FM: Is it clear what OTC products fall under CFTC jurisdiction and what goes to the SEC? What falls under both? Have you and Chairman Shapiro created a strategy for how the two agencies will work on specific mandates?
GG: Congress has spoken and there is a very good understanding. We are directed to write joint rules on the definitions of swaps and securities-based swaps and other key terms in the statute, but it is clear that some products like securities-based swaps that are based on a single or narrow based underlying securities, the SEC will regulate; and some products called swaps in the statue, which relate to interest rates, currencies, commodities and the broader-based securities, like those based on the S&P 500, would be regulated over here continuing jurisdictional understandings that have been in place since the Shad Johnson Accord but we will jointly write a rule on it and there are some areas on these broad-based securities swaps where the SEC will retain anti-fraud and anti manipulation and be able to see records but Congress has well defined it and the SEC and CFTC are working well together and will come up with a joint rule on these definitions in line with what Congress has done.
The approach the statute took was that each agency will be working closely with the other to make sure the rules are consistent with each other but some swaps will trade on and be cleared by SEC-registered trading houses and clearinghouse and some will be under the CFTC.
FM: Have the exchanges put in place a plan to clear OTC products?
GG: This is going to evolve. The law just passed 12 days ago. We have yet to propose rules. Allow us the next year to write rules on the clearing of OTC derivatives and then allow the exchanges to comment and react.
FM: A little over a year ago, you called for some form of fungibility in how OTC products are cleared. Has that shaped up the way you would like it in the law?
GG: It does provide that the clearinghouses for swaps have to offer their clearing services regardless of where you might have put on a transaction. So if you have done a transaction on one swap execution facility or another, if it is economically equivalent, then the clearinghouse has to take it. They can’t favor one execution facility over another. That is important because it helps promote competition among these exchanges and swap execution facilities. At the same time the bill did not require that any clearinghouse take the credit risk of another. Clearinghouses under the new law, which goes into affect next summer, would have to accept for clearing economic equivalent swaps — this does not speak to futures —regardless of whether it was entered in to one regulated exchange vs. another regulated exchange.
FM: What is your mandate as it pertains to position limits?
GG: The Dodd-Frank Act expanded the CFTC’s authority to set position limits and also directed us in a more clear way to actually do that and expanded it to [OTC] derivatives as well in something called aggregate position limits including the aggregate of [OTC] derivatives and on-exchange derivatives called futures. So, for the first time we are supposed to look across all of these markets. It sets a timeline of within 180 days we are supposed to do position limits for energy products and metals and in 270 days we are supposed to do that on the agricultural products.
FM: What will be the impact of the law on futures traders?
GG: Markets work best when there are rules of the road and they are clear and transparent rules that help promote transparency and lower risk. What Congress has done and what the SEC and CFTC is about to [do] is to make theses markets better for all of the end users that use these swaps and futures. It will bring more consistent regulatory practice to futures and swaps. We go from a situation where futures were regulated and swaps weren’t [despite similarities]. Now they both will be regulated for transparency and clearing and the dealers will be regulated. The goal is to make markets work better for the American public.
FM: What have you learned from your study of the flash crash and what actionable items have you spotted?
GG: We are going to have another joint advisory meeting next week. When we are able to finish the report we will be in a better position to tell you about the recommendations.
FM: The SEC’s initial circuit breakers have already resulted in some trades being busted. Breakers if too narrow can be manipulated. Is there a danger of overreacting and creating a bigger problem?
GG: We haven’t finished the report or had recommendations on the futures markets. We don’t have new rules, we have the current circuit breakers across markets—securities and futures markets — we are taking a look if any of those need to be changed. The SEC working with exchanges put in place some timeouts, these five minute pauses, when the price of a stock moves by a certain percent. Even that is a pilot program.
The review is ongoing. We are still looking at the across markets circuit breakers and how those worked. They were not triggered on May 6 but we are taking a close look at them to see if we should suggest any changes in them.
FM: One criticism of the new rules was that it would move markets overseas. Are you confident global regulators will adopt similar rules to avoid regulatory arbitrage?
GG: We have spent a lot of time consulting with international regulators, [all U.S. regulators: Treasury, the Fed and SEC] have been consulting a great deal, we even have been a part of the President’s meeting with other heads of state at the G20 meetings. I remain optimistic. We are the second nation to move forward; Japan has moved forward before us. The European Parliament will be taking up legislation this fall specific to derivatives that have many of the same features. And though we are different cultures and have different politics, we will end up with comparable approaches to oversight of the derivatives marketplace. (See: "Global regulatory reform: Let the game playing begin.")
FM: How important is that?
GG: I am optimistic that we are going to work to harmonize this. Capital at risk knows no geographical boundary so it is very important to work with our international counterparts to get as consistent as possible.