CFTC CHAIRMAN MASSAD'S REMARKS BEFORE GLOBAL EXCHANGE AND BROKERAGE CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Remarks of Chairman Timothy Massad before the Global Exchange and Brokerage Conference (New York)

June 3, 2015

As Prepared For Delivery

Thank you for inviting me today, and I thank Rich for that kind introduction. It’s a pleasure to be here.

Next month, we will observe the fifth anniversary of the passage of the Dodd-Frank Act. As you know, this law made dramatic changes to our regulatory system in response to the worst financial crisis since the Great Depression. In particular, it aimed to bring transparency and oversight to the over-the-counter swaps market, and gave the CFTC primary responsibility to accomplish that task.

The timing of this speech is significant to me in another way, as it was exactly one year ago today that I was confirmed by the Senate as chairman of the CFTC. So in light of those two anniversaries, it seems like a good time to take stock. Where are we in implementing these reforms? Is the new regulatory framework achieving the goals envisioned in Dodd-Frank? And what have we done over the last year in particular to advance those objectives? What are our priorities going forward?

All of you appreciate the important role that the derivatives markets play in our economy. In 2008, however, we saw how the build-up of excessive risk in the over-the-counter swaps market made a very bad crisis even worse. There were many causes of the crisis, but particularly because of that excessive swap risk, our government was required to commit $182 billion just to prevent the collapse of a single company – AIG – because its failure at that time, in those circumstances, could have caused our economy to fall into another Great Depression. Our country lost eight million jobs as a result of the crisis. I spent five years at Treasury helping our nation recover from that crisis – including getting all that money back from AIG. I also had a long career working as a corporate lawyer, which included helping to draft the original ISDA master agreements and advising businesses on all sorts of transactions, including derivatives. So I appreciate both the need for reform and the importance of implementing these reforms in a way that ensures that these markets can continue to thrive and contribute to our economy.

The Dodd-Frank Act enacted the four basic reforms agreed to by the leaders of the G-20 nations to bring transparency and oversight to this market: central clearing of standardized swaps, oversight of the largest market participants, regular reporting, and transparent trading on regulated platforms.

Today that framework is largely in place. The vast majority of transactions are centrally cleared. Trading on regulated platforms is a reality. Transaction data is being reported and publicly available. And we have developed a program for the oversight of major market participants.

There is more work to do in all these areas, as I will discuss in a moment. But as I see it, there are a lot of parallels between where we are today with swaps market reform and what happened with securities market reform in the 1930s and 40s. Coming out of the Great Depression, we created a framework for securities regulation and trading which proved tremendously successful. Many of its mandates were revolutionary at the time and therefore quite controversial. When the Securities Exchange Act was passed and required periodic reporting by public companies, the President of the New York Stock Exchange said it was “a menace to national recovery.” History has proved otherwise. Today, the concept of periodic reporting by public companies is about as controversial as seat belts. Indeed, the basic framework created in the 1930s of disclosure, transparency, periodic reporting and trading on regulated exchanges has been the foundation for the growth of our securities markets.

I believe the swaps market reforms we have put in place are similar. I believe the basic framework is one that will benefit our markets and the economy as a whole for decades to come. Is that framework perfect? No. Is there more to do? Yes. So let’s look at where we are.

Congress required that the rules be written within a year of passage of Dodd-Frank, and the agency worked incredibly hard to meet that goal. Now we are in a phase of making necessary minor adjustments to the rules, which is to be expected with any change as significant as this. And so a priority of mine over the last year has been to do just that: to look at how well the new rules are working and to make adjustments where necessary.

So let me give you a quick big picture view of where we are on each of the four key reforms of the OTC swaps market, as well as what I see as the next steps in each of those areas, and then discuss in more detail a couple of key priorities for the months ahead.

Clearing

First is the goal of requiring central clearing of transactions. This is a critical means to monitor and mitigate risk. Here we have accomplished a great deal. Our rules require clearing through central counterparties for most interest rate and credit default swaps, and the percentage of transactions that are centrally cleared in the swaps markets we oversee has gone from about 15 percent in December 2007 to about 75 percent today. That’s a dramatic change.

Importantly, our rules do not impose this requirement on commercial end-users. Nor do we impose the trading mandate on commercial end-users. And an important priority for me over the last year has been to make sure this new framework as a whole does not impose unintended burdens on commercial end-users. They were not the cause of the crisis or the focus of the reforms. And we want to make sure that they can still use these markets to hedge commercial risk effectively.

What are the next steps when it comes to clearing? First, we must recognize that for all its merits, central clearing does not eliminate risk, and therefore we must make sure clearinghouses are strong and resilient. The CFTC has already done a lot of work in this area. Over the last few years, we overhauled our supervisory framework and we increased our oversight. But there is more to do, and there will be significant efforts taking place, including through international organizations.

We will be looking at stress testing of clearinghouses, and whether there should be international standards for stress testing that give us some basis to compare the resiliency of different clearinghouses. And while we hope never to have to use these tools, we will be looking further at recovery and resolution planning.

You may also know that we are engaged in discussions with Europe on cross-border recognition of clearinghouses. While this issue is taking longer to resolve than I expected, I believe we have narrowed the issues and are making good progress. For those interested, I recently gave a speech to a committee of the European Parliament that describes the issues we are discussing in more detail. I believe my counterpart in these discussions, Lord Jonathan Hill of the European Commission, wants to resolve this soon, as I do, and we are working in good faith toward that end. I also believe we can resolve this without disruptions to the market, and I am pleased that the EC has again postponed capital charges toward that end.

Oversight of Swap Dealers

Let me turn to the second reform area, general oversight of major market players. We have made great progress here as well, as we have in place a regulatory framework for supervision of swap dealers. They are now required to observe strong risk management practices, and they will be subject to regular examinations to assess risk and compliance with rules designed to mitigate excessive risk.

Next steps in this area include looking at the swap dealer de minimis threshold. Under the swap dealer rules adopted in 2012, the threshold for determining who is a swap dealer will decline from $8 billion to $3 billion in December of 2017 unless the Commission takes action. I believe it is vital that our actions be data-driven, and so we have started work on a comprehensive report to analyze this issue. We will make a preliminary version available for public comment, and seek comment not only on the methodology and data, but also on the policy questions as to what the threshold should be, and why. I want us to complete this process well in advance of the December 2017 date so that the Commission has some data, analysis, and public input with which to decide what to do.

Another priority for us over the next few months in the area of general oversight is to finalize our proposal on margin requirements for uncleared swaps. This is one of the most important Dodd-Frank requirements that remains to be finalized, and one of the most important overall. There will always be a large part of the swaps market that is not and should not be centrally cleared, and therefore margin is key to minimizing the risk to our system that can come from uncleared bilateral trades. The proposal applies to swap dealers, in their transactions with one another and their transactions with financial institutions that exceed certain thresholds. As with the clearing and trading mandates, commercial firms are exempted.

We are working closely with the bank regulators on this rule. They have the responsibility to issue rules that apply to swap dealers that are banking entities under their respective jurisdictions, and our rule will apply to other swap dealers. It is vitally important that these rules be as consistent as possible, and we are making good progress in this regard. We are also working to have our U.S. rules be similar to rules being considered by Europe and Japan. I expect that they will be consistent on many major issues.

Reporting

With regard to reporting, the public and regulators are benefiting from a new level of market transparency – transparency that did not exist before. All swap transactions, whether cleared or uncleared, must be reported to registered swap data repositories (SDRs), a new type of entity responsible for collecting and maintaining this information. You can now go to public websites and see the price and volume for individual swap transactions. And the CFTC publishes the Weekly Swaps Report that gives the public a snapshot of the swaps market. This means more efficient price discovery for all market participants. Equally important, this reporting enables regulatory authorities to engage in meaningful oversight, and when necessary, enforcement actions.

While we have much better data today than in 2008, we have a lot more work to do to get to where we want to be. One step is revising our rules to bring further clarity to reporting obligations. Later this summer I expect that we will propose some initial changes to the swap reporting rules for cleared swaps designed to clarify reporting obligations and, at the same time, improve the quality and usability of the data in the SDRs. And we are looking at other possible changes as well to improve the data reporting process and usefulness of the information.

This is also an international effort. There are around two dozen data repositories globally. And there are participants around the world who must report. We and the European Central Bank currently co-chair a global task force that is seeking to standardize data standards internationally. While much of this work is highly technical, it is vitally important to international cooperation and transparency.

We will also make sure participants are taking their obligations seriously to provide us good data in the first place. We have taken, and will continue to take, enforcement action against those who do not.

Transparent Trading

Let me turn to the last reform area, which is trading. Today, trading swaps on regulated platforms is a reality. We have nearly two dozen SEFs registered. Each registered exchange is required to operate in accordance with certain statutory core principles. These core principles provide a framework that includes obligations to establish and enforce rules, as well as policies and procedures that enable transparent and efficient trading. SEFs must make trading information publicly available, put into place system safeguards, and maintain financial, operational, and managerial resources necessary to discharge their responsibilities.

So we are making progress, but here too, there is more work to do. We have been looking at ways to improve the framework, focusing on some operational issues where we believe adjustments can improve trading. We have taken action in a number of areas, including steps to make it easier to execute package trades and correct error trades, and steps to simplify trade confirmations and reporting obligations. We are looking at additional issues pertaining to SEF trading as well. For example, we are planning to hold a public roundtable later this year on the made-available-for-trade determination process, where many industry participants have suggested that the agency play a greater role in determining which products should be mandated for trading and when.

We have also been working to harmonize our trading rules with the rules of other jurisdictions where possible. CFTC staff worked with Australian swap platforms to clarify how they can permit U.S. participation under our trading rules. One platform, Yieldbroker, confirmed that it intends to apply for relief and achieve compliance by this fall. This is an important step and we are open to working with other jurisdictions and platforms.

Responding to Changes in the Market

I began by saying that the approaching five year anniversary of Dodd-Frank was a good time to take stock of what has been accomplished in terms of implementing the reforms required by the law. Equally important to consider is: How have the markets changed over the last five years? How does that impact what we are doing? After all, there is always the danger that as regulators, we focus on fighting the last war.

