to use this authority cautiously and to avoid unnecessarily upsetting the expectations of commercial end users and others that have come to depend on the exchanges. To be sure, private incentives are not always aligned with the public interest; but in seeking to align those incentives, we must take care to avoid doing harm to what is now a functional and effective marketplace.
In light of these considerations, the swap market structure poses difficult policy questions for the Commission and equally difficult operational questions for DCMs. The rules before us today will not answer all of these questions.
Perhaps most consequentially, the Commission is delaying its implementation of Core Principle 9 so that it can fully evaluate its ultimate approach in the context of other swap execution rules. Many DCMs and potential SEFs no doubt would like regulatory certainty. But I am confident that the public will be best served by a continued dialogue on Core Principle 9 and related issues. Public input remains our best protection against unintended consequences.
The debate about Core Principle 9 is not and should not be a debate about a particular trading venue or business model, nor is it a debate about the value of trading through the centralized market. Centralized trading enhances the transparency and efficiency of markets; and centralized trading generally means increased pre-trade transparency, and more specifically order book transparency, which provides important information about the supply of and demand for a particular commodity or contract. In short, centralized trading facilitates price discovery, provided there is sufficient trading interest to discover.
I believe there is consensus on the objectives of increasing centralized trading and pre-trade transparency. There remain, however, many challenging questions about the best means for achieving these objectives. For instance, in certain circumstances, there can be tension between our centralized-trading and pre-trade transparency objectives and our statutory objectives of reducing systemic risk and promoting responsible innovation at exchanges. I look forward to engaging with the public on these questions in the months ahead.
For now, I am confident that these final rules appropriately carry out the relatively modest changes to the core principles regime for DCMs. Thank you again to the professional staff for your hard work on these rules.
I will address a few additional issues shortly.
Last Updated: May 10, 2012