When the financial crisis hit, the swaps market was the largest dark pool in our financial markets. Think about this for a moment. At $300 trillion – or $20 for every $1 of goods and services in our economy – the swaps market lacked any transparency except for that which the financial sector was willing to share.
It lacked the great reforms of the 1930s, such as public reporting of transactions and central exchange trading.
It lacked the time-tested tenants of risk management to protect the public, such as central clearing and dealer regulation.
Congress and President Obama responded with the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and tasked the Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) with bringing transparency to and lowering the risk of the swaps market – the same type of public protections that have worked for decades in the securities and futures markets.
To date, the CFTC has completed 39 of these reforms, and substantive swaps market reform is now in sight. The foundation of transparency and lowering the risk of the swaps market has been laid.
The reform structure Congress and the President have built is becoming a reality this week. The new era is beginning.
Bright lights will begin to shine on the swaps market. Transparency lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition. And it shifts some of the information advantage from Wall Street banks to businesses across the country that use these markets to lock in a price or rate and hedge a risk.
By the New Year, we will have achieved real-time public reporting and reporting to swap data repositories (SDRs) of interest rate and credit default swap (CDS) indices. Reporting for energy and other physical commodity swaps begins shortly thereafter.
Regulators and the public will have their first full window into the swaps marketplace.