It is beyond the scope of my speech today to discuss all the significant changes to markets over the last few years, or how regulatory actions may be affecting market dynamics and costs. These are important, complex subjects, but they are well beyond the time I have today to explore. Today, however, I’d like to take a few minutes more to just note one major way in which our markets are changing, and how that is affecting our work.

That change has to do with the increased use of electronic and automated trading. Some speak of “high frequency trading” or HFT, a classification that is hard to define precisely. I will focus on automated or algorithmic trading. Over the last decade, automated trading has increased from about 25 percent to well over 50 percent of trading in U.S. financial markets. Looking specifically at the futures markets, almost all trading is electronic in some form, and automated trading accounts for more than 70 percent of trading over the last few years.

I commend to you a recent paper by our Chief Economist office which gives some interesting data on our markets. This looked at over 1.5 billion transactions across over 800 products on CME over a two year period. It found that the percentage of automated trading in financial futures – such as those based on interest rates, currencies or equity indices – was 60 to 80 percent. But even among many physical commodities, there was a high degree of automated trading, such as 40 to 50 percent for many energy and metals products. The paper also provides a lot of rich detail on what types of trades are more likely to be automated.

The increase in electronic, and particularly automated, trading has changed what we do, and how we do it. Let me say at the outset that the increased use of electronic trading has brought many benefits, such as more efficient execution and lower spreads. But it also raises issues. These are somewhat different in the futures markets than in the cash equity markets where they have received the most attention, in part because typically in the futures market, trading of a given product occurs on only one exchange. Nevertheless, the increased use of automated, algorithmic trading poses challenges for how we execute our responsibilities, and it raises important policy questions. For example, it creates profound changes in how we conduct surveillance. The days when market surveillance could be conducted by observing traders in floor pits are long gone. Today, successful market surveillance activities require us to have the ability to continually receive, load, and analyze large volumes of data. We already receive a complete transactions tape, but effective surveillance requires looking at the much larger sets of message data—the bids, offers, cancelations which far outnumber consummated transactions.

And consider that we oversee the markets in a wide range of financial futures products based on interest rates, currencies and equities, as well as over 40 physical commodity categories, each of which has very different characteristics.

Surveillance today requires a massive information technology investment and sophisticated analytical tools that we must develop for these unique environments. And we must have experienced personnel who understand the markets we oversee, who can discern anomalies and patterns and who have the experience, judgment, and skills to know when to investigate further.

The increased use of high speed and electronic trading has impacted our enforcement activity as well. We have recently brought several spoofing cases, where market participants used complex algorithmic strategies to generate and then cancel massive numbers of bids or offers without the intention of actually consummating those transactions in order to affect price. Some have asked, does that mean I cannot cancel a trade without fear of enforcement coming after me? Hardly. Intent is a key element that we must prove. There is a difference between changing your mind in response to changed market conditions and canceling an order you previously entered, and entering an order that you know, at the time, you have no intention of consummating.

The Commission is also looking at automated trading and specifically the use of algorithmic trading strategies from a policy perspective. We have adopted rules requiring certain registrants to automatically screen orders for compliance with risk limits if they are automatically executed. The Commission has also adopted rules to ensure that trading programs, such as algorithms, are regularly tested. In addition, the Commission issued a Concept Release on Risk Controls and System Safeguards for Automated Trading Environments. We received substantial public comment, and we are currently considering what further actions may be appropriate.

Although we have not made any decisions yet, let me note a few areas we are thinking about. Traditionally, our regulatory framework has required registration by intermediaries handling customer orders and customer funds. In addition, proprietary traders who were physically present on the floor of the exchange and active in the pits had to register as floor traders. Today, the pits are gone, and physical presence on the floor of an exchange is no longer a relevant concept. We are considering whether the successors to those floor traders – proprietary traders with direct electronic access to a trading venue – should be subject to a registration requirement if they engage in algorithmic trading.

We are considering the adequacy of risk controls, and in particular pre-trade controls, with respect to algorithmic trading. The exchanges, and many participants themselves, have put controls in place. The question is whether our rule framework should set some general principles to require measures such as message and execution throttles, kill switches, and controls designed to prevent erroneous orders. We also may consider standards on the development and monitoring of algorithmic trading systems.

We are also considering who should have the responsibility to implement controls. This may include persons using algorithmic trading strategies as well as the exchanges. But what about the role of clearing members who do not see the orders of customers using direct electronic access? Today, our rules require exchanges that permit direct electronic access to have systems to facilitate the clearing member’s management of the financial risk of their direct access customers. Should there be a similar requirement for the exchanges to facilitate the management by clearing members of risks related to those customers’ use of algorithmic trading?

We are looking self-trading – that is, when orders from distinct trading desks or algos from the same firm transact – and its potential implications and effects on the markets. In addition, we are looking at the adequacy of disclosure by exchanges of market maker and incentive programs.

Conclusion

I said at the outset that where we are today in the implementation of reforms of the swaps market has many parallels to the reforms of the securities market after the Great Depression. The framework created then – including public disclosure and regular reporting, and trading on regulated platforms – was controversial at the time. But it has proven to not only be effective, it has provided a vital foundation on which our securities markets grew to become the most dynamic in the world. I believe we can achieve the same result with the derivatives market. We must always be attentive to how the market is changing, and adapt core principles to those changes. I look forward to working with you to achieve that goal.

Last Updated: June 3, 2015

CFTC CHAIRMAN MASSAD'S REMARKS BEFORE DERIVOPS NORTH AMERICA 2015

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
Remarks of Chairman Timothy Massad before the DerivOps North America 2015
April 22, 2015
As Prepared For Delivery

Thank you for inviting me today, and I thank Diane for that kind introduction. It’s a pleasure to be here.

Yesterday was actually the 40th anniversary of the CFTC. The CFTC was formed as a separate agency on April 21, 1975, having been part of the Department of Agriculture prior to that time. What the agency has accomplished during that time is a credit to the CFTC staff. We have an incredibly dedicated and talented team whose tireless efforts have greatly benefitted the American public. I also thank my fellow commissioners for their efforts, particularly their willingness to work constructively together.

The growth of the derivatives markets over the last 40 years is really astounding. The sensible regulatory framework created by the CFTC for the futures market was a foundation for that market’s success. It has helped insure integrity and transparency while facilitating growth and innovation. Today we face a similar challenge in the swaps market – we must create a regulatory framework that achieves the goals of transparency and integrity while enabling the market to continue to grow and thrive.

And today, I want to update you on where we stand on creating that framework.

The New Regulatory Framework

Now unlike the futures and options market, the swaps market grew to be a global market in the absence of regulation. Moreover, while regulation of the futures and options market occurred gradually over time as the market evolved, the decision to create a regulatory framework for the swaps market occurred as a result of the worst financial crisis since the Great Depression. So these differences make our task particularly challenging.

As you know, the G-20 nations agreed to bring the over-the-counter derivatives market out of the shadows through four key commitments: central clearing, market oversight, transparent trading, and data reporting. Congress enacted those four G-20 commitments in the Dodd-Frank Act, and gave primary responsibility to the CFTC. Over the last five years, we have made substantial progress implementing each.

Clearing through central counterparties is now required for most interest rate and credit default swaps. About 75% of the transactions in our market, measured by notional amount, are cleared, compared to about 15% in December 2007.

We have increased oversight of major market players through our registration and regulation of swap dealers – more than 100 are now provisionally registered – and major swap participants.

Swaps transactions must now be reported to registered swap data repositories. There are now four data repositories in the U.S., and more than 20 others internationally, and thousands of participants are providing trade data which improves price discovery, increases market transparency, and enhances supervisory oversight.

Transparent trading of swaps on regulated platforms has begun. We currently have 22 swap execution facilities temporarily registered with 3 more applications pending. According to information compiled by the International Swaps and Derivatives Association, SEF trading accounted for about half of total volume in 2014.
But there is more work to do in all these areas. Let me briefly note some of the general issues we have been working on, and then talk specifically about some trading and data issues that I think will be of great interest to you.

Over the last ten months, one of our priorities has been to work on fine-tuning the new rules so that the new framework works effectively and efficiently for market participants. In particular, we have made a number of changes to address concerns of commercial end-users who depend on these markets to hedge commercial risk day in and day out, because it is vital that these markets continue to serve that essential purpose. This has included adjustments to reporting requirements and measures to facilitate access to these markets by end-users. We will continue to do this where appropriate. With reforms as significant as these, such a process is to be expected. We are also working on finishing the few remaining rules mandated by Dodd-Frank, such as margin for uncleared swaps and position limits.

Oversight of clearinghouses has been another key priority. Under the new framework, clearinghouses play an even more critical role than before. So we have also been focused on making sure clearinghouses operate safely and have resiliency. We did a major overhaul of our clearinghouse supervisory framework over the last few years. Today we are focused on having strong examination, compliance and risk surveillance programs. And while our goal is to never get to a situation where recovery or resolution of a clearinghouse must be contemplated, we are working with fellow regulators, domestically and internationally, on the planning for such contingencies, in the event there is ever a problem that makes such actions necessary.

We also remain committed to a robust surveillance and enforcement program to prevent fraud and manipulation. Whether holding some of the world’s largest banks accountable for attempting to manipulate key benchmarks or stopping crooks from defrauding seniors through precious metal scams and Ponzi schemes, our goal is to make sure that the markets we oversee operate fairly for all participants, regardless of their size or sophistication.

Yesterday, you may have seen that the Commission and the Department of Justice brought civil and criminal charges against an individual whose actions we believe contributed to the market conditions that led to the flash crash of 2010.  We believe this individual, using algorithmic trading strategies, sought to manipulate the E-mini S&P 500 on repeated occasions. The individual was arrested and taken into custody in London yesterday morning, and in addition to the Justice Department, I want to thank the FBI, U.K. Financial Conduct Authority, and Scotland Yard for their help on this case.  As this case illustrates, we will do everything in our power to pursue those who attempt to engage in fraud or manipulation in our markets, whether through electronic trading or conventional schemes. There is nothing more important than the integrity of our markets.

