CFTC CHILTON'S STATEMENT ON VOTE FOR FINAL VOLKER RULE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
"High Roller's Room"

Statement of Commissioner Bart Chilton

December 10, 2013

I’m pleased to be voting on a final Volcker Rule. Frankly, two-and-a-half weeks ago, I had grave doubts about getting this done in a meaningful fashion. It had become weaker than the original proposal. But, thankfully, and I thank the Chairman for his tireless efforts, we have a rigorous and robust rule before us.

If you’ve ever been to a casino, many of them have a high roller’s room. There’s usually a sign about a $1000 minimum bet. Many have ornate gaming tables and heavy draperies. If you walk around, you can catch a glimpse inside. But other than betting a lot of money, I’m not sure what goes on in there. And, that’s fine...some high rollers lose and some win.

But, what if what the high rollers did in that room impacted all of us? What if it impacted consumers, our economy and our country? What if what the high rollers did in that room cost us $417 billion dollars (in a big bank bailout) because the games they were playing were tanking the economy?

That’s why we need a strong Volcker Rule. We should never again be put in a circumstance where too big to fail high rollers play games of chance with our nation. This rule takes a heavy velvet rope with brass ends across the doorway and closes the high roller's room. (Maybe they'll put in more Blazing 7s or Wheel of Fortunes.)

The dilemma in drafting the final rule has been that there are certain permitted forms of trading that have been difficult to define. Fortunately, the language has been solidified tightly to avoid loopholes.

First, the key parts of the law, and what I have focused on for a very long time, are the words surrounding hedging. Proprietary hedging is allowed under the law, but speculative trading--risky gambles for the house--are exactly what Volcker sought to end. This rule does that by requiring hedges be designed to mitigate and reduce actual risk, and not just by an accidental or collateral effect of the trade. We also have better correlation language in the rule, correlation that shows that the hedging “activity demonstrably reduces or otherwise significantly mitigates the specific, identifiable risk(s) being hedged.” This is key--the risk has to be specific and identifiable. You can’t just say, “Ah, oh, that? Hmm, it was a hedge.” Nope, we aren't going to let ya play that game. The position needs to be correlated with the risk.

Furthermore, there is now an ongoing requirement to recalibrate the position, the hedge, in order to ensure that the position remains a hedge and does not become speculative. When people say this version of the Volcker Rule will stop circumstances like the London Whale, this ongoing recalibration provision is exactly what will help avoid similar debacles.

Second, the same goes for market making. Yes, market making is allowed, but only for the benefit of the banks’ customers – for their customers and not in order to collect market maker fees provided by the exchange or for any speculative reason. The market making is only permitted when a bank is hedging a legitimate business risk for a customer. Full stop.

Third, on portfolio hedging: One of the changes that has been made is that we have defined what a portfolio is NOT – it can’t be some amorphous set of excuses for doing a trade. You can’t call deuces and one-eyed jacks wild after the hand has been dealt. You can’t do an after-the-fact extract of a set of trades as a rationale for a hedge.

Fourth, I’ve spoken many times about perverse bonus structures that reward the macho macho men traders. The idea, and it is contained in actual rule text language, is that big bonuses and rewards in banking should not be tied to flyer bets. Our first proposal was fairly poorly drafted on this. It didn’t differentiate between prohibited proprietary trading and permitted proprietary trading very well. My view of the language that compensation should be “designed” not to reward or incentivize prohibited trading is that this is a sufficiently narrow test. One of the ways we will determine if something is designed in this way is how, in fact, traders are paid. So we will look after-the-fact at the payouts.

Finally, the Volcker Rule won’t be implemented until July of 2015. That’s ages in these morphing markets where new games seem to be played all the time. I guarantee there will be efforts to find loopholes, figure out ways around what has been written. That’s the way of the world. So, my final thought is that this rule must not be static. Regulators need to continue to monitor what is taking place. We need our regulatory eyes in the sky, but also to look around the corner for what’s coming next, and be nimble and quick, to ensure that what we do today holds up and that the high roller's room isn’t re-opened.

While this may be the end of part of the rulemaking process, it is, and must be, the beginning of a process, that continues.

Thank you.