CFTC CHAIRMAN MASSAD MAKES REMARKS TO ASIAN FINANCIAL FORUM, HONG KONG

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Remarks of Chairman Timothy G. Massad before the Asian Financial Forum, Hong Kong

January 19, 2015

As Prepared For Delivery

Introduction

Good morning. I want to thank the Asian Financial Forum for inviting me. It is a pleasure to be here. I am especially pleased to be here on a panel with Chairman Xiao, Chairman Maijoor, and Secretary Purisima. Since I took office in June of last year, working with my international counterparts has been a priority. I look forward to our discussion shortly with Professor Chan.

It is great to be back in Hong Kong. I spent five years living here when I was a lawyer in private practice – some of the best years in my life. I made many good friends, and met my wife here – though she happens to be from St. Paul, Minnesota.

It was a pleasure to begin my trip in Beijing last week, where I met with Chairman Xiao and others. And I will be going on from here to Tokyo and Singapore.

You have asked us to discuss the prospects for sustainable growth in Asia in a world of change, particularly a world of changing financial sector regulations. I am very involved in changing financial sector regulations. I chair the Commodity Futures Trading Commission, which is the United States agency responsible for overseeing the futures, options, and swaps markets. And in that capacity, it is my responsibility to lead the U.S. effort to implement the commitments of the G-20 nations to reform the over-the-counter swaps market.

Let me first say a word about the relationship of the derivatives markets to growth. Many people probably hadn’t heard the word derivatives until the financial crisis, and today they may associate that word with bad behavior by big banks. But these markets, when working properly, are very beneficial to the real economy. When designed to help commercial users, they create substantial, if largely unseen, benefits for all of us. They enable utility companies or airlines to hedge the costs of fuel. They help manufacturers control the costs of industrial metals like copper. They enable farmers to lock in a price for their crops. They enable exporters to manage fluctuations in foreign currencies. And businesses of all types can lock in their borrowing costs. In the simplest terms, derivatives enable businesses to manage risk.

The Asian economies have grown to the point where well-developed derivatives markets can provide great value. To achieve that, there must be a regulatory foundation that enables markets to thrive and that attracts participants. That is, a framework that provides transparency and sensible oversight while also promoting competition and innovation. And because the economies of Asia, the United States, and Europe are increasingly interconnected, we must work together to build a global regulatory framework that achieves those ends.

Our lives shape our views, so let me tell you a little about how mine has.

I agreed to move to Hong Kong in 1997 right before the handover. Things were booming here and throughout Asia at the time. But by the time I arrived in January 1998, the Thai baht had collapsed, and the financial crisis had spread throughout Southeast Asia. I spent much of the first year or so I was in Asia on transactions involving sales of distressed debt by Thailand and Korea.

Now, at that time, I never would have guessed that many years later I would work on distressed debt sales, or troubled assets as we called them, for my own country. But a decade later, I joined the U.S. Treasury Department to help the United States recover from the worst financial crisis we have experienced since the Great Depression. I oversaw the Troubled Asset Relief Program, the key U.S. response to the 2008 global financial crisis.

Today, I look back on both the Asian financial crisis and the 2008 global financial crisis as I think about the challenges we face and the relationship of sustainable growth to regulatory change.

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, or when authorities believe markets are fully self-policing

By the same token, after Asia had rebounded from its crisis, some 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. With markets so interconnected, the shock waves reverberated worldwide.

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

And that is why I am in Asia this week. I believe that we must continue to work together to build a global regulatory framework that helps our financial markets thrive. And that is especially true when it comes to the derivatives markets.

The Asian derivatives markets are growing. They represent nearly a third of global futures and options volume.

There are exciting developments taking place that may portend further growth and, in particular, greater sophistication and innovation in your markets. One is the launch of a crude oil contract on the Shanghai Exchange that is open to foreign participation. Another is what is happening in the equities market with Stock Connect.

I know many here are focused on making sure the derivatives markets serve the real economy. I share that objective, and I had a good discussion about this with Chairman Xiao last week. And I believe a good regulatory foundation is critical for that.

