Testimony of Chairman Gary Gensler Before the U.S. House Committee On Agriculture, Washington, DC
July 25, 2012
Good morning Chairman Lucas, Ranking Member Peterson and members of the Committee. I thank you for inviting me to today’s hearing on oversight of the swaps and futures markets. I will review the Commodity Futures Trading Commission’s (CFTC) implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), as well as the recent events related to the London Interbank Offered Rate (LIBOR) and Peregrine Financial Group.
I also thank my fellow Commissioners and CFTC staff for their hard work and commitment.
The 2008 crisis – caused in part by swaps – was the worst economic crisis Americans have experienced since the Great Depression. Eight million Americans lost their jobs, millions of families lost their homes and thousands of businesses shuttered.
Following the crisis, the President and the G-20 leaders convened in Pittsburgh in September 2009 and agreed that swaps, which were basically not regulated in the United States, Asia or Europe, should now be brought into the light of regulation.
In 2010, Congress and the President came together and passed the historic Dodd-Frank Act.
The goal of the law’s swaps market reforms is to:
- Bring public market transparency and the benefits of competition to the swaps marketplace;
- Lower the risk of the interconnected financial system by bringing standardized swaps into centralized clearing; and
- Ensure that swap dealers and major swap participants are specifically regulated for their swaps activity.
The Commission has made significant progress in implementing Congress’ direction to ensure that common-sense standards are established for the swaps market.
Turning Point: Implementation of Swaps Market Reforms
Throughout the rule-writing process, we have benefitted from significant public input. CFTC Commissioners and staff have met nearly 1,800 times with the public, and we have held 18 public roundtables on important issues related to Dodd-Frank reform. The agency has received more than 35,000 comment letters related to Dodd-Frank rules.
Last summer, we turned the corner and started finalizing rules. To date, we’ve completed 36 rules and now have fewer than 20 to go (see attachment).
This month, we reached another major turning point in the swaps market reform process. The CFTC and the Securities and Exchange Commission (SEC) completed the rule to further define the terms “swap” and “security-based swap.” These further product definitions mean many other critical swaps market reforms already completed by the Commission will come to life. We also finalized this month the rule on the end-user exception to clearing. With the completion of these foundational rules, we are increasingly moving from the rule-writing process to the implementation of reforms that bring transparency to the swaps marketplace and lower its risks to the public.
Swap dealers, for the first time, will register and begin to come under comprehensive regulation. This includes implementing already completed external and internal business conduct standards that will lower swap dealers’ risk to the economy and promote confidence in their integrity.
Two months after the rule further defining the term “swap” is published in the Federal Register, light will begin to shine on the swaps market. Initially, likely by October, swaps price and volume information will be reported in real time to the public for interest rate and credit default swap (CDS) indices. Three months later, such real-time reporting will begin for energy and other physical commodity swaps.
Swap data repositories (SDRs) will receive data on all swaps transactions, giving regulators their first full window into these markets. One SDR has already successfully registered with the Commission, and we have at least four other parties working on their applications.
The rule further defining “swap” is especially meaningful for the implementation of position limits. For the first time, limits will apply to the aggregate spot-month positions, including both futures and swaps. Spot-month limits protect the markets against corners, squeezes and the burdens that may come from excessive speculation.
I will now go into further detail on the Commission’s swaps market reform efforts.
Transparency is critical to both lowering the risk of the financial system, as well as to reducing costs to end-users. The more transparent a marketplace is to the public, the more efficient it is, the more liquid it is, and the more competitive it is.
We have completed the bulk of the congressionally mandated transparency reforms for the swaps market. This fall real-time reporting to the public and to regulators will begin for swaps market transactions.
Second, detailed and up-to-date reporting by large traders in the physical commodity swaps markets began last fall. This reporting allows regulators to better police for fraud, manipulation and other abuses.
Third, the CFTC also plans to begin publishing aggregated swaps market data. The public has benefited for years from the Commitment of Traders futures data we publish. Our goal is to provide similar public transparency for the swaps market.
Fourth, in May we completed rules, guidance and acceptable practices for designated contract markets (DCMs). DCMs will be able to list and trade swaps, helping to bring the benefit of pre-trade transparency to the swaps marketplace.
Looking forward, we have two important transparency rules to complete related to block sizes and swap execution facilities (SEFs). These critical Dodd-Frank reforms will bring pre-trade transparency to the swaps market for the benefit of all the end-users that use swaps.