Agenda Going Forward

Let me now highlight a few current agenda items that I believe will be of interest to you. I want to discuss some operational issues in swaps trading and data collection that we are working on. Many of you are responsible for operationalizing the new regulatory framework. So your understanding of these issues and your thoughts on how we might best achieve these regulatory objectives, are very important and helpful to us. And I look forward after I conclude my remarks to hearing your thoughts and questions.

Trading Issues

A key commitment of the G-20 nations embodied in the Dodd-Frank Act was exchange-based trading of swaps. In most jurisdictions, this has not yet occurred. Here in the U.S., as I already noted, the trading of swaps on regulated exchanges has begun, though it is still relatively new. It’s been just over a year since the first made available for trading determinations took place.

I noted earlier the ISDA data on overall volumes. Over the last year we have seen consistent use of these platforms, with weekly volumes in the $1.5 trillion range. Volumes of interest rate swaps have fluctuated both on and off SEFs, against a backdrop of low interest rates. In the case of swaps on CDS indices, SEF trading represented roughly two-thirds of trading. And participation on SEFs is increasing. One SEF recently confirmed that it had exceeded 700 buy side firms as participants. We have also seen a significant increase in non-U.S. market participants participating on SEFs for credit indices, now at about 20 percent from negligible levels this time last year.

So we are making progress. But there is more work to do. Last fall, I said the goal should be to build a regulatory framework that not only meets the Congressional mandate of bringing this market out of the shadows, but which also creates the foundation for the market to thrive. The regulatory framework must ensure transparency, integrity and oversight, and, at the same time, permit innovation and competition. I also said we would look at ways to improve the framework and rules to achieve this. Since that time, we have focused on some operational issues where we believe adjustments can improve trading. Today I want to note a couple of the things we have done and discuss some other adjustments that we intend to make over the coming months.

Packages. Last year CFTC staff took action related to package trades, to allow market participants sufficient time to adapt to exchange-based trading. They worked with market participants to provide additional time for implementation and compliance, which varied by package type. Such phasing has been very useful. The market has developed technical solutions for many packages, and progress is continuing.

Block Trades. Another area concerned block trades. Market participants expressed concern that technology limitations could impair a SEF’s ability to facilitate pre-trade credit checks where the trade is negotiated away from the exchange. Last September, CFTC staff provided no-action relief with respect to the so called “occurs away” requirement so that block transactions could continue to be negotiated between parties and executed on a SEF.
In the areas I’ve just noted, the staff believed it was appropriate in light of our regulatory objectives and the circumstances in the market to provide at least temporary relief or an adjustment through a no-action letter. This can give the market time to develop a solution, as well as allow the staff to explore with the Commissioners possible amendments to Commission rules to address some of these issues through a rulemaking.

Let me turn to some additional steps we plan to take. In some cases, the staff may again act by no-action letter to address an immediate issue, and the Commission may look to amend our rules thereafter.

Error Trades

The first area is to address how erroneous trades are handled. It is important for market participants to have a clear understanding of how corrections can be made where appropriate, while at the same time having certainty that trades they have executed are final. Today, our staff is issuing a no-action letter that will provide relief to enable market participants, SEFs, and DCMs to fix erroneous swap trades. This updates a previous no-action letter that expired last year, and extends the relief to June 15, 2016. Promoting trade certainty and straight-through processing for swaps transactions are critical components of the new market structure. However, there have been concerns that our rules resulted, in some cases, in the inability to resubmit or correct trades that either did not go through, or that did go through and contained correctable errors. There also have been concerns that the operational difficulty of resubmitting or correcting an erroneous trade has resulted in trades pending for surprisingly long periods of time in an affirmation process.

To address these concerns, the no-action letter provides relief that trades that have been rejected from clearing due to clerical or operational errors can be corrected within an hour after rejection. The SEF or DCM can then permit a new prearranged trade, with the same terms and conditions as the original trade, but corrected for any such errors, to be executed and submitted for clearing.

The letter also provides relief to enable SEFs and DCMs to permit new prearranged trades to offset and replace an erroneous trade that has already been accepted for clearing. We expect the industry to continue to take steps to reduce operational errors, as well as to meet the time frames contemplated in straight through processing for swaps.

Uncleared Swaps – SEF Confirmations and Confirmation Data Reporting

Market participants have also raised concerns about confirmations provided by SEFs to counterparties for swaps that are not cleared. As you know, the SEF may not have access to all the relevant non-economic terms of the transaction that are contained in an ISDA Master Agreement between the parties or other underlying documentation. Last year, the staff issued a no-action letter that permitted the SEF confirmation to incorporate by reference the ISDA Master Agreement. This provided temporary relief to SEFs from the requirement to maintain copies of the ISDA Master Agreements or other underlying documentation. Today, based on feedback from SEFs and market participants and our concern that the operational burdens of furnishing the ISDA agreements to the SEFs exceeded the benefits, this relief is being extended until March 31, 2016.

I should note that the relief pertains to a SEF’s obligations. Under the SEF rulebooks, the parties to a swap must maintain relevant trade documents and make these agreements available to the SEFs and the CFTC upon request.

This no-action letter also provides relief for SEFs regarding their obligation to report Confirmation Data on uncleared swaps to SDRs. SEFs have expressed concern that to comply with their reporting obligations for uncleared swaps, they might be required to obtain trade terms from the same ISDA Master Agreements or other underlying documentation that, as I have just discussed, are not otherwise available to them. In light of these concerns, this relief clarifies that SEFs need only report such Confirmation Data for uncleared swaps as they already have access to without undergoing this additional burden. I would note that SEFs must to continue to report all “Primary Economic Terms” data for uncleared swaps – as well as the Confirmation Data they do in fact have – as soon as technologically practicable. I would also note that the counterparties to the trade have ongoing reporting obligations for uncleared swaps.

This is not the full list of issues pertaining to SEF trading that we are looking at, and we will continue to consider adjustments to our rules are needed in other areas.

I want to turn now to some related issues concerning data which are equally important.

Data

Today, under our rules, swap transactions, whether cleared or uncleared, must be reported to swap data repositories. Regular reporting is the cornerstone of transparency. You can now go to public websites and see the price and volume for individual swap transactions. And the CFTC publishes the Weekly Swaps Report that gives the public a snapshot of the swaps market. The availability of accurate data also means we can do much more to evaluate systemic risk and make sure that the markets operate fairly.

Although we have come a long way since the global financial crisis, there remains a considerable amount of work still to do to collect and use derivatives market data effectively.

We continue to focus on data harmonization, including by helping to lead some very active international work in this area, such as in the development of unique product identifiers and unique swap identifiers and guidance on standardizing reporting fields. We are also looking at clarifications to our own rules to improve data collection and usage. In that regard, we are taking steps that will clarify reporting obligations and at the same time improve the quality and usability of the data in the SDRs. You may recall that last year we issued a concept release seeking the public’s views on a variety of issues related to swap data reporting. We received a great many helpful comments, including letters from many of the organizations represented in this room, and we very much appreciate those. One particular issue stood out as a top priority for clarification – the reporting workflow surrounding cleared swaps.

Let me elaborate a bit on the issue. For a cleared swap trade, the original trade is submitted to the clearinghouse, at which point it is novated and two resulting swaps are created, with the clearinghouse as central counterparty to both sides. Thus, the original swap can result in multiple records. Additionally, the first trade may be reported to a different SDR than the two resulting swaps, so those records can reside in two locations. For example, the original or “alpha” swap may appear to remain as an open bilateral swap in one SDR, while in fact, it is subject to the clearing requirement and has been terminated and novated into two swaps that are open in another SDR.

We intend to proceed with a rulemaking in the near future on this issue. I expect the proposal will include the following key elements:

First, the proposed new rules will ensure consistency and clarity of the reporting workflow for cleared swaps. They will provide that when the original swap is accepted for clearing, terminated, and novated into two swaps, the clearinghouse must report a notice of termination to the original SDR and the original SDR will be required to accept and record that termination in its records. The proposed rules will identify clearinghouses as reporting counterparties for resulting swaps, which our original rules had not explicitly contemplated, and clarify that the clearinghouse will select the SDR to which the resulting swaps are submitted.

I also expect the proposed rules will mandate new data fields that will allow users of the data to easily link the original swap and the original SDR to the resulting swaps and any subsequent SDR.

I believe the proposed rule should also provide that daily valuations of cleared swaps need only be supplied to the SDRs from the clearinghouse, eliminating a requirement for certain counterparties to the trade to supply their valuations as well. This requirement created noise in the data and detracted from its clarity and usability without providing any meaningful benefit.

In addition, I expect this proposed rule on cleared swap reporting to eliminate the requirement to report “Confirmation Data” for the original alpha swaps that are intended to be cleared and then terminated upon acceptance for clearing. Confirmation Data related to extinguished “alpha” swaps that are intended to be cleared is simply not useful enough to justify the burden of a reporting requirement. For any resulting swaps generated when the trade is accepted for clearing as well as other swaps intended to be cleared, however, Confirmation Data will continue to be required.

Conclusion

Let me conclude by simply noting the United States has the best derivatives markets in the world – the most dynamic, innovative, competitive and transparent. They have been an engine of our economic growth and prosperity because, day in and day out, they have served the needs of a wide array of market participants.

I know this group understands the importance of making sure our markets continue to operate effectively and efficiently. I look forward to working with all of you to make sure that these markets continue to work well for the many businesses that rely on them in the years ahead.

Thank you for inviting me.

