September 17, 2014
Good afternoon. This meeting will come to order.
This is a public meeting of the Commodity Futures Trading Commission (CFTC). It is the first open meeting of the Commission since two of my fellow Commissioners, Commissioner Bowen and Commissioner Giancarlo, and I took office. I am very pleased to have the benefit of their experience and insight as we move ahead. I also want to acknowledge and thank Commissioner Wetjen, our veteran, who has put in a tremendous effort, particularly over the first several months of this year when he served as Acting Chairman and who has been very helpful to all of us as we got up to speed on various issues. Thank you, Mark. And, I would like to welcome members of the public, market participants, and members of the media, as well as those listening to the meeting on the phone or watching the webcast.
As we take up any rule required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, we must never forget why the Act was passed and the motivations behind Title VII. The Dodd-Frank Act was a comprehensive response to the worst financial crisis since the Great Depression. While there were many causes of that crisis, one was excessive risk from the over the counter swaps market, a large, global industry essentially unregulated by any jurisdiction at that time. It was six years ago—September 16, 2008—when our government was required to step in and prevent the failure of AIG, which was on the brink of collapse because of excessive swap risk, a collapse that could have thrown our nation into another Great Depression.
These rules, like many of the Commission, are highly technical and complex, and they may seem esoteric and far removed from the lives of most Americans. But the costs of the crisis were not. They were very real, very large, and borne by the American people through millions of lost homes and jobs, many businesses shuttered, and many educations and retirements deferred. That is why these reforms are so important. And that is what brings us here today.
Today, we will consider a final rule that will help make sure that many of the small utility companies that serve communities across our nation can reduce their risk of doing business when it comes to the cost of fuel. We will also consider a proposed rule that will reduce the risk to our financial system that can be created when swap dealers enter into swaps that are not then cleared on central clearinghouses Both of these agenda items are important steps in our effort to finish the job of implementing the Dodd-Frank Act. They help us achieve the full benefit of the new regulatory framework, while at the same time protecting the interests of commercial companies that need to use these markets.
We will begin with consideration of the final rule pertaining to the swap activities of small utility companies--a small, but important, part of the market. This is what I like to refer to as the fine tuning of rules that is inevitably required when you have reforms as significant as Dodd-Frank required.
Congress directed the Commission to regulate swap dealers. Among other things, we require swap dealers to treat customers fairly and manage risk adequately. Congress directed the Commission to impose heightened standards on swap dealers in their swaps activity with Federal, state and municipal government agencies and certain other so-called special entities. This was in response to the instances where swap dealers may have failed to disclose material risks of swap transactions to municipal entities or otherwise acted improperly, which often resulted in massive losses to the municipality.
Because Congress defined “special entity” broadly, when the Commission implemented this Congressional directive, it applied to many utility companies that are government owned. These are the companies responsible for keeping the lights on in communities across our country, for heating and cooling our homes, and powering the kitchen appliances we use every day to feed our families. To do their job, they must manage the risk of their own fuel costs, and to do that, they must be able to access the energy commodity markets. They engage in energy swaps. The counterparties with whom they transact business were often not registered swap dealers, nor were they the dealers that engaged in the abusive practices that led to Congress’s concerns. The imposition of these requirements through a designation as a swap dealer could unduly burden their business and thereby threaten the ability of our local utility companies to manage their risks.
To avoid burdening local utility companies, CFTC staff issued a series of no-action letters, so that such requirements weren’t effective while the Commission studied the issue further and decided whether to take permanent action.
The rule we are considering today provides a permanent solution to enable such utility companies to continue to use these markets effectively.
We are also considering today a proposed rule on margin requirements for uncleared swaps. A key mandate of the Dodd-Frank Act was central clearing of swaps. This is a significant tool to monitor and mitigate risk, and we have already succeeded in increasing the overall percentage of the market that is cleared from an estimated 17% in 2007 to 60% last month, when measured by notional amount.