Good morning. I thank the Futures Industry Association for inviting me to speak this morning and John Damgard for that kind introduction. I regret that I am not with you in person.
This morning, I will discuss what the CFTC has done so far and some ideas that we’ve been considering as we proceed in our rule-writing process to implement the Dodd-Frank Act.
I want to start by thanking my fellow Commissioners – Mike Dunn, Jill Sommers, Bart Chilton and Scott O-Malia – for all of their hard work and close coordination on rule-writing. I believe that our rules, the markets and the American public benefit from the CFTC’s collaborative and inclusive process of writing rules to oversee the swaps markets.
The Process to Date
The CFTC is working deliberatively, efficiently and transparently to implement the Dodd-Frank Act. We initially organized our effort around 30 teams responsible for different rulemaking areas. A number of months ago we set up a 31st rulemaking team tasked with developing conforming rules to update the CFTC’s existing regulations to take into account the provisions of the Act.
We are enormously grateful for all of the input that the public, including many of you, provided to the agency. This began the day the President signed the Dodd-Frank Act into law, when we posted email addresses on our website to provide members of the public an opportunity to submit their views prior to rule-writing. To date, we have received nearly 2,900 pre-rulemaking submissions.
Public participation continued through nine roundtables hosted by the CFTC, many of which were held jointly with the Securities and Exchange Commission (SEC). Additionally, we have had many helpful meetings with members of the public on rule-writing. To date, we have had more than 600 of these meetings, each of which has been posted to our website.
Lastly, we have been working closely with our fellow regulators – both in the U.S. and abroad. This includes sharing many of our memos, term sheets and draft work product. Next week I will travel to Brussels to speak to the European Parliament in an effort to harmonize our swaps oversight. I also want to thank the international regulators who flew in from around the globe to join the CFTC’s meeting earlier this week to discuss and coordinate our financial reform efforts.
Now that we have proposed rules in 28 of the 31 areas, I want to take this opportunity to talk to you about what’s next. First, I’m going to chat a bit about the remaining proposals. Second, I will discuss some of the things we at the Commission have been talking about regarding sequencing of final rulemakings. Third, I will discuss some considerations regarding phasing implementation through the Commission’s authority to set rule effective dates.
Key amongst the proposed rules that we still need to consider are three that require significant coordination with our fellow regulators: capital and margin, product definitions and the Volcker Rule. There are others that we have yet to propose because we sought additional public input, such as segregation for cleared swaps and testing and supervision. We also still have some additional conforming rule proposals that we will consider. Other than the Volcker Rule, it is our goal – though we are human and we might slip – to complete proposed rules by the end of April.
As the CFTC completes the proposal phase of the rulemaking process, we are looking ahead to final rulemakings. There are two principles that will guide us through the final rulemaking process. First, we will begin considering final rules only after staff can analyze, summarize and consider comments, after the Commissioners are able to discuss the comments and provide feedback to staff, and after the Commission consults with fellow regulators on the rules. One component that we have asked the public about relates to cost-benefit analysis. Seeking public comment is one of the best ways to get a clearer picture of the costs and benefits of proposed rules.
Second, Congress gave the CFTC flexibility as to setting of the implementation or effective dates of the rules. So, even if we finish finalizing rules in a particular order, that doesn’t mean that the rules will be required to become effective in that order. Implementation dates may be conditioned upon other rules being finalized. Furthermore, we are looking at phasing implementation dates based upon a number of considerations, possibly including asset class, type of market participant and whether the requirement would apply to market platforms, like clearinghouses, or to specific transactions, such as real time reporting. For example, we are considering whether a rule might become effective for one asset class or one group of market participants before it is effective for other assets or other groups of market participants. We are looking to phase in implementation, considering the whole mosaic of rules.
In terms of timing of finalizing rules, amongst the staff and Commissioners, we have been discussing dividing proposals into three broad groups. For lack of better terms: early, middle and late. Today I will share with you some of my thoughts on how the rules could be divided. We are still consulting closely with each other on how we group final rules, so the groups I will share with you this morning could change. Your feedback is also appreciated.
We are hoping to take up the early group of final rules in the spring. In no particular order, this group may include the entity definitions rule and the associated swap dealer and major swap participant registration requirements. It also may include a final rule on the end-user exception from clearing. These are important rules that many market participants have indicated they hope we consider early.
Second, there are two process rules that we have discussed finalizing early. These relate to the process for mandatory clearing and Part 40 for rule submissions from clearinghouses and exchanges.
Third, we are discussing finalizing the large trader reporting rule early, as it is important for the CFTC to accomplish many of its surveillance and position limits initiatives.
Fourth, we may look to consider some of the rules relating to enforcement, such as the whistleblower rule and the anti-manipulation rule, in the early group.
Fifth, there are some rules that we proposed early in the process and thus may be ready soonest for Commission consideration. These include the fair credit reporting rule, consumer information privacy rules, conflicts of interest, removing references to credit rating agencies and the related revisions of Rule 1.25 and the definition of agricultural commodities.
Beyond the rules that we will possibly consider in the early group, there are four broad clusters of rules, as well as a number of more specific rules, that may be included in the middle group.
The first cluster includes rules relating to clearinghouses, such as risk management, financial resources, participant eligibility, recordkeeping and straight-through processing.
