Opening Statement of Commissioner J. Christopher Giancarlo, Open Meeting on Proposed Rule on Margin Requirements for Uncleared Swaps and Final Rule on Utility Special Entities
September 17, 2014
Mr. Chairman, it is a great pleasure to participate today with my fellow Commissioners in this first open meeting under your Chairmanship.
I thank the CFTC staff for their warm welcome to me and my team and their ready support in getting us up and running.
I thank Commissioner Bowen for her fellowship through the Senate confirmation process and in our first months at the Commission.
I thank Commissioner Wetjen for his steady leadership as Acting Chair and policy insights as a Commissioner, especially on the challenging subject of cross-border rule application.
I thank you, Chairman Massad, for the tone of professionalism and collegiality that you are setting at the Commission. It bodes well for this iteration of the Commission as we engage on complicated issues that are critical to the proper oversight of America’s financial and commodity derivatives markets. I look forward to participating in the work of this Commission.
Uncleared Margin Proposed Rule
With respect to the proposed rules for uncleared margin, uncleared over-the-counter (OTC) swaps and derivatives are vital to the U.S. economy. Used properly, they enable American companies – and the banks they borrow from – to manage changing commodity and energy prices and fluctuating currency and interest rates. They allow our state and local governments to manage their obligations and our pension funds to support healthy retirements.
Uncleared swaps serve a key role in American business planning and risk management that cannot be filled by cleared derivatives. They do so by allowing businesses to avoid basis risk and obtain hedge accounting treatment for more complex, non-standardized exposures. While much of the swaps and OTC derivatives markets will eventually be cleared – a transition I have long supported – uncleared swaps will remain an important tool for customized risk management by businesses, governments, asset managers and other institutions whose operations are essential to American economic growth.
At the outset, I take positive note that the prudential regulators have moved in the CFTC’s direction. They will no longer require non-financial end-users to pay margin except in certain circumstances. This accords with Congressional intent. Non-financial end-users do not create systemic risk and should not bear the increased cost of uncleared swaps margin. This is one rule-set that the CFTC got right the first time. I commend the CFTC’s common-sense leadership on the issue.
Somewhat less positively, I note that today’s proposal requires collateral coverage on uncleared swaps equal to a ten-day liquidation period. This 10-day calculation comports with rules adopted recently by the U.S. prudential bank regulators.
The question must be asked, however: Is 10 days the right calculation? Why not 9 days; why not 11? Should it be the same 10 days for uncleared credit default swaps as it is for uncleared interest rate swaps and for all other swaps products? Surely, all non-cleared swap products do not have the same liquidity characteristics or risk profiles.
I am mindful of a recent statement by SEC Chair Mary Jo White: “Our regulatory changes must be informed by clear-eyed, unbiased, and fact-based assessments of the likely impacts – positive and negative – on market quality for investors and issuers.”
Chair White’s standard of assessment certainly must apply to the proposed rule on uncleared swaps. Where is the clear-eyed assessment of the 10-day margin requirement? Where is the cost benefit analysis? What are the intended consequences? What will be the unintended ones? How much of the increased margin costs will be passed on to America’s farmers, ranchers and manufacturers, and ultimately the American consumers of their goods and services?
I am very concerned by recent press reports of remarks by unnamed Fed officials that the 10 day coverage period may be intentionally “punitive” in order to move the majority of trades into a cleared environment. Any punitive or arbitrary squeeze on non-cleared swaps will surely have consequences – mostly negative – for American businesses and their ability to manage risk. With tens of millions of Americans falling back on part-time work, it is not in our national interest to deter American employers from safely hedging commercial risk to free capital for new ventures that create full-time jobs. It is time we moved away from punishing U.S. capital markets and move toward rules designed to revive American prosperity.
In a related concern, I note that the CFTC and the prudential regulators have set the threshold for material swaps exposure for financial end-users at $3 billion, while the 2013 international framework sets the threshold closer to $11 billion. It appears that the middle-tier of American financial end-users could be subject to margin requirements that will not be borne by similar firms overseas. This may well limit the number of counterparties willing to enter into swaps with these American lenders.
In this time of dismal economic growth, it is hard to justify placing higher burdens on America’s medium-sized financial firms than those being asked of their overseas competitors.
Again, why are we punishing American lenders with higher burdens than those faced by their foreign competitors? Where is the clear-eyed analysis of the impact of this rule on the American economy? It is time our rules were designed less to punish and more to promote U.S. capital markets and encourage prosperity by supporting job creators.
Finally, I am supportive of the Commission’s decision to issue an Advance Notice of Proposed Rulemaking to solicit comments regarding how the uncleared margin rule should apply in light of last summer’s cross-border guidance. It is undeniable that the lack of such certainty in the Commission’s cross-border framework is causing fragmentation of what were once global markets, increasing systemic risk rather than diminishing it.
I will be issuing a separate written statement with the publication of the uncleared margin proposal that will amplify these concerns and address several additional issues, and seek well-informed public comment.
I also thank Chairman Massad and the rule-writing staff for their thoughtfulness and flexibility in responding to concerns over cross-border issues raised by me and my staff and those of my fellow commissioners.
Special Entity Utility Final Rule
I’d now like to turn to the special entity utility final rule. The Dodd-Frank Act requires that American towns and municipalities be labeled as “special entities” when they enter into swaps transactions. The purpose was to provide specific protections for municipalities who used complex financial swaps of the type that ensnared Jefferson County, Alabama, and led it to file what – at the time – was the largest municipal bankruptcy in U.S. history. Congress never intended, however, and Dodd-Frank does not include requirements to limit the ability of our not-for-profit utilities to manage ordinary risks associated with generating electricity or producing natural gas.
Unfortunately, the CFTC’s first shot at the “special entity” rule contained onerous restrictions on ordinary risk management activities by America’s not-for-profit taxpayer-owned utilities. It generated an enormous amount of public comment. Many commenters asserted that the rule would cause trading counterparties to avoid dealing with special entity utilities due to the increased regulatory compliance and registration burdens of being labeled as a swap dealer. That meant that these utilities would have had far fewer tools to control fluctuations in operational costs or supply and demand, resulting in increased electricity and other energy costs for American consumers.
The CFTC’s original special entity proposal also led to two identical pieces of legislation to correct the CFTC’s action in Congress, one passed the House unanimously, and the other was introduced in the Senate with 14 co-sponsors evenly split between both political parties. I’m not sure of any legislation pending in the Congress related to the Dodd-Frank Act that can boast similar credentials.
The final rule we consider today recognizes Congressional concern. It provides the relief that our not-for-profit taxpayer-owned utilities need to manage risks in the production of natural gas and electricity.
Without today’s rule, a regulatory action inspired by the Dodd-Frank Act would have increased utility rates for millions of Americans. In times of economic uncertainty, that would have been an unacceptable result. Today’s rule is a good rule and it avoids such a result and I am glad to vote for it.
I must note that the work that went into the Special Entity Utility rule exemplifies how this agency should conduct rulemaking: reasoned, collaborative and supportive of U.S. markets while, at the same time, providing proper protections to the American public. I also look forward to helping develop a straightforward reporting regime for these type of transactions that works for the marketplace.
I commend Commissioner Wetjen for proposing this common-sense rule when he was Acting Chairman. I applaud Chairman Massad and his team for making the special entity utility rule a priority. I thank the CFTC staff for working with Commissioner staffs to improve the rule by making it less burdensome on market participants.
In closing, I thank the Commission staff for working with me and my staff and listening to our concerns and suggestions on both rules. I especially thank the Chairman for his thoughtfulness and pragmatic approach.
Last Updated: September 17, 2014