One way a good regulatory foundation can do so is by creating transparency. This can encourage innovation, which can lead to the development of a wide range of contracts that enable businesses to hedge different types of risk. For example, in the U.S., there are futures contracts traded on over 40 physical commodities, but there are more than 2000 different listed futures and options contracts on those commodities, though not all are actively traded. These contracts reflect differences in grade or quality of the product, length of term, delivery location, or other factors. This variety is a response to the diverse hedging needs of market participants. And in the over-the-counter market, parties can design contracts that allow for further customization.

But a good regulatory framework is needed so that this innovation does not create excessive risk or other problems. In the U.S., we have had a strong framework for futures for many years. We learned in the 2008 financial crisis that we needed regulation for over-the-counter swaps. We saw how over-the-counter swaps accelerated and intensified 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. And we learned how a country’s financial stability could be threatened by excessive risk that starts outside its borders.

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 some fundamental reforms such as requiring central clearing of standardized swaps.

The fact that the nations comprising the G-20 agreed on how to reform the swap market is, in and of itself, an achievement.

A G-20 communique only goes so far, however. The task of actually implementing those reforms remains with individual nation states, each with its own markets, legal traditions, regulatory philosophies and political processes. That can lead to differences.

Now, the fact is that, in most areas of financial regulation, national laws differ. Consider how securities are sold, for example. When I was working here, and we received approval for listings and initial public offerings on the Hong Kong Stock Exchange, that did not mean we could sell the same stock in a public offering in the United States.

But because the swap market was already global, many participants expect harmonization in regulation from the start. That is a good goal, though it may take time. To me, however, the glass is half full, not half empty. We are making good progress.

I can assure you that we in the United States want to continue to work with Asia to build that framework. We are aware 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.

I believe Asia has much to gain from building this new global regulatory framework. It can create strong and innovative derivatives markets that can help propel growth in the real economy. And that can contribute to sustainable growth.I look forward to working with you to build that framework, and to enhancing sustainable growth for all of us.

Last Updated: January 18, 2015

CFTC CHAIRMAN MASSAD'S STATEMENT BEFORE CFTC AGRICULTURE ADVISORY COMMITTEE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Opening Statement of Chairman Tim Massad before the CFTC Agriculture Advisory Committee Meeting
December 9, 2014

As Prepared for Delivery

Thank you all for coming. I want to welcome you to this meeting of the CFTC’s Agricultural Advisory Committee. This forum is a valuable opportunity to discuss evolving market issues relevant to our work.

Let me begin by thanking the CFTC staff involved in planning this gathering. Thank you to them, and to all of our professional staff, whose hard work on behalf of the American public is extraordinary. Thank you also to Dr. Randy Fortenbery for serving as Committee Chair. He flew all the way from Lewiston, Idaho to get here, and I appreciate his extensive knowledge and ability to keep us running on time. I’d also like to thank our guest, Secretary Vilsack, for being generous with his time. His coming here today demonstrates the importance of the Department and the CFTC working together. We’ll do more of an introduction before he speaks.

Much of what we do here at the CFTC can seem removed from everyday life. Most Americans do not participate directly in the markets we oversee. But as you know, the agency’s origins are in agriculture, an industry that is basic and important to the lives of all American families. Futures on agricultural commodities have been traded in the US since the 19th century and have been regulated at the federal level since the 1920s. Today, agricultural derivatives are now only one piece of the markets we oversee, but they are fundamentally important. The ability of the Ag sector to hedge commercial exposures is critical to having a successful agricultural industry, and to putting food on the table for all of us. The CFTC’s job in overseeing these markets should not only help participants be able to hedge effectively. It should help these markets thrive, and in turn help the agricultural economy thrive. And I know strengthening the ag economy, and fostering investment and new opportunities in the ag economy are important to all of you and to Secretary Vilsack.

Our ability to successfully oversee these markets requires listening to market participants. It is helpful to hear your thoughts on what we are, or should be, doing. And that is why this Advisory Committee is so important. I know travelling to Washington two weeks before the holidays—which is a very busy time—is not always easy. But I know I speak for all the Commissioners in saying that your presence and your participation on this Committee are much appreciated.

