Final Rules on Regulation 1.25, Registration of FBOTs, and Proposed Rule on Made Available for Trade
December 5, 2011
Thank you, Chairman Gensler.
Before I comment on the rules before the Commission today, I want to thank Chairman Gensler and Commissioners Chilton, Sommers and O’Malia for their graciousness during my first weeks here at the Commission. You have been both welcoming and extremely helpful during my transition here, and I have sincerely enjoyed working with each of you, especially on the rules we are considering today.
I also want to thank the professional staff for their assistance. I look forward to knowing all of you better as we work together to meet the important mission of this agency.
I also have been meeting with members of the public almost nonstop since I arrived. I want to express my special appreciation to those who have reached out to offer suggestions and comments to these rules. Public input is an indispensable part of the Commission’s rulemaking process, as well as the best safeguard against unintended consequences, so your involvement was critical to ensuring we have the best version of the rules before us.
I want to stress my belief that the Commission should remain open to course correction as the facts change. The Commissioners and staff have been active in responding to questions and issues raised by my office and others. I believe the rules under consideration today are better for it. And I believe we must remain open and nimble during the implementation phase. I will be supporting all three rules today, though I intend to pay especially close attention to the Commission’s final rule concerning the protection of customer funds.
Today we are considering changes to Regulation 1.25 against the backdrop of recent developments at MF Global. It’s important to note that the MF Global investigation is ongoing and may yield additional facts to explain what led to the disappearance of customer funds. But the Commission cannot ignore the widely reported fact that thousands of futures customers do not know where their money is. Futures customers generally and, indeed, the public are rightly demanding that the Commission take immediate steps – even before the MF Global investigation is complete – to reassure them we are doing everything we can to safeguard customer money.
Although we cannot be sure the present rule will address the specific issues that are ultimately raised by the MF Global case, it is an important step towards re-emphasizing the Commission’s commitment to ensuring that customer money is invested in a manner that “preserves principal” and “maintains liquidity.” I believe this rule is necessary to restore confidence that this is the case.
It is incumbent upon the Commission, however, to revisit rule 1.25 and our other rules as markets evolve, circumstances change, and new information is brought to light. An investment once viewed as safe may not be viewed as such only a few months later, and vice versa. What is deemed a prudent investment cannot be a static determination. Toward this end, we remind market participants in this rule that the Commission can and should implement further changes to our rules whenever it is presented with an informed basis to do so.
There are a few issues important to protecting customer funds that the Commission was unable to address in this rule but perhaps should address in the future in order to restore confidence to the futures markets. First, I agree with Commissioner Chilton that misconduct with respect to segregated funds must be addressed immediately and with all appropriate sanctions. The Commission therefore should consider whether its current approach to penalties in this area is a sufficient deterrent to misusing or misplacing customer funds.
Second, as the Commission continues to conduct or order special reviews of intermediaries in response to the MF Global failure, we should reconsider the examination and other processes to ensure they are complying with the law. I support the Chairman’s request for a review of the Commission’s regulations in this regard.
Finally, I also believe the staff should begin thinking about an appropriate FCM disclosure regime that would disclose to customers certain risk and investment information concerning the firms that take custody of margin. Customers have a right to know how FCMs and DCOs are investing segregated funds, and that they are doing so prudently. I hope the Commission can take this matter up in the near future.
Today I also will support the staff’s recommendations with respect to the registration of foreign boards of trade (or “FBOTs”) offering direct market access to participants located in the United States. Congress granted the Commission new authority to register such foreign exchanges in the Dodd-Frank Act, and I believe that the final regulations appropriately implement this new authority.
The regulations provide a standardized and transparent process that will benefit the public. They also provide a firmer legal foundation than the current no-action regime governing access to FBOT trading platforms by U.S. participants.
In my view, the final regulations better ensure the fair treatment of applicants through formal and published processes and criteria. They also align our registration regime with a number of countries that permit U.S. exchanges to provide direct market access internationally.
Make Available to Trade
Finally, I am supporting the Commission’s re-notice of an issue from the SEF and DCM proposals in order to seek further comment on the meaning of the phrase “made available to trade,” or “MATT.” There has been some confusion concerning the Commission’s SEF proposal and its provisions relating to MATT assessments and reports.
I support the staff’s recommendation to reconsider and clarify our initial approach and to propose a new MATT-determination process with greater Commission involvement. Again, I think it is important that we permit course correction as new facts come to the Commission’s attention, and I am confident that the proposal will elicit useful comments that will inform our ultimate approach. I look forward to reading the comment letters and reviewing our options for meeting our congressional mandate while ensuring that U.S. swap markets remain liquid and efficient.
Again, I want to thank the staff for all their hard work on each of these rulemakings. I also look forward to the Commission’s future efforts to implement the Dodd-Frank Act in the weeks and months ahead.
Last Updated: December 6, 2011