CFTC Gensler addresses industry at FIA Expo

Cross-border application of swaps market reform

Comprehensive oversight of swap dealers will promote transparency and lower their risk to the rest of the economy.

With swap market reform now a reality, we anticipate many dealers will register by January 1.

In enacting financial reform, Congress had the basic lessons of modern finance and the 2008 crisis in mind.  Congress knew that when a run starts on one part of a modern financial institution, almost regardless of where it is around the globe, it invariably means a funding and liquidity crisis rapidly spreads to the entire consolidated entity. Then finance, rather than serving the rest of the economy, can threaten the rest of the economy.

This was true with AIG, whose affiliate AIG Financial Products’ swaps business was basically run out of Mayfair in London.  It nearly brought down the U.S. economy.

To give financial institutions and market participants guidance on the cross-border application of Dodd-Frank, the CFTC in June sought public input on an interpretation of these provisions.

In consultation with the international regulatory community, the CFTC will move shortly to finalize the cross-border and phased-compliance releases.

Customer Protection

Segregation of customer funds is the core foundation of customer protection in the commodity futures and swaps markets.

Last week, the Commission put out for public comment a proposal on enhanced protections for customer funds. The commission looks forward to public input on these reforms.

This proposal is about ensuring customers have confidence that the funds they post as margin or collateral are fully segregated and protected.

It is the direct result of significant input from the public and market participants that the CFTC gathered throughout the year, working with the FIA, the National Futures Association and the self-regulatory organizations (SROs).

It would strengthen the controls around customer funds at futures commission merchants (FCMs).  It also would set new regulatory accounting requirements that would provide stronger protections for customer money held by FCMs and would raise minimum standards for independent public accountants who audit FCMs.  And it would provide regulators with daily direct electronic access to FCMs’ bank and custodial accounts for customer funds.

These rules would build upon the completed amendments to rule 1.25 regarding the investment of customer funds, which prevented the use of in-house lending through repurchase agreements.

In addition, the so-called “LSOC rule” (legal segregation with operational comingling) for swaps will be implemented this month.  In light of Hurricane Sandy, CFTC staff will provide market participants a little more time, moving the compliance date from November 8 to November 13.

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