I joined the Commission about six months ago, as did Commissioners Bowen and Giancarlo. The three of us have benefitted from Commissioner Wetjen’s experience as we got up to speed. I am pleased that all three of my fellow commissioners are here today.

We have all been listening and learning from market participants like you. In the last six months, we have focused on moving forward important reforms, to promote greater transparency and market integrity. But we’ve also made it a priority to address areas where our rules may not be working as well as they should. Our goal is not to create unnecessary burdens on commercial end users but to build a reliable, orderly framework for oversight in which vibrant markets can thrive.

In the last few months, we have taken a number of steps to that end.

I know some of our recent actions have been especially important to the agricultural industry, such as our proposal on “residual interest,” and our changes to certain recordkeeping requirements. We’ve addressed contracts with volumetric optionality, making sure publicly-owned utilities can access the energy swaps markets, and making sure end users can use their treasury affiliates for swap transactions and still benefit from the Congressional end user exemptions.

Today, we will discuss a few topics important to the agricultural markets that we have decided upon in consultation with you. We’ll first discuss how the current agricultural economy is impacting CFTC-regulated markets and then discuss how to best calculate deliverable supply for commodities, a topic that is critically important to establishing position limits. We also will spend a little time discussing what the agency has been doing lately, and what we should consider having this Agriculture Advisory Committee discuss in the future.

Thank you again for being here and contributing your ideas. I look forward to a productive discussion.

CFTC CHAIRMAN'S STATEMENT ON $1.4 BILLION BANK ENFORCEMENT FINE AND SETTLEMENT

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Statement of Chairman Tim Massad on today’s Forex Enforcement Announcement
November 12, 2014

Washington, DC – U.S. Commodity Futures Trading Commission Chairman made the following statement on today’s enforcement action against five banks for attempting to manipulate the foreign exchange benchmark rate. The five banks settled with the CFTC and agreed to pay a $1.4 billion fine, and they will be required to implement policies and procedures to prevent this misconduct going forward.

“Integrity of the market place is a paramount concern to the CFTC, and today’s enforcement action should be seen as a message to all market participants that wrongdoing and foul play in the financial markets is unacceptable and will not be tolerated,” said Chairman Massad. “I want to especially thank the dedicated and hardworking staff of the CFTC’s Enforcement Division, who spent countless hours in order to uncover this egregious behavior and hold those responsible accountable for it.”

Last Updated: November 12, 2014

CFTC CHAIRMAN MASSAD'S STATEMENT BEFORE GLOBAL MARKETS ADVISORY COMMITTEE OPEN MEETING

FROM:  U.S. COMMODITY FUTURES EXCHANGE COMMISSION  

Opening Statement Chairman Timothy G. Massad before the Global Markets Advisory Committee Open Meeting

October 9, 2014

Thank you, Mark. Commissioner Wetjen and his office, as well as the professional staff have done a tremendous amount of work to support the GMAC and I thank them for that. I also want to thank today’s participants. Your presence and input is very much valued.

Our advisory committees provide a valuable forum for discussion of complex and evolving market issues relevant to our work here at the CFTC. And, it is important for us to listen to a broad variety of viewpoints as we consider these.

The topics of discussion today are both timely and important.

The first session on non-deliverable forwards should be very helpful to us as we consider whether to propose mandatory clearing for NDFs.

As you know, under the law pertaining to swaps clearing, the Commission must consider several factors to determine whether a swap is required to be cleared, which include: whether there is sufficient liquidity to support clearing; whether the necessary rules and infrastructure are in place to support clearing; and what are the effects on the mitigation of systemic risk and on competition.

Now, today’s meeting is not a formal process to consider those factors; but today is an opportunity for us to learn more about the NDF market so that we can consider whether to go forward with a proposed rule. If we decide to propose a rule, there will be an opportunity later for all the public to give their views.

Considering whether to propose a rule for further clearing mandates underscores the importance of working out the cross border issues on clearinghouse regulation and supervision. Europe has not yet recognized our clearinghouses as equivalent. I believe they should because our clearinghouses meet international standards. They believe we should change our regulatory approach to clearinghouses that are located in Europe but are also registered with the U.S. But the existing dual registration regime has worked well for many years. And so I believe this is a situation of, if it ain’t broke, don’t fix it. But we have agreed to look at whether we can further harmonize our rules and regulatory approach. And I am pleased that they have decided to postpone the imposition of higher capital charges on European banks participating in our markets. It was this threat of higher capital charges that was going to fragment the market, not the existence of dual registration, which has existed for years and has actually been the foundation for the growth of the global markets.