CFTC CHAIRMAN MASSAD'S REMARKS AT NATIONAL GRAIN AND FEED ASSOCIATION CONVENTION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Remarks of Chairman Timothy Massad before the National Grain and Feed Association 119th Annual Convention

March 17, 2015

As Prepared For Delivery

Thank you for inviting me today, and I thank Gary for that kind introduction. It’s a pleasure to be here. It’s been a while since I have been to San Antonio, but I am not a stranger to this part of the country. I drove in this morning from Austin, where I spent last night. Both my mother and sister live there, and my brother lives in Houston. My family lived in Texas for many years when I was a kid – in Midland, Brownsville and Houston. My father worked in the oil business so we moved around a lot between Texas, Louisiana and Oklahoma. Eventually as my dad advanced in his career we moved to the Northeast. When my dad retired, my folks moved back to Texas and my siblings gradually migrated back as well. I was the black sheep of the family who stayed in the Northeast, other than some years in the Midwest and abroad. So I hope those of you from this part of the country will give me a little credit for at least having lived here, rather than concluding I’ve got bad judgment for not coming back.

While my time in Texas had more to do with oil than with agriculture, as a kid I did spend some time on farmland outside of Tyler Texas. My uncle, who still lives in Dallas, and my father had some land there, and we’d come for part of the summer and vacations. They had a few cattle that a local guy tended for them. I can’t say that taught me anything about raising cattle – other than to watch where I was walking – but I have fond memories of those times.

Moving around a lot as a kid, and later as an adult, taught me a few things about our country. One is you appreciate the incredible richness and physical beauty of this country. Another is you learn to listen to and respect those who may have a different point of view. When you live in different parts of the country and the world, when you have to make new friends and acquaintances, you come to appreciate that people can look at things differently. Now, of course, if you work in Washington as I do, admitting that others may have a reasonable point of view, even if you don’t agree with it, can be an occupational hazard. But I try to do the best I can despite this limitation.

My view of the country was also shaped by the fact that my grandparents were immigrants who came over as teenagers, one suitcase in hand and speaking no English. After getting past Ellis Island, they went to Oklahoma and Kansas. This was in the years before World War I. They struggled hard to make it and create a better life for their kids. And my parents were part of the Greatest Generation, who grew up learning how to survive and build a better life for their kids in the face of events that were totally out of their control – the Depression and then World War II.

I say all this because many of the characteristics that have made our country great – the richness of the land, the diversity of our people, the opportunities for those who work hard, and the challenge of dealing with forces and events that are far greater than you and are outside of your control – are deeply tied to agriculture. You all know that, I’m sure. Every day, your work, your lives are shaped by these things – the richness of the land, the opportunity for those who work hard, and the challenge of dealing with events beyond your control.

So today I want to say a few words about the importance of the agricultural industry to our work at the CFTC, then talk about our current priorities, and then I would be happy to take your questions.

The agricultural industry is the foundation for the CFTC. Indeed, helping the agricultural industry is what gave this agency its start, its purpose, and it remains central to our mission today.

As you know, the futures industry started because farmers and ranchers needed a way to deal with events outside of their control – the uncertainties of weather, the unpredictability of the market. Many decades before people in finance figured out that they could manage interest rate or credit risk using futures, people in agriculture were hedging risk. Futures on agricultural commodities have been traded in the U.S. since the 19th century and have been regulated at the federal level since the 1920s. The CFTC itself was part of the U.S. Department of Agriculture before becoming an independent agency in 1974-1975. And, in fact, the newly independent Commission initially worked out of the USDA basement and cafeteria.

In the hall leading to my office in the CFTC’s headquarters, there’s a wall with historic objects documenting the roots of the agency in the agriculture sector. You can see some of the first agricultural contracts approved by the USDA – objects signed by both USDA Secretary Henry Wallace Sr. of the Hoover administration and Secretary Henry Wallace Jr. of the Roosevelt administration.

Many things have changed in the 40 years since the agency was created. Like the agricultural industry itself, the derivatives markets we at the CFTC oversee have grown and changed over the years. The number and types of futures, options and swaps have increased dramatically, with products based on energy, metals, interest rates, currencies, and equities in addition to those based on agricultural commodities. The markets have grown substantially in size. U.S. futures and options markets are now estimated to be $30 - $40 trillion, measured in notional value, and the swaps markets are around ten times that amount. The way trades take place has also changed. Trading pits have given way to automated, electronic trading.

Despite these significant changes, a few things haven’t changed: the first is the importance of agricultural futures products. While they may no longer be the largest segment of the markets by volume, their importance is just as great today as it was then, just as agriculture is just as important today as it was then – if not, in each case, more so. After all, our agricultural industry doesn’t just put food on the table for every American family, it feeds the world. You all also know that while there have been tremendous advances in technology, science and knowledge, and our ability to influence or control many things, you still can’t control the weather. And even if you can at least predict the weather a bit better, you can’t predict or control the market. And so, the derivatives markets have remained just as important for agricultural folks as they were when they started: farmers and ranchers rely on these markets to hedge price, production, and other risk.

For these very reasons, the connection, and commitment, of the CFTC to agriculture is still strong, and our mission has changed very little. At its core, our mission is to make sure that the farmers, ranchers, and other businesses that depend on these markets to hedge risk can use them effectively. Our job is to help these markets thrive, to do all we can to make sure they operate with integrity, to prevent fraud and manipulation, and to protect customers.

The global financial crisis, however, taught us that this is not the only thing we must think about. We learned how excessive risk and a lack of transparency in the over-the-counter swaps market could intensify the crisis and the damage it caused. Now, I know that excessive swap risk wasn’t created by agricultural futures. I know it wasn’t caused by farmers, ranchers, or other commercial businesses hedging routine price risk. But the damage that was caused by the crisis hit all of us: millions of jobs lost and homes foreclosed, many businesses shuttered, and countless retirements and college educations deferred. I saw the terrible impacts first hand and spent five years working to help our nation recover. It’s an experience that has shaped how I approach being Chairman of the CFTC.

So the task for us today is to do our job in a way that helps make sure these markets continue to thrive and work well for the businesses that depend on them, while also making sure they do not create excessive risk to our financial system or our economy generally.

If you look at what we have been doing since June, when two other commissioners and I took office, you will see that we are addressing both those goals, and trying to do so in a pragmatic, balanced manner. We have been active in a number of areas, and I want to review what we have been doing and what’s on our agenda in the months ahead.

Before I do so, I want to thank the CFTC staff. Our recent progress and, really, how far we have come since the crisis is a credit to their hard work and dedication. I also want to thank my fellow commissioners as well for their willingness to collaborate and work constructively together.

I know all of us are committed to carrying out the CFTC’s responsibilities and enhancing these markets.

I also want to acknowledge the work that the NGFA and its members do to help us do our work. Your participation in the issues facing the Commission is appreciated and very valuable. We appreciate your input through comment letters, and through arranging meetings or occasions like this one.

I’m also pleased that we have NGFA representation on our Agricultural Advisory Committee. Our advisory committees are a very good way for us to get input from the public. I am the sponsor of the Agricultural Advisory Committee. As chairman, I get to choose, and I wanted to be the sponsor of this committee because of the importance of agriculture to the CFTC and these markets, and because the issues interest me. We had an excellent meeting in Washington in December, where we were joined by Secretary Vilsack. MJ Anderson and Todd Kemp were there, and it was an excellent opportunity to hear directly from farmers, ranchers, and others, who rely on these markets day in and day out – about how our rules are working, where some adjustments may be necessary, and perhaps most importantly, what issues we should be focusing on going forward.

Let me describe some of the things we’ve been doing and some of our current priorities.

Making Sure the Markets Work for Commercial End-Users

I believe that a key measure of our markets’ success is how well they serve the needs of commercial end-users – the farmers, ranchers and wide range of other businesses that depend on them. So a key priority since I took office has been to address some of the concerns of end-users with respect to our rules and fine-tune them where possible.

Last November, the Commission proposed to modify one of our customer-protection related rules to address a concern that I know many of you have had, as have others in the agricultural community, regarding the posting of collateral. Market participants asked that we modify the rules so that the deadline for futures commission merchants to post “residual interest” would not automatically become earlier in the day a couple years from now. This deadline can affect when customers must post collateral. So we have proposed changing the rule so that the deadline would not become earlier unless the Commission takes affirmative action to change it.

I should note that we separately made it clear that you can use electronic transfers, or ACH payments, which makes it easier to meet the deadline.

We also proposed to revise our rules regarding record-keeping requirements to provide some relief to commercial end-users. We proposed to exempt end-users and commodity trading advisors from certain recordkeeping requirements related to text messages and phone calls, as well as from some requirements as to how records must be kept.

On both the residual interest and record-keeping proposals, I appreciate the NGFA’s input and support for these changes, although I also recognize that you’d like us to make further changes. I hope we can take final action on both proposals soon.

We have taken a number of other steps as well that may not be of direct concern to you but that reflect our desire to address the needs of end-users generally. These other changes include making it easier for local utility companies to access the energy swaps market. We also recently proposed to clarify when forward contracts with embedded volumetric optionality – a contractual right to receive more or less of a commodity at the negotiated contract price – will be excluded from being considered swaps. This change, if adopted, should make it easier for commercial companies to use these types of contracts in their daily operations efficiently.

The Commission staff has also taken action to make sure that end-users can use the Congressional exemptions given to them regarding clearing and swap trading if they enter into swaps through a treasury affiliate.

Some of these changes affect the cost of trading, an issue that I know is of concern to many of you. We will continue to focus on these costs. I have recently spoken out about a banking regulation that may increase the cost of clearing because of requirements placed on clearing members. This pertains to the leverage ratio. I’ve directed our staff to work with the staffs of the banking regulators to see if they can modify this rule to address the concern.

Finishing the Remaining Rules

Another priority for us is completing the position limits rule. Congress mandated that we implement position limits to address the risk of excessive speculation. In doing so, we must make sure that commercial end-users like agricultural producers can continue to engage in bona fide hedging. We have received substantial public input on the position limits rule. We got input at the Agricultural Advisory Committee meeting last December, for example. The Commission and CFTC staff are considering these comments carefully. We understand the importance of bona fide hedging, and I want you to know that we are looking at the concerns many of you have raised. We are going to take our time to get this right.