The second cluster includes rules relating to business conduct standards for swap dealers – both internal and external. This includes rules related to sales practices, trading documentation, confirmation, portfolio reconciliation and compression requirements, recordkeeping, conflicts of interest and risk management.
The third cluster of rules relates to data. It includes rules governing swap data repositories (SDRs) and swap data recordkeeping and reporting requirements.
The fourth cluster relates to trading markets. It includes regulations for trading platforms, such as designated contract markets (DCMs), swap execution facilities (SEFs) and foreign boards of trade, as well as real-time reporting and block trading rules.
Beyond the four clusters, there are a number of other rules that might be included in this middle phase. These include agricultural swaps, governance for DCOs, DCMs and SEFs, and segregation for uncleared swaps.
One other important rule relates to position limits. When the CFTC proposed an energy position limits rulemaking last year, we received more than 8,000 public comments. The public comment period for our re-issued position limits proposed rulemaking doesn’t close until March 28, and yet we already have received more than 3,500 public comments. We’ve received comments from interested parties ranging from DCMs registered with the CFTC to commercial end-users to someone purporting to be Charlie Sheen – we did remove that one from the comment file. It’s safe to say there is a lot of interest in this rulemaking.
To put the number of comments in context, we received roughly 170 comments in response to the entity definitions rulemaking, generally around 10-20 on the clearinghouse rules, 15-55 on business conduct standards rules, about 70 on real time reporting and 10-20 on our process rulemakings.
It will take some time to consider, summarize and respond to all of the comments we expect to receive in response to the position limits rulemaking, and it therefore may be included in the middle group.
We are discussing finalizing the middle group in the summer months.
There are some rules that, because we proposed them only within the last month or two or because we have yet to propose them, likely will be considered later. Though more rules could be added, this group could include the disruptive trading practices interpretive order, product definitions, capital and margin requirements, supervision and testing requirements and conforming rules. In addition, amongst the late rules, we may consider finalizing the joint rule with the SEC regarding reporting requirements for investment advisors as well as our similar rule on commodity pool operators. Rules in the late group probably will not be considered until the late summer and early fall.
Congress gave the CFTC broad latitude in determining when final rulemakings would become effective. Congress specifically determined that no rule would go effective less than 60 days after it is finalized. We may give market participants more time than that, however. In each of our rules, we included a question asking for the public’s input on our rule implementation schedule. We also have continued to seek public input, and I invite you to share any further thoughts you have on this issue. In looking across the entire set of rules and taking into consideration the costs of cumulative regulations, public comments help inform the Commission as to what requirements can be met sooner and which ones will take a bit more time.
The statute itself includes some natural phasing. I will highlight one example that relates to mandatory clearing. The Dodd-Frank Act says that before any swap can be subject to the clearing requirement, it has to be submitted by a clearinghouse to the CFTC for consideration. If a clearinghouse already was clearing a swap as of last July, the swap was deemed submitted by the legislation. The process to determine whether a swap will be subject to the clearing requirement lasts 90 days, including a public comment period of 30 days. I expect that clearinghouses will come to the CFTC shortly after we finalize rules relating to clearinghouses and submit swaps that they intend to clear – whether they be interest rate swaps or commodity swaps or broad based credit default swaps. Our review must be completed before a clearing mandate can take effect.
So if we were to finalize the clearing rules this summer, the earliest that any products could be determined to be subject to the clearing mandate would be into the fall. Even at that point, the Commission has flexibility as to the clearing mandate effective date. For instance, we are considering whether the implementation date of such a mandate might be phased by asset class or type of market participant. Similarly, any trading mandate can only come after the clearing requirement is effective.
Before I close, I will briefly address the resource needs of the CFTC. First, we just this past year have been able to get back to the headcount we had in the late 1990s. We currently have about 675 people. As some of you may remember, we had 634 at our peak in the early 1990s but were shrunk more than 25 percent to around 440 in 2007. Second, as you know, the futures market has grown significantly since the 1990s. Third, the Dodd-Frank Act tasks us with taking on a market about seven times the size of the futures markets and that is more complex because of the role that bilateral swaps play.
We are currently operating under a Continuing Resolution, which means that our budget was kept at the same level that it was last year. The CFTC’s resources are used primarily on staff and technology, and we need both. Unfortunately, this year we have had to cut back in a number of areas, including technology. We also have not been able to grow to prepare for oversight of the swaps market. The President had proposed that our budget increase to $261 million this year from last year’s level of $169 million. The President further proposed a $308 million budget for next year, which would anticipate growing the agency by 45 percent to 983 people and more than doubling our technology budget from $31 million to $66 million.
Our current funding level of $169 million is simply not sufficient for the CFTC’s expanded mission to oversee both the futures and swaps markets. Though we will work very closely with the National Futures Association, and they will take on as many responsibilities as they can, including those related to registration and examination of swap dealers, we will need significant resources to properly oversee both the futures and swaps markets.
The CFTC is a good investment for the American public and a good investment for market participants. Markets work best when they are transparent, open and competitive. To ensure confidence in markets, though, they also need an effective cop on the beat that protects against fraud and manipulation, helps lower risk and promotes market integrity.
I thank you for inviting me to speak with you today. I’d be happy to take your questions.