Lowering Risk to the Real Economy
Financial reform also means lowering the risk that the swaps market poses to investors, consumers, retirees and businesses in America. Dodd-Frank addresses this in three principal ways:
• Bringing transparency to the swaps market, as I just discussed;
• Mandating that standard swaps between financial entities move into central clearing; and
• Regulating swap dealers comprehensively.
For over a century, through good times and bad, central clearing in the futures market has lowered risk to the broader public. Dodd-Frank brings this effective model to the swaps market. Standard swaps between financial firms will move into central clearing, which will significantly lower the risks of the highly interconnected financial system.
The Commission has completed rules establishing new derivatives clearing organization risk management requirements and a rule on the process for clearinghouses to submit swaps that may be mandated for central clearing. In addition, the Commission adopted an important customer protection enhancement, the so-called “LSOC rule” (legal segregation with operational commingling) for swaps. It ensures customer money is protected individually all the way to the clearinghouse.
Moving forward, the Commission is working to complete three additional clearing rules. First, to further facilitate broad market access, we will address client clearing documentation, risk management, and so-called “straight-through processing,” or sending transactions immediately to the clearinghouse upon execution. Second, to fulfill Congress’ requirement, we will take up the end-user exception related to non-financial companies. And third, we will consider a final rule on the implementation phasing of the clearing mandate.
Under the congressionally directed process for determining which swaps will be subject to the clearing mandate, the Commission will have 90 days to review a clearinghouse’s submission and determine whether a swap or group of swaps is required to be cleared. Staff now is reviewing clearinghouse submissions and preparing recommendations. During the Commission’s review period, there will be a 30-day public comment period on a clearinghouse’s submission. I anticipate that the first such comment period will begin this spring. Thus, for market participants trying to plan for a possible start date for mandatory clearing – the so-called “T” of mandatory clearing determinations – though I don’t have a specific date, it could be as early as this summer.
The CFTC has begun finalizing reforms to, for the first time, regulate swap dealers and lower their risk to the rest of the economy. Based on completed registration rules, dealers will register after we finalize jointly with the SEC the further definition of key terms, such as swap dealer and swap. The two agencies are closer to finalizing entity definitions. We are taking into account all the public comments, and are paying particular attention to those from end-users and hedgers. We’ve also made great progress on product definitions. Not only are these further definition rules, which Congress required, critical to regulating swap dealers, but they also are pivotal to moving forward on the clearing mandate and position limits.
The CFTC also has completed business conduct standards for swap dealers addressing sales practices and risk management policies, which will protect customers and taxpayers.
Financial reform also means investors, consumers, retirees and businesses in America will benefit from enhanced market integrity. Congress provided the Commission with new tools to ensure market participants can have confidence in U.S. derivatives markets.
Rules the CFTC completed last summer close a significant gap in the agency’s enforcement authorities. The rules extended our enforcement authority to swaps and prohibited the reckless use of fraud-based manipulative or deceptive schemes. Also, the CFTC now can reward whistleblowers for their help in catching market misconduct.
Congress also directed the CFTC to establish aggregate position limits for both futures and swaps in energy and other physical commodities. In October 2011, the Commission completed final rules to ensure no single speculator is able to obtain an overly concentrated aggregate position in the futures and swaps markets. The Commission’s final rules come into effect for the spot-month limits once the CFTC and SEC jointly adopt the rule to further define the term “swap,” and for other limits, following a year’s worth of large trader swap data. It is essential that the two Commissions move forward on the product definition rulemaking expeditiously so that the important position limits rule can go into effect.
Foreign regulators also are making progress on financial reform, including Japan, which passed a measure; Hong Kong, Singapore and Canada, which have made regulatory proposals; and the European Union, which is working toward putting European Market Infrastructure Regulation (EMIR) in place this year. The CFTC has been actively consulting and coordinating on financial reform with our international counterparts. CFTC staff has been sharing many of our comment summaries and drafts of final rules with the international community and has gotten constructive feedback. Just yesterday, we held a meeting with 42 foreign regulators. Last week, I was in Europe meeting counterparts in both Basel and Brussels. Commissioner Sommers has done great work as Chair of the CFTC’s Global Markets Advisory Committee and as the Commission's representative to the International Organization of Securities Commissions. Furthermore, I anticipate the Commission will explicitly seek public input this spring on the cross-border application of Title VII of the Dodd-Frank Act.