Another rule we must finish is our proposed rule on margin for uncleared swaps. This would require swap dealers to post and collect margin from their counterparties on uncleared swaps, much as is required on cleared swaps. This helps reduce the risk of those trades and the risk to our financial system as a whole. Our rule makes clear that swap dealers are not required to collect margin from end-user counterparties. This is consistent with Congress’s intent. Congress recognized that the activities of commercial end-users in the derivatives markets do not create the same types or degree of risk as with large financial institutions, and so Congress provided these exemptions to minimize the impact of necessary regulatory reform on commercial end-users.

Enforcement

We also remain committed to a robust surveillance and enforcement program to prevent fraud and manipulation. There is nothing more important to restore and maintain public confidence in our markets than robust enforcement. An important part of this effort is vigorous financial surveillance over futures commission merchants. We have stepped up our efforts to make sure FCMs safeguard customer funds and meet their financial obligations to clearinghouses. We require FCMs to make daily reports demonstrating compliance with the segregation obligations; and to provide notice to us of certain withdrawals of funds from the customer segregated accounts. Depositaries holding customer funds also are required to confirm balances on a daily basis, so that it is possible to verify that the funds that FCMs report as being held for customers are, in fact, on deposit. And CFTC staff, working with the self-regulatory organizations, conduct periodic on-site examinations of the FCMs to assess their compliance with the financial requirements.

With regard to enforcement, we have been vigilant in bringing cases where FCMs have failed to meet their financial and regulatory obligations – not maintaining sufficient capital or keeping customer funds properly segregated, for example. We have held some of the world’s largest banks accountable for attempting to manipulate LIBOR. And we recently ordered five of the biggest banks in the world to pay $1.5 billion in fines for attempting to manipulate foreign exchange benchmarks. We have brought successful cases against those who would attempt to manipulate our markets through high frequency trading using spoofing strategies. And we have also stopped crooks trying to defraud seniors through precious metal scams and Ponzi schemes. In all these efforts, our goal is to make sure that the markets we oversee operate fairly for all participants regardless of their size or sophistication.

Finally, we are focused on new challenges and risks in our markets. Cybersecurity has been getting a lot of attention, and rightly so. It is now perhaps the single biggest threat to financial stability. We are making this a priority in our examinations. Another example of a new challenge is automated, electronic trading, including high frequency trading. We are looking at whether we should take further action to make sure this type of trading does not lead to unfair advantages for some traders or pose excessive risks to our markets.

We are also doing all we can to make sure clearinghouses are strong and stable. The reforms that are being implemented worldwide since the financial crisis have made clearinghouses even more important in the global financial system. A few clearinghouses, in particular, are clearing most of the futures and swaps products. As a result, there is more attention being paid around the world to the risks that clearinghouses pose and what would happen if there was a problem at a clearinghouse. As we think about these issues, we need to address financial stability concerns while still making sure that clearinghouses, and clearing members, can operate successfully so that their clients – end-users like you – can still participate in these markets in a cost-effective manner.

The Importance of Market Participant Feedback

In all that we do, feedback from people like you, businesses that use these markets, is vital. Your input helps us understand the issues you face in using these markets. That’s particularly helpful when we face the task of balancing competing objectives. So I look forward to your continued input.

Resources

One of the biggest challenges we face is simply that there is more we should be doing that we cannot do because of resources. Not more rules to write, but rather, things like responding quickly to the concerns of market participants. Dealing with the threats posed by cybersecurity, or the challenges of high frequency trading. Or simply processing requests for registration, rule changes, or new product approvals. The CFTC’s current budget has simply not kept up with the growth of the markets and our responsibilities.

We have more work to do than we have people to do it. This means we cannot be as responsive as we wish to be. And today’s markets are sophisticated and technology driven. To be effective, our oversight must be as well. Without additional resources, it is difficult for us to do the job that I believe our markets need and the American people deserve.

Conclusion

The United States has the best derivatives markets in the world – the most dynamic, innovative, competitive and transparent. They have been an engine of our economic growth and prosperity, in large part because they have attracted participants and served the needs of end-users who depend on them. I know this group understands the importance of risk management and price discovery more than most. I look forward to working with all of you to make sure that these markets continue to work well for businesses like yours in the years ahead.

Thank you for inviting me. I would be happy to take some questions.

CFTC CHAIRMAN MASSAD'S ADDRESS TO FUTURES INDUSTRY ASSOCIATION BOCA CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
Keynote Address of Chairman Timothy G. Massad before the Futures Industry Association Boca Conference
March 11 2015
As Prepared For Delivery

Thank you for inviting me today, and I thank Walt for that kind introduction. It is a pleasure to be here. This is my first time to the International FIA Conference here, an event that I have heard a lot about. And, of course, with the winter we have been having in Washington, being here is a real treat.

Let me begin by acknowledging the work that the Futures Industry Association and its members do. Your commitment to improving the industry, and your participation in the work of the Commission, is very important.

I want to also acknowledge and thank the CFTC staff. What this agency has accomplished, not only since my arrival, but well before that, is a credit to their hard work. We have an incredibly dedicated and talented team. I also thank my fellow commissioners for their efforts, particularly their willingness to work constructively together. We may not always agree, but I believe all of us are working in good faith to carry out the CFTC’s responsibilities.

Everyone here appreciates the importance of the derivatives markets. They enable businesses of all types to manage risk, and in so doing, are engines of economic growth. The success of these markets depends on many factors, and a key one is having a strong and sensible regulatory framework.

We knew that before the global financial crisis, but the crisis certainly drove that lesson home. The absence of regulation allowed the build-up of excessive risk in the over-the-counter swaps market. That risk intensified the crisis and the damage it caused. We must never forget the true costs of the crisis: millions of jobs lost, homes foreclosed and dreams shattered.

As a result of the financial crisis our country took action to address those risks. We are implementing a new regulatory framework for swaps, one that mandates central clearing and brings greater transparency, reporting and oversight. The CFTC’s responsibility today is to regulate the derivatives markets in a manner that not only prevents the build-up of excessive risk, but also creates a foundation on which the derivatives markets can continue to thrive and work for the many businesses that rely on them.

So today I would like first to review briefly some of the things we have done recently, and some of the things we will be doing in the months ahead. And then I want to discuss a key aspect of that new framework, which is the role of clearinghouses. In particular, I want to discuss the issue of clearinghouse resiliency, because this is an issue that has been a priority for us and has received increased public attention lately.

Current Priorities

We have been very busy since two of my fellow commissioners and I took office last summer. Our agenda today reflects several priorities.

First, the agency has largely finished an intensive rule-writing phase to create the new regulatory framework for swaps. We are now focused on implementation of that framework. One of our priorities has therefore been to focus on fine-tuning our rules, in particular to make sure that the commercial businesses, consistent with the Congressional mandate, that depend on these markets to hedge risk can continue to use the markets effectively. We have made a number of changes to address concerns of commercial end-users. This has included amending our rules to enable publicly-owned utilities to continue to be able to hedge their risks effectively in the energy swaps market. We have proposed revisions regarding the posting of residual interest which is related to the posting of collateral with clearing members. We have proposed exemptions for commercial end-users from certain recordkeeping requirements and clarifications to give the market greater certainty with regard to the treatment of contracts with embedded volumetric optionality.

In addition, the Commission staff has taken action to make sure that end-users can use the Congressional exemption regarding clearing and swap trading, including when they enter into swaps through a treasury affiliate. The staff also recently granted relief from the real-time reporting requirements for certain less liquid, long-dated swap contracts, recognizing that immediate reporting can sometimes undermine a company’s ability to hedge.

We have also extended relief with respect to the treatment of package trades on swap execution facilities to avoid unnecessary disruptions in the marketplace. There may be additional measures, such as today we are looking at trade option reporting rules and the rules on trading of swaps on swap execution facilities.

Finishing the Dodd Frank Rules. We are also working to finish the few remaining rules mandated by Congress, including our proposed rule on margin for uncleared swaps. This rule plays a key role in the new regulatory framework, because uncleared transactions will always be an important part of the market. Certain products will not be suitable for central clearing because of their lack of sufficient liquidity or other risk characteristics. In these cases, margin will continue to be a significant tool to mitigate the risk of default from those transactions and, therefore, the potential risk to the financial system as a whole.

We are currently working with the bank regulators to finalize these proposed rules. These rules exempt commercial end-users from the margin requirements, consistent with Congressional intent. I am hopeful that we can finalize these rules by the summer.

We are also working on the rules on position limits and capital for swap dealers.

Cross-Border Harmonization. We are also focused on addressing cross border issues related to the new framework. We have had productive discussions with the Europeans to facilitate their recognition of U.S. based clearinghouses, and I would hope that we could reach agreement soon. Another important area for cross-border harmonization is the proposed rule I just mentioned, concerning margin for uncleared swaps. We have been working with our counterparts in Europe and Japan, and I am hopeful that our respective final rules will be substantially similar, even though they are not likely to be identical.

Data. We have also made enhancing our ability to use market data effectively a key priority. We continue to focus on data harmonization, including by helping to lead the international work in this area. We are also looking at clarifications to our own rules to improve data collection and usage. We have a lot of work to do in the area of data generally, but we have come a long way since 2008, when we knew very little about the swaps market. Today, there is real time price and volume information and we have much better insight into participant activity.

New Challenges and Risks. We are also looking at new challenges and risks in our markets. We have been very focused on the increased use of automated trading strategies, for example, and their impact on the derivatives markets. We issued a concept release last year and we received a lot of very useful input. We are also keenly focused on cybersecurity, which is perhaps the single most important new risk to market integrity and financial stability. We have incorporated cyber concerns into our core principles and made it a priority in our examinations. Our challenge is to leverage our limited resources as effectively as possible. Many major financial institutions are spending far more on cybersecurity than our entire budget. We do not have, for example, the resources to do independent testing. So one of the things we are looking at is whether the private companies that run the core infrastructure under our jurisdiction – the major exchanges and clearinghouses for example – are doing adequate testing themselves of their cyber protections. We are holding a public staff roundtable to discuss this issue next week.

