CFTC Progress on Rules
To date, the CFTC has made a real down payment on reform in finalizing 25 rules of the road for the swaps market. We have benefited from significant public input – over 27,000 comment letters, over 1250 meetings, and 14 public roundtables. I recognize many of you who have represented clients at these meetings. I am just curious, has the ABA yet tallied up who amongst you has submitted the most comment letters?
With an eye on why Dodd-Frank reforms really matter, let me review some highlights of what has been finalized, as well as upcoming matters before the Commission.
The CFTC has completed seven key reforms to make the swaps marketplace more transparent. For the first time, the public and regulators will have specific information on the swaps markets, in aggregate and transaction-by-transaction.
This July, when real-time reporting begins for much the swaps market, it will bring post-trade transparency to the market and give the public critical information on the pricing of transactions.
Also in July, regulators will benefit from a window into the risks of the swaps market, as swaps transactions will be required to be reported to trade repositories. Based on completed registration rules, three swap data repositories already have filed with the CFTC.
The agency also began, for the first time last fall, to get position information for large traders in the swaps markets for agricultural, energy and metal products.
Furthermore, based upon a provision in completed clearinghouse rules, this month clearinghouses must make their settlement prices public on a daily basis for every swap.
By this fall, based on the just completed external business conduct rules, dealers will be required every day to tell their counterparties the mid-market mark of their outstanding bilateral swaps.
In August, foreign boards of trade, currently operating under no-action relief, must begin the application process for registration.
As a whole, these seven completed reforms will bring much greater transparency and competition to the swaps market, benefiting both the real economy and the buy side.
Looking forward, we also hope to complete rules for designated contract markets (DCMs) and swap execution facilities (SEFs). These rules will be critical in bringing pre-trade transparency to the swaps market. Hedgers, investors and speculators will be able to meet in an open and competitive market, benefitting from seeing available bids and offers and gaining liquidity.
Lowering Risk to the Public through Clearing and Regulating Dealers
The CFTC also has completed many key reforms to lower the risk posed by the swaps market to the public.
Last year, the CFTC completed rules establishing robust risk management requirements, consistent with international standards, for derivatives clearing organizations (DCOs). We also completed rules on the process for clearinghouses to submit swaps that may be mandated for central clearing. Dodd-Frank reforms lower the risks of an interconnected financial system by mandating that standard swaps between financial entities move into central clearing. We are now working with the major clearinghouses as they prepare for submissions of swaps to be mandatorily cleared.
We also hope to finish two critical rules that will further promote the democratization of the swaps market. The rules for client clearing documentation and straight-though processing will provide users of swaps – both in the real economy and the buy side – more direct access to the markets.
The real economy and the buy side also will benefit from comprehensive regulation of swap dealers. This month, the CFTC began the reforms to regulate dealers.
We finalized a registration rule so the Commission, along with the National Futures Association, can monitor swap dealers and major swap participants. We also completed external business conduct rules to establish and enforce robust sales practices in the swaps market.
Next month, we hope to consider final internal business conduct rules that will lower the risk that dealers pose to the real economy. Looking forward, we will consider finalizing capital and margin rules, which will have the benefit of close consultation with other regulators, both domestic and international.
The CFTC also has focused on enhancing the protection of customer funds. The completed amendments to rule 1.25 bring customers back to protections they had prior to exemptions the Commission granted between 2000 and 2005. Importantly, it prevents in-house lending through repurchase agreements.
In addition, as part of completed rules, clearinghouses will have to collect margin on a gross basis. This means that as of this upcoming November, futures commission merchants (FCMs) will no longer be able to offset one customer’s collateral against another and then send only the net to the clearinghouse. Building upon this gross margining provision, we also just completed reforms that require FCMs and DCOs to segregate customer collateral supporting cleared swaps. For the first time, customer money must be protected individually all the way to the clearinghouse.
We are continuing to consider thoughtful input on how we might build upon these segregation protections. This review includes further safeguards for client collateral on an individual basis, as well as possibly considering for futures similar protections to what we approved for swaps. Staff plans roundtables to hear from the public, the first of which will be on February 29.