Opening Statement of Commissioner Dawn D. Stump before the CFTC Open Meeting, November 5, 2018
Open Meeting on Final Rule: Amending the De Minimis Exception to the Swap Dealer Definition, Proposed Rule: Amendments to Regulations on Swap Execution Facilities and the Trade Execution Requirement, and Request for Comment regarding the Practice of “Post-Trade Name Give-Up” on Swap Execution Facilities
November 5, 2018
Washington, DC – I am pleased to participate in my first open meeting exactly two months to the day after being sworn-in. On my first month anniversary we held a Technology Advisory Committee Meeting so I am looking forward to seeing what sort of gathering we have to mark my third month.
I would like to express my thanks and sincere gratitude to the staff who diligently worked to make today’s meeting possible. As a former legislative committee staffer, I know how much effort goes into the development and planning process long before these formal proceedings can occur. To those who are presenting today and the countless others supporting the rule writing process behind the scenes, I want to commend you for your excellent work.
I would also like to thank my fellow Commissioners for welcoming me to the CFTC. You gain a tremendous amount of respect for people whom you encounter positively during times of challenge, and that is exactly how I came to know many of my fellow Commissioners – through past problem solving exercises during the financial crisis, times of energy market instability, and unfortunate customer protection failures. While I hope this new working relationship is void of such uneasy times, if the past two months are any indication I know the experience will not be dull.
While previous Commissions were tasked with the enormous endeavor to set up a new OTC regulatory framework, the current Commission has a different task derived from the sometimes overlooked component of the 2009 Group of 20 (G-20) nation’s agreement in Pittsburgh which stipulates that regulators should “assess regularly implementation and whether it is sufficient to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse”. It is noteworthy that in 2009, in the midst of responding to the crisis, the G-20 leadership admitted that as individual jurisdictions implemented these monumental principles a look-back was needed to ensure the objectives were being met.
As I was pondering how best to carry out this element of the G-20 reforms, my children received their first quarter report cards. I note that as they mature their academic success is measured against knowledge previously assembled – they are no longer graded on how well they know their math facts but rather how they apply the math facts in the current phase of their development, say for example in geometry or algebra. We too need to assess the agency’s work product based upon what we have learned from experience and the current data available, and we should measure success against established goals. For the purpose of today’s subject matter, the objectives to which we should be graded are simply outlined in the G-20 directives to improve transparency in the derivatives markets, mitigate systemic risk, and protect against market abuse. You will continue to hear me reference our report card throughout my tenure as I believe it is time for us to evaluate the effectiveness of our authorities post crisis.
Final Rule: Amending the De Minimis Exception to the Swap Dealer Definition
It is important to finalize the numeric threshold and provide a level of regulatory certainty. Stabilizing the Aggregate Gross Notional Amount (AGNA) of permitted dealing activity under the De Minimis exception for Swap Dealer registration allows those impacted to focus on their key role in the US economy - providing liquidity and offering risk management alternatives to their clients, rather than worrying about being captured in a net of regulations intended for those with swap dealing activity many orders of magnitude greater than their own. Alternatively, casting regulations and burdens on firms posing little, if any, systemic risk due to their relatively small presence in swaps markets would lead to some entities forgoing this business altogether and does not further the objectives of the G-20 standards. This is precisely what Congress sought to avoid when they instructed the CFTC to provide a De Minimis exception. Policy that would prompt firms to contract business models and reduce dealing activity as a strategic choice to avoid registration is not a prudent approach to ensuring the quality of US markets in the competitive global arena. Years ago we might have pled ignorance to the reason for such an outcome, but today, that would be tantamount to willful and irresponsible regulation based on the information at our disposal. Today, we have the benefit of improvements in swap data reporting and analytical capability to refine analysis of swap dealing activity.
It is time for the Commission to finalize a data derived De Minimis threshold. Market participants have endured a rule proposal, adopting release, two Commission Orders extending the phase-in, and two staff studies on the De Minimis exception. Based on the data in those studies and the rule before us, I disagree with arguments towards lowering the threshold for Swap Dealer registration requirements and unnecessarily subjecting entities with a limited swap dealing capacity to registration and the associated rigorous obligations and substantial costs. The intent is not to strangle the activity of swap dealing operations, which would bring no discernable benefit while increasing the costs, diminishing the quality of service, and limiting the hedging opportunities for end users that rely on these institutions. I cannot justify such a regulatory application without a clear and demonstrable policy reason. To the contrary, the swap data now available to the Commission underscores the large regulatory capture preserved by this rule as approximately 98% of all swap transactions involved at least one registered SD and greater than 99% of Aggregate Gross Notional Amounts in IRS, CDS, FX, and equity swaps included at least one registered SD.