Our second topic pertains to bitcoin.  While the development of digital payment systems raises many issues outside our jurisdiction, one area within our responsibility is derivative contracts traded on SEFs or DCMs that are based on bitcoin. Today, we have the opportunity to hear about that.

I think about this area in the following way: Innovation is a vital part of our markets that our regulatory framework is designed to encourage. At the same time, our regulatory framework is intended to prevent manipulation and fraud, and to make sure our markets operate with transparency and integrity. Our responsibilities at the CFTC in this regard are ongoing. Of course, the fact that a contract exists doesn’t mean the CFTC endorses it, as the staff will explain more fully later today. As with all new developments, we must remain vigilant and will continue to evaluate these new contracts over time. And of course, we will coordinate with our colleagues at other regulatory authorities as appropriate. I think it is helpful to keep these points in mind whenever we consider a new innovation in our markets.

Thank you again for being here and contributing your ideas. I look forward to a productive discussion.

CFTC CHAIRMAN MASSAD'S TESITMONY BEFORE U.S. SENATE COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

FROM:  COMMODITY FUTURES TRADING COMMISSION

Testimony of Chairman Timothy Massad before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Washington, DC

September 9, 2014

Thank you Chairman Johnson, Ranking Member Crapo and members of the Committee. I am pleased to testify before you today on behalf of the Commission. This is my first official hearing as Chairman of the CFTC. It is truly an honor to serve as Chairman at this important time.

I met and spoke with several members of this Committee during the confirmation process, and I appreciated hearing your thoughts and suggestions during that time. I look forward to this Committee’s input going forward.

During the last five years, we have made substantial progress in recovering from the worst financial crisis since the Great Depression. The Dodd-Frank Act was a comprehensive response, and much has been accomplished in implementing it. The CFTC has largely completed the rulemaking stage of Dodd-Frank implementation. However, much work remains to finish the job Congress has given us.

I look forward to working together with you, as well as my colleagues at the CFTC and others around the globe to ensure that our futures, swaps and options markets remain the most efficient and competitive in the world, and to protect the integrity of the markets.

The Significance of Derivatives Market Oversight

Very few Americans participate directly in the derivatives markets. Yet these markets profoundly affect the prices we all pay for food, energy, and most other goods and services we buy each day. They enable farmers to lock in a price for their crops, utility companies or airlines to hedge the costs of fuel, and auto companies or soda bottlers to know what aluminum will cost. They enable exporters to manage fluctuations in foreign currencies, and businesses of all types to lock in their borrowing costs. In the simplest terms, derivatives enable market participants to manage risk.

In normal times, these markets create substantial, but largely unseen, benefits for American families. During the financial crisis, however, they created just the opposite. It was during the financial crisis that many Americans first heard the word derivatives. That was because over-the-counter swaps – a large, unregulated part of these otherwise strong markets – accelerated and intensified the crisis like gasoline poured on a fire. The government was then required to take actions that today still stagger the imagination: for example, largely because of excessive swap risk, the government committed $182 billion 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.

It is hard for most Americans to fathom how this could have happened. While derivatives were just one of many things that caused or contributed to the crisis, the structure of some of these products created significant risk in an economic downturn. In addition, the extensive, bilateral transactions between our largest banks and other institutions meant that trouble at one institution could cascade quickly through the financial system like a waterfall. And, the opaque nature of this market meant that regulators did not know what was going on or who was at risk.

Responding to the Crisis – Enactment and Implementation of the Dodd-Frank Act

The lessons of this tragedy were not lost on the leaders of the United States and the G-20 nations. They committed to bring the over-the-counter swaps market out of the shadows. They agreed to do four basic things: require regulatory oversight of the major market players; require clearing of standardized transactions through regulated clearinghouses known as central counterparties or CCPs; require more transparent trading of standardized transactions; and require regular reporting so that we have an accurate picture of what is going on in this market.

