Congress and the President responded to the lessons of the 2008 crisis – they came together to pass the historic Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
The law gave the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC) oversight of the $300 trillion swaps market. That’s more than $20 of swaps for every dollar of goods and services produced in the U.S. economy. At such size and complexity, it is essential that these markets work for the benefit of the American public; that they are transparent, open and competitive; and that they do not allow risk to spread through the economy.
To date, the CFTC has finalized 18 rules to make the swaps marketplace more open and transparent and lower risk to taxpayers. We have a full agenda of public meetings in December and into next year. The agency is continuing to concentrate on four areas of reform: promoting transparency, lowering risk through clearinghouses, promoting market integrity and regulating dealers.
The more transparent a marketplace is, the more liquid it is and the more competitive it is. When markets are open and transparent, price competition is facilitated, and costs are lowered for companies and their customers. Transparency shifts information from derivatives dealers to the public, which helps promote economic activity throughout the entire economy.
To promote transparency, we have completed rules that, for the first time, give regulators and the public specific information on the derivatives market’s scale and risk. These rules will require large traders to give the CFTC data about their swaps activities and establish swap data repositories, which will gather information on all swaps transactions. By contrast, in the fall of 2008, there was no required reporting about swaps trading.
Moving forward, we are working to finish rules relating to the specific data that will have to be reported to regulators. These reforms will provide a window into the risks posed by the system so regulators can effectively police the markets for fraud, manipulation and other abuses.
We are also looking to finalize real-time reporting rules, which will give the public critical information on transactions – similar to what has been working for decades in the securities and futures markets. In addition, we are working on final regulations for trading platforms, such as Designated Contract Markets, Swap Execution Facilities and Foreign Boards of Trade – all of which will help make the swaps market more open and transparent.
Lowering Risk Through Clearing
Another significant reform is lowering risk to the economy by mandating central clearing of standardized swaps. Centralized clearing protects banks and their customers from the risk of a default by one of the parties to a swap. Clearinghouses reduce the interconnectedness between financial entities. They have lowered risk for the public in the futures markets since the late 19th century. Last month, we finalized a rule establishing risk management and other regulatory requirements for derivatives clearing organizations.
The market events of the last three years have underscored the importance of maximizing protection of customer funds. It is critical that the CFTC finish a rule that will enhance customer protections regarding where clearinghouses and futures commission merchants can invest customer funds. I am hoping we can consider it at the Commission’s next public meeting December 5.
We also are looking to finalize a rule on segregation for cleared swaps. Segregation of funds is the core foundation of customer protection.
In addition, after the first of the year, we hope to finish rules that will broaden access to the markets, including client clearing documentation; straight-through processing, or sending transactions immediately to the clearinghouse upon execution; and the exemption for non-financial end users.