Herding regulatory cats on Volcker rule

Testimony of Acting Chairman Mark Wetjen Before the U.S. House Committee on Financial Services on the Volcker Rule Impact

Good morning Chairman Hensarling, Ranking Member Waters and members of the Committee. Thank you for inviting me to today’s hearing on Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank), otherwise known as the Volcker Rule. I am honored to testify as Acting Chairman of the Commodity Futures Trading Commission (CFTC). I also am pleased to join my fellow regulators in testifying today.

Congress directed the CFTC to implement Section 619 of Dodd-Frank, which prohibits or places restrictions on certain types of financial activities conducted by “banking entities” and certain financial companies supervised by the Federal Reserve Board. For the CFTC, the Volcker Rule was one of the last remaining rulemakings required by Dodd-Frank. Most of the CFTC’s rulemaking responsibilities are complete and have been, or are in the process of being, implemented.

CFTC Progress on Financial Reform

Due to Dodd-Frank and the efforts of my colleagues and staff at the CFTC, today there is both pre-trade and post-trade transparency in the swaps market where it did not exist before. The public now can see the price and volume of swap transactions in real-time, and the CFTC’s Weekly Swaps Report provides a snapshot of the market each week. The most liquid swaps are being traded on regulated platforms and exchanges, with a panoply of protections for those depending on the markets, and regulators themselves have a new window into the marketplace through swap data repositories.

Transparency, of course, is helpful only if the information provided to the public and regulators can be usefully employed. Therefore, the CFTC also is taking steps to protect the integrity of that data and ensure that it continues to be reliable and useful for surveillance, systemic risk monitoring, and the enforcement of important financial reforms, including the Volcker Rule.

These transparency rules complement a number of equally important financial reforms. For example, the counterparty credit risks in the swaps market have been reduced as a large segment of the swaps market is now being cleared. Additionally, nearly 100 swap dealers and major swap participants have registered with the CFTC, bringing their swaps activity and internal risk-management programs under the CFTC’s oversight for the first time.

As it has put these reforms in place, the CFTC has consistently worked to protect liquidity in the markets and ensure that end-users can continue using them to hedge risk, as Congress directed. The CFTC, in short, has completed most of its initial mandate under Dodd-Frank and has successfully ushered in improvements to the over-the-counter derivatives market structure for swaps, while balancing countervailing objectives.

Leadership from the U.S. Department of the Treasury and Coordination within the Financial Regulatory Community on the Volcker Rule

The Volcker Rule was exceptional on account of the unprecedented coordination among the five financial regulators.

Congress required the banking regulators to adopt a joint Volcker Rule, but it also provided that the market regulators, the Securities and Exchange Commission (“SEC”) and the CFTC, need only coordinate with the prudential banking regulators in their rulemaking efforts. One of the hallmarks of the final rule is that the market regulators went beyond the congressional requirement to simply coordinate. In fact, the CFTC’s final rule includes the same rule text as that adopted by the other agencies. Building a consensus among five different government agencies was no easy task, and the level of coordination by the financial regulators on this complicated rulemaking was exceptional.

This coordination was thanks in no small part to leadership at the Department of the Treasury. Secretary Lew, Acting Deputy Secretary Miller, and others have been instrumental in keeping the agencies on task and seeing this rulemaking over the finish line. Along with the other agencies, the CFTC received more than 18,000 comments addressing numerous aspects of the proposal. CFTC staff hosted a public roundtable on the proposed rule and met with a number of commenters. Through weekly inter-agency staff meetings, along with more informal discussions, the CFTC staff and the other agencies carefully considered the comments in formulating the final rule.

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