In the United States, these commitments were set forth in Title VII of the Dodd-Frank Act. Responsibility for implementing these commitments was given primarily to the CFTC. I would like to review where we stand in implementing the regulatory framework passed by Congress to bring the over-the-counter swaps market out of the shadows.

Oversight

The first of the major directives Congress gave to the CFTC was to create a framework for the registration and regulation of swap dealers and major swap participants. The agency has done so. As of August 2014, there are 104 swap dealers and two major swap participants provisionally registered with the CFTC.

We have adopted rules requiring strong risk management. We will also be making periodic examinations to assess risk and compliance. The new framework requires registered swap dealers and major swap participants to comply with various business conduct requirements. These include strong standards for documentation and confirmation of transactions, as well as dispute resolution processes. They include requirements to reduce risk of multiple transactions through what is known as portfolio reconciliation and portfolio compression. In addition, swap dealers are required to make sure their counterparties are eligible to enter into swaps, and to make appropriate disclosures to those counterparties of risks and conflicts of interest.

As directed by Congress, we have worked with the SEC, other US regulators, and our international counterparts to establish this framework. We will continue to work with them to achieve as much consistency as possible. We will also look to make sure these rules work to achieve their objectives, and fine-tune them as needed where they do not.

Clearing

A second commitment of Dodd-Frank was to require clearing of standardized transactions at central counterparties. The use of CCPs in financial markets is commonplace and has been around for over one hundred years. The idea is simple: if many participants are trading standardized products on a regular basis, the tangled, hidden web created by thousands of private two-way trades can be replaced with a more transparent and orderly structure, like the spokes of a wheel, with the CCP at the center interacting with other market participants. The CCP monitors the overall risk and positions of each participant.

Clearing does not eliminate the risk that a counterparty to a trade will default, but it provides us various means to mitigate that risk. As the value of positions change, margin can be collected efficiently to ensure counterparties are able to fulfill their obligations to each other. And if a counterparty does default, there are tools available to transfer or unwind positions and protect other market participants. To work well, active, ongoing oversight is critical. We must be vigilant to ensure that CCPs are operated safely and deliver the benefits they are designed to provide.

The CFTC was the first of the G-20 nations’ regulators to implement clearing mandates. We have required clearing for interest rate swaps (IRS) denominated in US dollars, Euros, Pounds and Yen, as well as credit default swaps (CDS) on certain North American and European indices. Based on CFTC analysis of data reported to swap data repositories, as of August 2014, measured by notional value, 60% of all outstanding transactions were cleared. This is compared to estimates by the International Swaps and Derivatives Association (ISDA) of only 16% in December 2007. With regard to index CDS, most new transactions are being cleared – 85% of notional value during the month of August.

Our rules for clearing swaps were patterned after the successful regulatory framework we have had in place for many years in the futures market. We do not require that clearing take place in the United States, even if the swap is in U.S. dollars and between U.S. persons. But we do require that clearing occurs through registered CCPs that meet certain standards – a comprehensive set of core principles that ensures each clearinghouse is appropriately managing the risk of its members, and monitoring its members for compliance with important rules.

Fourteen CCPs are registered with the CFTC as derivatives clearing organizations (DCOs) either for swaps, futures, or both. Five of those are organized outside of the United States, including three in Europe which have been registered since 2001 (LCH.Clearnet Ltd.); 2010 (ICE Clear Europe Ltd); and 2013 (LCH.Clearnet SA). In some cases, a majority of the trades cleared on these European-based DCOs are for U.S. persons.

At the same time, the CFTC has specifically exempted most commercial end-users from the clearing mandate. We have been sensitive to Congress’s directive that these entities, which were not responsible for the crisis and rely on derivatives primarily to hedge commercial risks, should not bear undue burdens in accessing these markets to hedge their risk.

Of course, central clearing by itself is not a panacea. CCPs do not eliminate the risks inherent in the swaps market. We must therefore be vigilant. We must do all we can to ensure that CCPs have financial resources, risk management systems, settlement procedures, and all the necessary standards and safeguards consistent with the core principles to operate in a fair, transparent and efficient manner. We must also make sure that CCP contingency planning is sufficient.