Enforcement and Compliance. We also remain committed to a robust surveillance and enforcement program to prevent fraud and manipulation. We have held some of the world’s largest banks accountable for attempting to manipulate key benchmarks. We have brought successful cases against those who would attempt to manipulate our markets through sophisticated spoofing strategies. And we have also stopped crooks trying to defraud seniors through precious metal scams and Ponzi schemes. In all these efforts, our goal is to make sure that the markets we oversee operate with fairness for all participants regardless of their size or sophistication.

Ensuring the Strength and Stability of Clearinghouses in the New Regulatory Framework

Let me turn now to discuss clearinghouses. In just about every speech I have given since taking office, I have talked about our progress in implementing the mandate to clear standardized swaps. In our markets, the percentage of swaps cleared has increased from 15% in December 2007 to about 75% today. At the same time, I have talked about the importance of clearinghouse stability and oversight. As we make clearinghouses even more important in the global financial system, we must pay attention to the risks that they can pose.

Lately, there has been increased discussion of this, with many views put forward in papers and speeches, on issues like clearinghouse resiliency, recovery, and resolution. Questions are being asked in particular about the adequacy of recovery plans, about whether clearinghouses have enough capital or “skin in the game,” and whether the potential liability of clearing members is properly sized or capped. This is a good and healthy debate. Today, I would like to discuss how we at the CFTC think about some of these issues. Let me do so by first talking about the work that has taken place in this area, both by us and internationally, then discuss the need to look at issues in context, and then discuss the work that lies ahead.

First, a great deal of work has already taken place to consider these issues, here and internationally. The CFTC has had a regulatory framework in place to oversee clearinghouses since well before the passage of Dodd-Frank. Dodd-Frank amended the agency’s core principles for clearinghouses, with the goal of reducing risk, increasing transparency, and promoting market integrity within the financial system. In 2011, the agency adopted detailed regulations to implement the revised core principles. These regulations provide a regulatory framework designed to strengthen the risk management practices of DCOs, promote financial integrity for swaps and futures markets, and enhance legal certainty for DCOs, clearing members, and market participants.

In 2013, we also supplemented these regulations by adopting additional requirements for systemically important clearinghouses. Thus, our clearinghouse regulations are now consistent with the Principles for Financial Market Infrastructures, or PFMIs, published in 2012 by CPMI-IOSCO.

The work of CPMI-IOSCO with respect to clearinghouses has been an important international effort, and the CFTC has played an active role. The PFMIs set comprehensive principles and key considerations for the design and operation of financial market infrastructures, including clearinghouses, to enhance their safety and efficiency, to limit systemic risk, and to foster transparency and financial stability. This same group also published a Disclosure Framework and Assessment Methodology and last month published quantitative disclosure standards, to further increase transparency of clearinghouses.

The Basel Committee on Banking Supervision has provided strong incentives for clearinghouses to meet these standards, because bank exposures to such “qualifying CCPs” are subject to capital treatment that is significantly more favorable than that afforded to exposures to clearinghouses that do not meet these standards. CPMI-IOSCO has also undertaken a rigorous process to assess the completeness of the regulatory framework in several jurisdictions. The Financial Stability Board has also contributed through the publication of the Key Attributes of Effective Resolution Regimes, which includes an annex on financial market infrastructures.

Writing standards that clearinghouses must follow, however, is of course not enough. That is why the CFTC also engages in extensive oversight activities. Our program includes daily risk surveillance, analysis of margin models, stress testing, back testing, and in-depth compliance examinations. We engage in ongoing review of clearinghouse rules and practices, and we review what products should be mandated for clearing. We require a variety of periodic reporting including some on a daily basis as well as event-specific reporting.

In addition to supervision of clearinghouses, we look at risk at the clearing member and large trader levels. We conduct daily stress tests to identify traders who pose risks to clearing members and clearing members who pose risks to clearinghouses. We require clearinghouses to oversee the risk management policies and practices of their members. We require FCMs, whether clearing members or not, to meet risk management and minimum capital standards. And we have a rigorous compliance examination process.

There is also public transparency on these matters. You can go to our website and see each FCM’s net capital requirement and the amounts of adjusted capital and customer segregated assets they hold.

This oversight and reporting framework is intended to enable us to take proactive measures to promote the financial integrity of the clearing process.

So as we engage in this public discussion about clearinghouse risk, we should always remember to look at the full picture – that is, to look at all the regulatory policies, the clearinghouse practices, the oversight, and the sum of activities that contribute to rigorous risk mitigation. We should not focus on one particular issue without considering how it connects to other issues.

An example of the importance of looking at the full picture is when we consider issues pertaining to risk mitigation through the collection of initial margin. Although there are many aspects to consider, there has been some focus on one issue in particular, which is the liquidation period – that is, whether a clearinghouse should assume a 1 day, 2 day, 5 day, or other minimum time horizon for its ability to liquidate a particular product. This is an important issue. Indeed, our regulations require that the time period must be appropriate based on the characteristics of a particular product or portfolio. But the minimum liquidation period is only one of the many issues that affect how much initial margin is posted with the clearinghouse.

The amount of margin a clearinghouse holds will also depend on whether clearing members post margin on a gross or net basis. “Net” means a clearing member can net customers’ positions to the extent they offset one another, which reduces the amount of margin that must be sent to the clearinghouse for the overall portfolio. By contrast, “gross” posting means the clearing member must post for each customer, without any offsets across customers, which means the clearinghouse receives more – in many cases, much more – collateral than under net posting.

A further difference in regulatory regimes is whether the clearing member is even obligated to collect a minimum amount of margin from each customer, sufficient to cover that customer’s position, or whether the clearing member can negotiate different deals with different customers. Our rules, for example, require that the clearinghouse must require each clearing member to collect from each customer, more than 100% of the clearinghouse’s initial margin requirements with respect to each product and swap portfolio.

Another example of the importance of context is with regard to the issue of whether clearinghouses have enough capital or “skin in the game.” There has obviously been a lot of public and regulatory attention in the last few years on how much capital banks should hold. When it comes to clearinghouses, it’s important to remember that there are significant differences between the business models of clearinghouses and banks, and therefore, in the role that capital plays. A banking institution needs capital to offset losses that may arise frequently. Those losses can be as varied as the many lines of businesses in which a bank engages.

By contrast, when people talk about a clearinghouse drawing on its capital, they are usually talking about a very unusual event: there has been a default of a clearing member, and the resources of the defaulter held by the clearinghouse – both initial margin and default fund contribution – are not enough to cover the loss. The clearinghouse has sought to transfer the defaulting member’s positions to one or more other clearing members, and the success of that auction has affected the size of the loss. The clearinghouse is now looking at covering that loss through the waterfall of resources available to it for recovery – that is, the clearinghouse’s capital, the other clearing members’ prefunded contributions to the default fund, and potential assessments on clearing members.

This would be a very serious event. Historically, however, the use of other clearing members’ resources to meet a default is exceedingly rare worldwide. To my knowledge, it has never happened here in the United States.

That does not mean we should not think about it or plan for it. Post financial crisis, we are and should be doing many things to increase the resiliency of our financial system in the event of unusual situations. The issue of capital needs to be considered in the context of a clearinghouse’s overall financial resources. That is, what are the resources to deal with a loss if initial margin is not adequate? Under CFTC requirements, each of our systemically important clearinghouses must maintain sufficient financial resources to meets its financial obligations to its clearing members notwithstanding the default by the two clearing members creating the largest combined loss to the clearinghouse in extreme but plausible market conditions – the standard known as “Cover 2.” These requirements are consistent with the PFMIs.

To meet these requirements, a clearinghouse may use initial margin payments, its own capital dedicated to this purpose, and default fund contributions. The allocation or the balance between these financial resources may vary, such that the more margin paid up front, the less default fund contributions the clearinghouse will collect and vice versa.

I should note that a clearinghouse faces risks outside of a default by a member, and we are looking at those as well. These can include operational or technological issues, such as the cybersecurity concerns I noted earlier. And we separately require clearinghouses to have capital, or other resources acceptable to us, to cover operating costs for one year. This capital is not fungible with the Cover 2 resources.

We are currently considering the issues pertaining to the resources available to deal with a default in the context of reviewing clearinghouse recovery plans. We are trying to make sure that these plans are “viable” – that is, that they are designed to maximize the probability of a successful clearinghouse recovery, while mitigating the risk that recovery actions could result in contagion to other parts of the financial system. And we will be holding a public staff roundtable on these issues next week – unless Washington gets another snowstorm. The agenda will include discussion of what tools a clearinghouse may use in these situations.

Let me suggest a few questions that may be useful to think about in considering clearinghouse capital in this context: first, is capital primarily about alignment of incentives – that is, alignment of incentives between the clearinghouse and its clearing members – rather than the quantitative increase to the waterfall? In an era when the equity of clearinghouses is held by persons other than the clearing members, this may be particularly important. As the CPMI-IOSCO Recovery Report notes, “[e]xposing owners to losses … provides appropriate incentives for them to ensure that the [clearinghouse] is properly risk-managed.”

Second, when we think about capital in the context of recovery plans, should we also think about issues of governance and process? That is, whose interests should be taken into account when a clearinghouse designs its recovery plan and when a clearinghouse faces a default? If the waterfall of resources is not sufficient to cover a default, then how does the clearinghouse decide what happens next, and who should participate in or have input into that decision? How do we ensure there is adequate time for that decision-making process to take place?

In outlining the things the CFTC has done and is doing, as well as the international work that has taken place, let me note a couple of caveats. While I believe the agency has developed very good policies and practices, there is more we should be doing, particularly with respect to the frequency of examinations. Unfortunately, we are limited by our resources. In addition, to state the obvious, no matter how good the regulatory framework, no regulator can ever guarantee that there won’t be problems.

Finally, I want to underscore that this work is ongoing, and there are many aspects of these issues that I have not touched on today given time limitations. We will be continuing to look at the full range of issues pertaining to clearinghouse risk, resiliency, recovery, and resolution. We will also be participating in further international work on these issues. I note that CPMI-IOSCO will be continuing to look at stress testing – are clearinghouse stress testing programs adequate and should we develop standards, for example – and they will also be looking at recovery issues, and we will be helping to lead that process. I also expect the FSB’s Resolution Steering Group to look further at the resolution issues, and we will work with our colleagues on that as well. While no one wants to get to resolution, it is important that we explore how this would be done as well, without a government bailout and without creating contagion. This is very useful, and it reflects the very good international dialogue that has taken place already in this area. In addition, this work can help us balance the multiple regulatory objectives that come into play in considering these issues, so that regulators with different responsibilities do not work at cross purposes.

