Thank you very much for the kind introduction and for inviting me to speak here today.
While it is an honor to be offered a speaking spot, I am also very interested in participating in this conference to learn more about changes that are in store for the commodity merchant businesses. Recent headlines herald the exit of banks from this business. The landscape is changing since the Volcker rule now limits proprietary trading by banks and the Federal Reserve may start assessing new capital charges on bank commodity activities.
Let’s not forget the change that has already come to the commodity space as a result of Dodd-Frank, including the swap dealer definition rule, the position limits final rule and re-proposal, the evolving hedge definitions and the futurization of swaps.
Considering these changes, it is amazing you have let me within a mile of this place, let alone offered me a speaking slot.
Today, I will address three areas where the Commission must make changes. First, I will discuss positive developments in meeting the Commission’s data challenges and our much needed investment in technology. Next, I will discuss challenges in swap trade execution. Finally, I will talk about solutions and possible reforms to rules that negatively impact end-users.
In my opinion, the Commission must make the necessary adjustment to improve our rules when we encounter unexpected outcomes of our rulemakings. In fact, it would be irresponsible of the Commission to ignore problems and to continue implementing its unworkable regulations. The topics I will discuss today are candidates for rule revisions. In the case of data and end users, we will need significant changes. Swap trade execution, on the other hand, requires more targeted reforms.
1. The Commission’s Progress on the Data Front
First, I’d like to address the Commission’s ability to receive and utilize data. I am pleased to announce that the Commission is making progress towards improving the quality of its data. On January 21, the Commission announced that it will establish a cross-divisional team to identify data utilization problems faced by each division and to recommend appropriate solutions.
Until now, nobody has taken ownership to fix our data problems. At last, this will change. In March, the Commission will provide a comment period for market participants to offer suggestions to improve reporting. Based on the comments and its own self-evaluation, the data team will make recommendations to the Commission in June.
I can’t emphasize enough how important it is for the Commission to improve our data quality so it can have an accurate and complete picture of the swaps market. Our ability to perform risk assessments and market oversight will hinge on the quality of our data.
In this regard, I would also like to emphasize the importance of harmonizing the Commission reporting rules with the reporting rules of foreign jurisdictions.
I hope the Commission will reengage with the various jurisdictions that have trade repositories to come up with a global solution to data reporting. As you may know, the European Union reporting rules will be effective on Feb 12, 2014.
By recognizing E.U. trade repositories, we would eliminate the need for dual reporting by U.S. persons trading in Europe and non-U.S. persons trading in the United States. Both regimes can work together to agree on a data standard and taxonomy that can be readily used for identifying risk and performing market surveillance.
Speaking of market surveillance, the Commission’s major oversight functions will be severely impaired if we do not invest in new technology. Investing in technology must be the Commission’s top investment priority.
While on the subject of the Commission’s investment priorities, I would like to note that I appreciate Congressional efforts to provide the Commission with an appropriation of $215 million, a modest increase in current spending levels. It is quite clear from this funding level that the Commission will need to pick its funding priorities carefully.
Tony Blair once said, “It is not an arrogant government that choses priorities, it is an irresponsible government that fails to choose.” I look forward to working with my fellow Commissioners and staff to develop a responsible spending plan with clear deliverable goals that makes technology investment our top priority.
I realize that technology doesn’t run itself, but we must acknowledge we live in a digital age where over 90 percent of markets trade electronically. The future of our compliance and oversight mission must be electronic and data driven. In other words, this agency needs to become a 21st century regulator. So far, we have not articulated our mission and technology priorities, but I believe we can do better.
To ensure that we continue to identify the appropriate corrections, I have included a panel on data at the upcoming February 10 Technology Advisory Committee (TAC) meeting, which I chair. At the TAC meeting, the pertinent Commission Division Directors will share their challenges in utilizing our swaps data.