Trading

The third area for reform under Dodd-Frank was to require more transparent trading of standardized products. In the Dodd-Frank Act, Congress provided that certain swaps must be traded on a swap execution facility (SEF) or other regulated exchange. The Dodd Frank Act defined a SEF as “a trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants.” The trading requirement was designed to facilitate a more open, transparent and competitive marketplace, benefiting commercial end-users seeking to lock in a price or hedge risk.

The CFTC finalized its rules for SEFs in June 2013. Twenty-two SEFs have temporarily registered with the CFTC, and two applications are pending. These SEFs are diverse, but each will be required to operate in accordance with the same 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 to discharge their responsibilities.

Trading on SEFs began in October of last year. Beginning February 2014, specified interest rate swaps and credit default swaps must be traded on a SEF or other regulated exchange. Notional value executed on SEFs has generally been in excess of $1.5 trillion weekly.

It is important to remember that trading of swaps on SEFs is still in its infancy. SEFs are still developing best practices under the new regulatory regime. The new technologies that SEF trading requires are likewise being refined. Additionally, other jurisdictions have not yet implemented trading mandates, which has slowed the development of cross-border platforms. There will be issues as SEF trading continues to mature. We will need to work through these to achieve fully the goals of efficiency and transparency SEFs are meant to provide.

Data Reporting

The fourth Dodd-Frank reform commitment was to require ongoing reporting of swap activity. Having rules that require oversight, clearing, and transparent trading is not enough. We must have an accurate, ongoing picture of what is going on in the marketplace to achieve greater transparency and to address potential systemic risk.

Title VII of the Dodd-Frank Act assigns the responsibility for collecting and maintaining swap data to swap data repositories (SDRs), a new type of entity necessitated by these reforms. All swaps, whether cleared or uncleared, must be reported to SDRs. There are currently four SDRs that are provisionally registered with the CFTC.

The collection and public dissemination of swap data by SDRs helps regulators and the public. It provides regulators with information that can facilitate informed oversight and surveillance of the market and implementation of our statutory responsibilities. Dissemination, especially in real-time, also provides the public with information that can contribute to price discovery and market efficiency.

While we have accomplished a lot, much work remains. The task of collecting and analyzing data concerning this marketplace requires intensely collaborative and technical work by industry and the agency’s staff. Going forward, it must continue to be one of our chief priorities.

There are three general areas of activity. We must have data reporting rules and standards that are specific and clear, and that are harmonized as much as possible across jurisdictions. The CFTC is leading the international effort in this area. It is an enormous task that will take time. We must also make sure the SDRs collect, maintain, and publicly disseminate data in the manner that supports effective market oversight and transparency. Finally, market participants must live up to their reporting obligations. Ultimately, they bear the responsibility to make sure that the data is accurate and reported promptly.

Our Agenda Going Forward

The progress I have outlined reflects the fact that the CFTC has finished almost all of the rules required by Congress in the Dodd-Frank Act to regulate the over-the-counter swaps market. This was a difficult task, and required tremendous effort and commitment. My predecessor, Gary Gensler, deserves substantial credit for leading the agency in implementing these reforms so quickly. All of the Commissioners contributed valuable insight and deserve our thanks. But no group deserves more credit than the hardworking professional staff of the agency. It was an extraordinary effort. I want to publicly acknowledge and thank them for their contributions.

The next phase requires no less effort. I want to highlight several areas going forward that are critical to realizing the benefits Congress had in mind when it adopted this new framework and to minimizing any unintended consequences.

Finishing and Fine-tuning Dodd-Frank Regulations

First, as markets develop and we gain experience with the new Dodd-Frank regulations, I anticipate we will, from time to time, make some adjustments and changes. This is to be expected in the case of a reform effort as significant as this one. These are markets that grew to be global in nature without any regulation, and the effort to bring them out of the shadows is a substantial change. It is particularly difficult to anticipate with certainty how market participants will respond and how markets will evolve. At this juncture, I do not believe wholesale changes are needed, but some clarifications and improvements are likely to be considered.

