Swaps Trading Rules
Unfortunately, the flawed swaps trading rules imposed by the CFTC in 2013 have put America at a disadvantage globally. These rules are highly over-engineered, disproportionately modeled on the US futures market and biased against both human discretion and technological innovation. They are fundamentally mismatched to the distinct liquidity, trading and market structure characteristics of the global swaps market.
The CFTC’s flawed swaps trading rules have driven global market participants away from transacting with entities subject to CFTC swaps regulation. They have contributed to the continuing fragmentation of global markets into a series of distinct liquidity pools that are less resilient to market shocks and less supportive of global economic growth.
The CFTC must move forward with a better regulatory framework for swaps trading. It must allow market participants to choose the manner of trade execution best suited to their swaps trading and liquidity needs and not have it chosen for them by the federal government. Our regulatory framework must help to attract, rather than repel, global capital to US trading markets. It must better align regulatory oversight with inherent swaps market dynamics. Most importantly, it must facilitate risk transfer in support of increased commercial lending and broad-based economic revival.
Our goal is to oversee markets that are neither the least nor the most prescriptively regulated – but the BEST regulated – balancing market oversight, health and vitality.
III. Regulatory Comity
I will now turn to the critical importance of cross-border regulatory coordination.
As part of his Executive Order on Core Principles for Regulating the United States Financial System, President Trump also called upon US government agencies to advance national interests in international financial regulatory negotiations and meetings. The CFTC seeks to fully embrace that Core Principle in President Trump’s executive order.
By their very nature, swaps instruments trade in global markets. They allow American agriculture producers, industrial manufacturers and financial service providers to transfer or bear exposure to the risk of variable commodity prices, foreign exchange, rate of interest or counterparty credit default in marketplaces around the world.
Without robust and orderly global derivative markets, American firms would bear greater risk in their international commercial activities. As a result, they would either curtail operations or be less competitive than their overseas counterparts. That would mean fewer jobs at home and diminished US economic activity.
Instead, we must ensure that global markets are salutatory and suitable for the risk transfer needs of American agriculture producers, industrial manufacturers and financial service providers. To do so, the CFTC must be an active participant in international bodies, like the International Organization of Securities Commissions (IOSCO), where it may pursue policies to enhance the health, durability and vitality of global markets suitable for American trading and risk transfer.
As our regulatory counterparts continue to implement swaps reforms in their markets, it is critical that we make sure our rules do not conflict and fragment the global marketplace. That is why the CFTC should operate on the basis of comity, not uniformity, with overseas regulators. The CFTC should move to a flexible, outcomes-based approach for cross-border equivalence and substituted compliance.
In all of its international engagements with fellow financial regulators and related regulatory bodies, the CFTC should act in a forthright and candid manner, displaying leadership when appropriate and respect and due consideration at all times. The CFTC aims to be considered a trusted and worthy counterpart by its overseas regulatory associates.
I am committed to making regulatory comity work. I will do everything I can to see that the CFTC works positively with our regulatory counterparts from around the world. As I am here in Lisbon, I particularly want to emphasize the importance I hold for the relationship between the CFTC and European Commission (EC) and the European Securities and Markets Authority (ESMA). I want to build on the success we have had working with the EC and ESMA – chaired by Steven Maijoor – on CCP equivalence. I look forward to positive equivalence decisions by the EC on trading platforms and margin requirements. It is critical that we achieve these results and make them enduring and provide market certainty.