As we engage in this work, and as the public discussion about clearinghouse resilience continues, I would just encourage all of us to keep in mind the full picture. We should always take a comprehensive approach to these issues, one that is based on a clear understanding of risk, that enhances transparency and market integrity, and that is backed up by rigorous, ongoing oversight. Effective risk mitigation and resiliency require a broad range of policies and procedures.

Central clearing is fundamental to the health and vibrancy of our markets. We must make sure that clearing firms, as well as clearinghouses, can continue to operate successfully. It is only in this way that the businesses which depend on these markets can continue to use them effectively.

Conclusion

That brings me back to where I started, which is the importance of these markets to the many businesses that rely on them, and to our economy generally. All of you who participate in these markets understand that. And that is what guides us at the Commission. I know I speak for all the Commissioners in saying it is a privilege for us to work on these issues of importance to these markets and our economy. I look forward to working with you to make sure these markets continue to thrive in the years ahead.

Thank you for inviting me.

Last Updated: March 11, 2015

CFTC CHAIRMAN MASSAD SPEAKS AT MONETARY AUTHORITY OF SINGAPORE ON REGULATION

Keynote Address by Chairman Timothy G. Massad before the Monetary Authority of Singapore

The Future of Financial Market Regulation

January 23, 2015

As Prepared For Delivery

Introduction

Good morning. I want to thank Lucien for that kind introduction. I also want to thank Ravi Menon and the MAS and the Singapore Academy of Law for inviting me and for organizing this excellent conference. It is a privilege and a pleasure to be here. I am also very pleased to be here with Masa Kono, with whom I spent some time in Tokyo earlier this week, and I look forward to our panel shortly with Ong Chong Tee.

While this is my first trip here as Chairman of the CFTC, I am no stranger to Singapore. I spent five years living in Hong Kong and working in the region as a lawyer in private practice.

It’s great to have the opportunity to visit Asia again. I began my trip in Beijing and was also in Hong Kong earlier this week.

My five years in Asia were some of the best years in my life. The work was interesting, and getting to know the various countries and cultures in Asia was fascinating. I met my wife here—though she happens to be from St. Paul, Minnesota. She is a fluent Mandarin speaker who spent many years in Beijing and Taipei. She fell in love with the language and wanted to have a legal career that revolved around Asia. I, on the other hand, was a complete novice to the region. I fell in love both with her and with Asia.

I have many fond memories of my time in Asia, including many fond memories of Singapore. During those years, I came here many times, and made many good friends. As I learned more about your history, my respect and admiration grew. In 200 days you will celebrate the 50^th anniversary of your independence. What you have built and accomplished over the last fifty years is simply staggering. Lee Kuan Yue said, “Some countries are born independent. Some achieve independence. Singapore had independence thrust upon it.” You certainly seized the mantle once it was thrust upon you. The relationship between our countries has also become very important over those years, another reason why I am pleased to be here today.

I want to talk today about where we are in the process of global financial regulatory reform. I want to talk about Singapore’s role in that effort and why that effort is important to the prospects for growth here and throughout Asia. But I want to first say a few more words about my path to standing in front of you today, and how it shapes my perspective on these issues.

My Experience in Asia

During my time in Asia, I had the privilege to work with the MAS, Temasek, and many fine corporate leaders, bankers, and lawyers here on a variety of transactions. I had the honor of being the United States counsel for the initial public offering of SGX, and the merger of the cash equities and derivatives exchanges. I had done a lot of public offering and securities work throughout my career. And my derivatives work began as a young lawyer, when I represented the International Swaps and Derivatives Association (or ISDA), and helped lay the groundwork for the modern financial derivatives industry. I was one of a handful of lawyers who worked for over a year to draft the first master agreements for swaps; before that, swaps were documented on 50 page agreements.

The SGX offering was a landmark transaction for Singapore. It was a pleasure to work with Joe Pillay, who was then chairman, the MAS, Lucien Wong, and many others on this important transaction.

But my stay in Asia began at a difficult time. It was in June of 1997 that I agreed with my firm that I would move to Hong Kong. It was right before the handover by the British. Things were booming in Hong Kong, China, and throughout Southeast Asia at the time. There was lots of work for bankers and lawyers.

But a few weeks after I agreed to move, the Thai baht collapsed. By the time I arrived in January 1998, the baht had lost over 50% of its value, and the crisis had spread throughout Southeast Asia. Singapore suffered, though not nearly as badly as others. I know you all remember this period well.

I spent much of the first year or so I was in Asia on transactions involving sales of distressed debt by Thailand and Korea.

I recount all this because, while it’s hard to predict or plan out your career or your life, when you look back, you can often see how one experience led to another, and how those experiences shape your views.

When I was working on distressed debt sales by the governments of Thailand and Korea during the Asian financial crisis, I never would have guessed that ten years later I would oversee the Troubled Asset Relief Program, the key U.S. response to the 2008 global financial crisis.

When I was helping to standardize the swaps market through the writing of the first master agreements in the late 1980s, I never would have guessed that twenty five years later I would have the responsibility to lead the efforts of the United States to bring much greater transparency and cross-border harmonization to the swaps market.

And similarly, when I was meeting just down the road at the offices of SGX to prepare them for an initial public offering, I never would have guessed that, fifteen years later, I would be back here to meet with SGX as chairman of the CFTC.

But I have drawn on these experiences in this job and at Treasury, when I was helping the United States recover from the worst financial crisis we have experienced since the Great Depression.

Learning from the Past Crises

Looking back not only reminds us of how we got here; the perspective can inform our way forward. That is true for nations as well as individuals. It is particularly relevant when we think about the next steps in financial regulatory reform.

Looking back teaches us more than a little humility. When the Asian financial crisis occurred, many in the West were quick to point out why the West would not catch what was sometimes referred to as the “Asian flu.” Some people said our markets and financial regulatory system were more mature, more transparent, and better supervised. They said that all of those things made us more resilient to shocks. Well, not resilient enough. Those things didn’t mean we wouldn’t have our own crisis. They didn’t inoculate us from the dangers that can occur when risks are not properly understood, when authorities believe markets are fully self-policing.

By the same token, recall some of the things that were said after Asia had recovered from its crisis, and in the years before the financial crisis, about “decoupling”. People began to suggest that the Asian economies had “decoupled” from the economies of the West. No longer were they dependent on what happened in the West. Slow growth or even more serious problems in the West would not affect the dynamic growth in Asia.

Well, that didn’t prove true either. The Asian economies did not escape the collateral damage of the 2008 financial crisis. And that should not surprise us, given the severity of the shocks. In the United States, we lost eight million jobs and millions lost their homes in foreclosure. Our economy was in free-fall. And with markets so interconnected, the shock waves reverberated worldwide.

Looking back on these crises is helpful as we think about the way forward when it comes to financial regulatory reform today.

The Asian financial crisis and the global financial crisis illustrate the speed with which capital can move, and the speed with which markets can fall, when problems hit. And these crises remind us that the economies of the United States and Asia are strongly intertwined. What we do affects you. What happens here affects us. We are all in this together.

The Importance of Asia’s Role in Financial Regulatory Reform

Simply put, that is why I am here. I am here because Singapore and other countries in Asia are critically important in building a new global regulatory framework for derivatives. Our effort to build that framework can only fully succeed if we act together.

Building this new regulatory framework is important for Asia because well-developed derivatives markets can propel growth in the real economy.

The Asian derivatives markets are growing rapidly. Today the Asian derivatives markets represent nearly a third of global futures and options volume measured by number of contracts, and continued growth is to be expected. China is liberalizing its markets, which will bring further opportunity. The commencement of the HK – Shanghai Stock Connect is very important, as are their plans to introduce an oil futures contract that would be open to foreign participation. And I know you have had success in growing the Singapore market, a subject to which I will return in a moment.

Let me turn then to discuss where we are in the process of building the global regulatory framework with respect to derivatives, and the importance of your role in that process.

In 2008, we learned how over-the-counter swaps could accelerate and intensify the financial crisis. Of course, in normal times, the derivatives markets provide significant benefits to our economies. They enable airlines to hedge the costs of fuel, manufacturers to hedge the price of industrial metals, exporters to manage fluctuations in foreign currencies, and businesses of all types to lock in borrowing costs.

But in 2008, swaps worsened the crisis. The swaps market had grown to be a massive, global market that was unregulated. Participants had taken on risk that they didn’t always fully understand, and that was opaque to regulators. The interconnectedness of large institutions meant that trouble at one firm could easily cascade through the system.

In response, the leaders of the G-20 nations agreed to bring the swaps market out of the shadows and achieve greater transparency. They agreed to implement four fundamental reforms: require central clearing of standardized swaps through regulated clearinghouses; require regular reporting so that regulators and the public can have a view of what is happening in the market; require oversight of the largest market participants; and require transparent trading of swaps on regulated platforms.

Let’s pause just to reflect on the fact that the nations comprising the G-20 agreed on how to reform the swap market. That illustrates how far we have come. At the time of the Asian financial crisis, there was no G-20, nor was there a Financial Stability Board. There was no simple way to agree to global reforms.

A G-20 communique only goes so far, however. The task of actually writing laws and developing rules remains with individual nation states.

What makes this reform effort unique and especially challenging is that we must regulate what is already a global market, but we can only do so through the actions of individual countries, each of which has its own legal traditions, regulatory philosophies, political processes, and market concerns. That can lead to differences.

Now in most areas of financial regulation, the fact that there are differences between national laws wouldn’t be news. Consider the laws that govern how corporations sell securities, which vary significantly among jurisdictions. When we did the SGX offering, for example, it was structured legally as a public offering in Singapore, but that did not entitle us to sell securities publicly in other countries. Whether we could sell, and how, depended on the laws in those jurisdictions. The fact is the U.S. and many other countries established their securities laws long before there was a global securities market, and we are not trying to make all those laws the same.