I am not advocating for a roll-back of the Dodd-Frank Act or seeking loopholes for massive swap dealing banks to escape the oversight of the CFTC. What I am striving for in a future state for Swap Dealer monitoring is a system that is true to the law and properly applies the De Minimis exception with which the CFTC was tasked to design – an exception that should adhere to the ultimate goals of the Swap Dealer registration regime. The narrowing of this rule from its proposed form to the final product signifies that difficult, yet critical, questions remain unresolved. If the ultimate concerns to be addressed in defining and registering firms as Swap Dealers are excessive bilateral counterparty exposure, global systemic risk, and/or business conduct in client facing activity then are we receiving a passing grade against these benchmarks? If the aim of Swap Dealer registration is to oversee and improve the interaction with clients and apply business conduct standards, then should those who do not face clients be in scope? Similarly, if Swap Dealer oversight is required for the purpose of monitoring bilateral counterparty risk, then should those predominately engaged in cleared swaps, whereby counterparties cease to face a dealer and rather become counterparty to the clearinghouse continue to be included? If portfolio compression exercises are encouraged for the purpose of mitigating risk, then is it not appropriate to consider such reduction in notional exposures in this context? I am not suggesting that these activities should go unmonitored and reporting elements of the new regulatory regime should continue to apply, but we must remind ourselves that Swap Dealer registration is meant to serve a distinct purpose – are our rules fit for that purpose?
These unresolved questions will need to be answered another day because calendar deadlines sometimes serve as the driving force in the Commission’s actions. This slimmed down final rule will provide market participants with certainty as they plan and count their activity for the 12 months prior to the December 31, 2019 termination of the phase-in period.
I am hopeful that completing the quantitative component of the De Minimis Rule today will afford staff and my fellow Commissioners and I the opportunity to refocus attention on the issues that remain. Again, I want to thank the staff for their efforts and considerable time devoted to completing thorough analysis based upon real data. While I am pleased to offer market participants this level of regulatory clarity, I fear our report card on the more complex subject matter shows a grade of “incomplete”. I look forward to working with the staff of DSIO to further refine the application of the swap dealer regime, consistent with established goals of the G-20 so that we can very soon remove this incomplete score on our report card.
Proposed Rule: Amendments to Regulations on Swap Execution Facilities and the Trade Execution Requirement
As a former legislative staffer with a front row seat during the development of the Dodd-Frank Act, I was a party to the many conversations regarding how the new regulated market structure for swaps would apply the broad G-20 directives of reporting, clearing, and executing OTC transactions. With consensus around the regulatory benefit of reporting OTC derivative contracts, the bulk of the debate was devoted to the complicated task of how the clearing mandate would be applied and which types of market participants would need to migrate positions into a cleared environment, but the operational aspects of the execution mandate were left to be finalized near the end of the process and unfortunately received less attention due to a push for quick completion of the legislation – this is probably evident from the verbiage, or lack thereof, that appears in the statute on this matter. While I was not here at the CFTC when the subsequent Swap Execution Regulations were established, it is not surprising that varying statutory interpretations emerged among Commissioners at that time. The resulting confusion surrounding how best to implement Congressional goals resulted in the current Part 37 rule set. The Commission would likely have been disappointed if it had objectively graded itself after the initial roll-out of SEF trading. Questions persisted and uncertainty reigned as trading volume was slow to materialize and numerous no-action letters for relief were promulgated to address shortcomings.
More recently, we have seen a considerable uptick in SEF activity and counterparties are voluntarily coming to SEFs to execute swaps via permitted transactions for products that are neither cleared nor required to execute on SEF. Today, we must heed the lessons learned and leverage our knowledge from observing these markets in action, rather than the assumptions and unknowns that constrained previous Commissions. To the extent that improvements and refinements can be made to the SEF market structure, I support the Chairman putting forward a thoughtful proposal for public consideration and I look forward to learning from those who comment as to whether a change in course is warranted for both the execution mandate application and the operational structure of swap execution facilities.
Request for Comment regarding the Practice of “Post-Trade Name Give-Up” on Swap Execution Facilities
I am looking forward to learning more and interacting with all types of entities impacted by name give-up in the coming months. That being said, I would prefer that the Commission be able to opine on a final SEF rule and a final rule on name give-up at the same time. Acting on all aspects impacting SEF trading contemporaneously would benefit all entities involved.
In closing, I would like to reiterate my view that we need a current and ongoing review that builds upon the efforts of this agency in the aftermath of the financial crisis. Having spent my entire life working in and around agriculture, as well as a decade in the energy policy arena, and more recent days in the exchange and clearing infrastructure space I am keenly aware of the real world implications of the work we do here. For that reason, I intend to keep a running report card and test whether our Commission policies are commensurate with intended objectives going forward.
Thank you, Mr. Chairman.