Two years ago, the financial system and the financial regulatory system failed. On July 21, 2010, the Administration and the Congress responded with the passage of the Dodd-Frank Act.
The Dodd-Frank Act will—for the first time—bring comprehensive regulation to the OTC swaps marketplace. These products, which have not been regulated in the United States, were at the center of the 2008 financial crisis. Derivatives dealers will be subject to robust oversight. Standardized derivatives will be required to trade on open platforms and be submitted for clearing to central counterparties. The Dodd-Frank Act authorizes the Commission to:
Though the Commission has much experience regulating the on-exchange derivatives marketplace—having done so for more than 70 years—the Dodd-Frank Act presents new responsibilities and authorities. The futures marketplace that the CFTC currently oversees is a $39 trillion industry in notional amount. The swaps market that the Dodd-Frank Act tasks the CFTC with regulating has a far larger notional amount. The Office of the Comptroller of the Currency estimates that, as of the first quarter of 2010, swaps entered into by U.S. commercial banks have a notional amount of $217 trillion. The challenges before the Commission to implement the Dodd-Frank Act are significant, but manageable. The challenges, summarized below, are expected to significantly change the way the Commission uses and allocates its resources across its performance goals.
The CFTC released, on July 21, 2010, the list of 30 areas of rulemaking to implement the Dodd-Frank Act. Some of these areas will require only one rule, while others may require more. The CFTC is required to complete these rules, generally in 360 days, though some are required to be completed within 90, 180 or 270 days.
“The CFTC, working along with the SEC and other regulators, will have a full and busy rule-writing agenda over the coming year,” CFTC Chairman Gary Gensler said. “The financial reform bill presents new responsibilities and authorities for the agency. The Commission looks forward to taking on these new responsibilities to lower risk, promote transparency, and protect the American public.”
The public is encouraged to provide input on the rulemaking process. Instructions for submitting views can be accessed on the individual rule-writing pages on the CFTC’s Web site at: http://www.cftc.gov/LawRegulation/DoddFrankAct/index.htm.
The Commission is committed to transparency in the rulemaking process. Information on all meetings that Chairman Gensler and Commission staff have had with outside organizations regarding the implementation of the Dodd-Frank Act is publicly available. The topics, meetings, attendees, summaries of the meetings and any materials presented at the CFTC can be found at: http://www.cftc.gov/LawRegulation/DoddFrankAct/ExternalMeetings/index.htm.
The Dodd-Frank Act requires the CFTC, along with the SEC, the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Treasury to write and implement a significant number of rules (most of which are required within the next 12 months) to regulate the financial system.
Many of these rules are required to be issued jointly by two or more agencies or require consultation with other agencies.
In addition to working with the U.S. Federal agencies to implement the Dodd-Frank Act, the CFTC will need to reach out to international regulators to harmonize regulation and oversight of the swaps market. For example, the global reach of the 2008 financial crisis demonstrated that regulators need a more transparent, consolidated view of registered entities exposures across all financial markets. The goal of sharing OTC data among trade repositories will be facilitated if authorities can agree on common formatting. This will require international engagement to ensure that access to needed information will be available for comprehensive financial supervision, and encourage common data formatting.
The effects of the Dodd-Frank legislation on Human Capital programs include the need to focus on filling numerous newly authorized positions; adjusting the agency organization and reporting relationships as necessary to serve the new mission; supporting the training and acculturation of the many newly hired employees; and streamlining business processes to continue effectively supporting a far larger agency headcount.
Recruitment initiatives must focus on targeting and attracting individuals with mission-critical skills from the swaps market and knowledge of the swaps instruments that the CFTC now regulates. Contributing to this staffing challenge is the increased competition for these skills caused by other employers, who are also responding to the requirements of the Dodd-Frank Act.
The financial crisis prompted multilateral organizations, such as IOSCO, to emphasize the identification of systemic risks as a new principle for its member regulatory agencies. The 2010 financial legislation similarly stressed the need for a more comprehensive approach to the identification of systemic risk through the creation of a new risk council composed of the U.S. financial regulators. The Commission will need to develop internal mechanisms and acquire new competencies and approaches to risk identification to address this new policy objective. Addressing systemic risks will also involve greater international cooperation and the development of new global mechanisms for the ongoing evaluation of, and sharing of concerns regarding, emerging global financial risks. The challenge will be to develop internal, domestic and global mechanisms that can understand, identify and address novel, emerging forms of risk.
The May 2010 “flash crash” has focused attention on the activities of high frequency, algorithmic-driven traders. High frequency trading challenges regulators to understand how this form of trading has transformed markets and poses new questions concerning what constitutes abusive trading practices. As part of addressing this issue, the Commission will continue its participation with the SEC in the Joint Advisory Committee on Emerging Regulatory Issues. Because trading takes place globally, the CFTC expects to cooperate with other international authorities that are examining these issues as well. The Commission also will continue to conduct its own research in this area.
The continued concerns that have been expressed with respect to contract specifications in several agricultural futures contracts raise issues that go to the core of the commodity markets and their continued viability for hedging. The Commission will remain engaged in these critical issues, both through the Commission’s Agricultural Advisory Committee and the deployment of staff to analyze these problems on a priority basis.
Global shortages, increasing consumer demands and a variety of fundamental factors that affect and possibly distort supply and demand make it likely that there will be continued periods of price volatility in strategically important energy and agricultural commodities. Most recently these concerns have been expressed by the G20 Group of Financial Ministers, and the Commission expects that these concerns will continue to be expressed in the years ahead.
The Commission has contributed to the U.S. response to these G20 concerns through its co-chairing of an IOSCO Task Force on Commodity Futures Markets. Work within the Task Force helped focus attention on the need for greater transparency in OTC and cash markets as means to match the transparency that already exists in futures markets. The Commission expects to share its expertise concerning techniques used to: identify and make public (through its COT reports) large concentrations of positions, the use of position limits as a means to address what the CEA terms excessive speculation, and the application of aggressive enforcement programs that target conduct that may involve futures, OTC and cash markets. The continued “linkage” of U.S. and European markets through dually-regulated intermediaries, exchanges, clearing-houses and soon-to-be registered trade repositories will undoubtedly require closer cooperation and coordination with European authorities.