But the swaps industry grew to be a global market before there was any regulation. So today, many participants expect harmonization. They expect it in timing of implementation as well as in the substance of the reforms. Indeed, they are critical that we haven’t achieved it yet.

I would say that those who are critical are looking at the glass as half empty; I see it as half full.

The fact is the G-20 nations have agreed on necessary reforms and are moving in the same direction. We have made great progress, and we will continue to do so, but it will take time.

Another challenge in regulating this global swaps market is the fact that a country’s financial stability can be threatened by offshore swaps activity. In the U.S., we experienced this first-hand with AIG, which nearly failed because it took on excessive swap risk through operations located in London. The failure of AIG, at that time, in those circumstances, could have triggered another Great Depression. As a result, U.S. taxpayers were required to commit $182 billion to prevent this one company’s collapse. I spent a significant part of my time at Treasury working to recover those monies on behalf of American taxpayers, and so I am very aware of the need to address cross-border risk.

But we also know that there are limits to the reach of any one country’s laws. We recognize the importance of harmonizing our rules with those of other nations where possible. And, at the CFTC, I have made it a priority to work with my international counterparts on these issues.

I am pleased that Singapore and other countries in Asia have taken many steps to implement these reforms. I think that’s good for you, and for us.

I talked earlier about the growth generally of the Asian derivatives markets and the prospects for future growth. Let me say a few more words about growth here in Singapore. What you have done to date is quite impressive. You have developed a wide range of products since the time I was here for the IPO. Your success with equity derivatives is particularly notable, including those based on China’s and Japan’s markets. The Wall Street Journal ran a feature story on derivatives innovation at SGX last month. And more generally, you have built a very successful financial services industry, and no doubt you are looking at the best ways to continue to grow your financial markets and the industry generally in the future.

Part of the answer is surely a sound regulatory framework. History demonstrates that markets are strongest when they are built on a firm foundation of transparency and sensible oversight. Consider how successful was the framework for securities regulation that the U.S. implemented in response to securities scandals in the Great Depression. And you have focused on creating a strong regulatory structure to date.

The goal of the reforms we are adopting today should be to create a framework in which the derivatives markets can continue to thrive and develop, here, and throughout Asia, and throughout the world.

The framework must bring transparency, integrity, and oversight, but, at the same time, provide predictability to market participants, and encourage innovation and competition.

So let me turn to discuss where we are on the four key areas of reform—clearing and clearinghouse regulation, market data, oversight of market participants and trading.

Clearing and Clearinghouse Oversight

Clearing is perhaps the most important reform in terms of reducing systemic risk. But we must remember that central clearing does not eliminate risk.

We are making substantial progress in requiring clearing of standardized swaps. The percentage of transactions that are centrally cleared in the markets we oversee has gone from 15% in December 2007 to about 75% today. Globally, the FSB reports that the percentage is close to half, again up substantially over the last few years. Some countries in Asia have implemented mandates, such as Japan, which did so in 2013, thanks in part to Masa’s leadership. Other countries are still working on theirs.

But now that we are requiring more clearing, we must make clearinghouse supervision a top priority. We must make sure that clearinghouses themselves do not pose risk to the stability of the financial system.

Doing so requires regulators from different countries to work together effectively. The fact is that a small number of clearinghouses are becoming increasingly important single points of risk in the global financial system. Their importance transcends national borders. Their importance transcends swaps—they handle clearing for many products.

And here, I want to congratulate the MAS and SGX for implementing and adhering to high standards. In December 2013, SGX became the first Asian clearinghouse registered with the U.S., which means it can clear swaps for U.S. participants. And just last week, I understand Mizuho Securities became the first clearing member on SGX registered with us.

Our dual registration system came about originally because we took a very non-territorial view as to where clearing must occur. The U.S. did not mandate that clearing of futures traded on U.S. exchanges must take place in the U.S.; we simply required that it take place through clearinghouses that are registered with us and that meet certain standards.

This dual registration system has been the foundation on which the swaps market grew to be a global market. The clearinghouse LCH, which now handles 85% of swaps clearing, is based in Europe, and has been registered with us since 2001.

Today, we are also continuing to work with Europe on harmonizing our rules with theirs as much as possible with respect to clearinghouse supervision. And we are working out cooperative supervision arrangements with them.

We do not take the view that every clearinghouse in the world must register with us. The CFTC previously granted temporary relief from registration to several clearinghouses where the clearing for U.S. persons is limited to clearing members and their affiliates. We did this for clearinghouses in Hong Kong, South Korea, India, and Australia. We are currently working with those four clearinghouses on permanent exemptions, and we hope to have those in place later this year. They can also apply to register with us should they wish at a later date to engage in clearing for U.S. customers.

I believe cooperation among regulators with respect to clearinghouse supervision will be increasingly critical given the increasing importance that major clearinghouses play in the global financial system. I expect that there will be significant dialogue among regulators about clearinghouse standards and strength. Margining standards will be a critical piece of this discussion. So will stress testing. We will need to make sure that the financial, managerial, and operational resources of major clearinghouses are adequate, and in particular that liquidity is adequate. We will need to focus on clearinghouse recovery and resolution. And we will also be very focused on cybersecurity, which is perhaps the most important single risk to global financial stability today.

Market Data

The second area of reform is the collection and analysis of data. The establishment of swap data repositories in the U.S., and trade repositories abroad, is bringing unprecedented transparency to the swaps market.

Data enables regulatory authorities to engage in meaningful oversight. Robust surveillance and enforcement, so critical to maintaining market integrity, depends on the availability of accurate market data. And increased transparency helps market participants by increasing competition, facilitating the price discovery process, and enhancing confidence in the integrity of the market. It also enables participants and regulatory authorities to understand systemic risk exposures.

We have come a long way from 2008, when we knew very little about the exposures in this market. Today we have real-time information on prices and volumes of traded swaps, and we are in a much better position to monitor risk. But we have a considerable amount of work still to do to collect and use derivatives market data effectively. We must harmonize data reporting standards and make sure that market participants fulfill their obligations to provide accurate and timely reports. There are four data repositories in the U.S. and more than 20 others internationally, plus thousands of participants who must report data. This is a challenging task that will take time.

Important work is going on today. We and the European Central Bank currently co-chair a global task force that is seeking to standardize data standards internationally. While much of this work is highly technical, it is vitally important to international cooperation and transparency. Japan, Singapore, and Hong Kong are all participating in that process, but I encourage you to become even more active in helping to lead this effort. We need your involvement.

Oversight of Market Participants

Let me turn to a third reform area agreed to by the G-20, which is oversight of major market players. I want to focus on two aspects in particular. The first is margin requirements for uncleared swaps. And I want to focus on this for two reasons—one is its importance, and the second is what it says about international harmonization. This rule is important because uncleared, bilateral swap transactions will continue to be a large part of the derivatives market. And setting margin requirements for the largest players in this market will be a significant tool to mitigate risk to the financial system as a whole.

This is also an opportunity to make the rules in the U.S., Asia, and Europe substantially similar from the outset. The CFTC recently proposed margin rules for uncleared swaps, which are similar to those being developed in Japan and Europe. Collectively, the rules reflect a set of standards agreed to by a broader international consensus. There are some differences, and I hope that we can minimize those in the months ahead. I also hope similar reforms will be adopted by Singapore.

Another important area is risk mitigation standards, such as confirmation, documentation, portfolio reconciliation, compression, and valuation. These risk mitigation techniques are essential for addressing operational and other risks faced by market participants, and are based on industry best practices that were developed over many years. I congratulate Singapore for having co-chaired an international committee in this area. That committee is producing international standards, and the U.S. has implemented rules consistent with those standards.

Trading

Finally, let me say a word about swaps trading as well as futures trading. The CFTC has implemented a trading mandate for swaps as well as rules for swap execution facilities. Today we are looking at ways to fine tune those rules, so that we enhance transparency and market integrity, but also allow market participants the freedom to innovate and compete as much as possible. It is challenging to be the first mover with swaps trading in a market that has been global, unregulated and highly mobile. So we look forward to other jurisdictions implementing their trading mandates. My impression is there is still some work to be done in most Asian countries on this issue. As you consider this, we are open to your ideas and happy to work with you.

I also want to talk about trading of futures. We generally do not regulate the trading of futures on offshore exchanges. U.S. citizens are free to trade futures on exchanges located in other countries. However, we have in the past required foreign exchanges to apply for relief from our registration requirements if they wish to provide direct electronic access to U.S. citizens. We have now formalized that process so that foreign exchanges, which we refer to as foreign boards of trade or FBOTs, can be officially registered with us.

Today I am pleased to announce that we have approved the foreign board of trade registration application for the SGX derivatives exchange. I congratulate you and look forward to working with you.

I would also like to announce that we have approved the application for Bursa Malaysia, and two days ago, while in Tokyo, I announced we approved the application for the Tokyo Commodities Exchange (or TOCOM). These approvals recognize the increasing interconnectedness of the global derivatives markets and the importance of Asia in that development. The approvals also demonstrate our commitment to a coordinated regulatory approach that relies on foreign supervisory authorities and ongoing cooperation. I am delighted that these exchanges have this status, and we look forward to continuing to work with them as well as any other Asian exchanges that intend to register.

Conclusion

Let me conclude with this: markets thrive where there is confidence and integrity. You saw how quickly markets lost confidence when the Asian financial crisis hit. And we all saw how quickly that happened in 2008.

Market confidence requires transparency, which in turn requires good regulation. Since 2008, the global community has made significant progress implementing reform. We are all stronger and more resilient as a result.

But there is much more to do, and it requires action by all of us—the U.S., Asia, and Europe.

We in the U.S. stand ready to work with you to implement the G-20 commitments. We look forward to creating a foundation that will enable all of our markets to thrive, and economies to grow into the future.

Thank you again for inviting me today.

Last Updated: January 22, 2015