In fine-tuning existing rules, and in finishing the remaining rules that Congress has required us to implement, we must make sure that commercial businesses like farmers, ranchers, manufacturers, and other companies can continue to use these markets effectively. Congress rightly recognized that these entities stand in a different position compared to financial firms. We must make sure the new rules do not cause inappropriate burdens or unintended consequences for them. We hope to act on a new proposed rule for margin for uncleared swaps in the near future. On position limits, we have asked for and received substantial public comment, including through roundtables and face-to-face meetings. This input has been very helpful enabling us to calibrate the rules to achieve the goals of reducing risk and improving the market without imposing unnecessary burdens or causing unintended consequences.

Cross-Border Regulation of the Swaps Market

A second key area is working with our international counterparts to build a strong global regulatory framework. To succeed in accomplishing the goals set out in the G-20 commitments and embodied in the Dodd-Frank Act, global regulators must work together to harmonize their rules and supervision to the greatest extent possible. Fundamentally, this is because the markets that the CFTC is charged to regulate are truly global. What happens in New York, Chicago, or Kansas City is inextricably interconnected with events in London, Hong Kong and Tokyo. The lessons of the financial crisis remind us how easy it is for risks embedded in overseas derivatives transactions to flow back into the United States. And Congress directed us to address the fact that activities abroad can result in importation of risk into the United States.

This is a challenging task. Although the G-20 nations have agreed on basic principles for regulating over-the-counter derivatives, there can be many differences in the details. While many sectors of the financial industry are global in nature, applicable laws and rules typically are not. For example, no one would expect that the laws which govern the selling of securities, or the securing of bank loans, should be exactly the same in all the G-20 nations. While our goal should be harmonization, we must remember that regulation occurs through individual jurisdictions, each informed by its own legal traditions and regulatory philosophies.

Our challenge is to achieve as consistent a framework as possible while not lowering our standards simply to reach agreement, thus triggering a “race to the bottom.” We must also minimize opportunities for regulatory arbitrage, where business moves to locales where the rules are weaker or not yet in place.

The CFTC’s adoption of regulations for systemically important CCPs is a useful model for success. Our rules were designed to meet the international standards for the risk management of systemically important CCPs, as evidenced by the Principles for Financial Market Infrastructures (PFMIs) published by the Bank of International Settlement’s Committee on Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions, to which the Commission was a key contributor.

Since the day I joined the CFTC, I have been focused on cross-border issues. In my first month in office I went to Europe twice to meet with my fellow regulators, and I have been engaged in ongoing dialogue with them.

Robust Compliance and Enforcement

A third major area is having robust compliance and enforcement activities. It is not enough to have rules on the books. We must be sure that market participants comply with the rules and fulfill their obligations. That is why, for example, several weeks ago we fined a large swap dealer for failing to abide by our data reporting rules.

A strong compliance and enforcement function is vital to maintaining public confidence in our markets. This is critical to the participation of the many Americans who depend on the futures and swaps markets – whether they are farmers, oil producers or exporters. And even though most Americans do not participate directly in the futures and swaps markets, our enforcement efforts can help rebuild and maintain public confidence and trust in our financial markets.

We must aggressively pursue wrongdoers, big or small, and vigorously fulfill our responsibility to enforce the regulations governing these markets. Our pursuit of those who have manipulated benchmarks like LIBOR, a key global benchmark underlying a wide variety of financial products and transactions, is a prime example of this principle in practice. So is our successful litigation against Parnon Energy and Arcadia, two energy companies that systematically manipulated crude oil markets to realize illicit profits.

Dodd-Frank provided the Commission with a number of new statutory tools to ensure the integrity of our markets, and we have moved aggressively to incorporate these tools into our enforcement efforts. Our new anti-manipulation authority gives us enhanced ability to go after fraud-based manipulation of our markets. We have put that authority to good use in a host of cases and investigations, including actions against Hunter Wise and a number of smaller firms for perpetrating precious metals scams. Congress also gave us new authority to attack specific practices that unscrupulous market participants use to distort the markets, such as "spoofing," where a party enters a bid or offer with the intent to move the market price, but not to consummate a transaction. We used this new anti-spoofing provision to successfully prosecute Panther Energy for its spoofing practices in our energy markets.

Going forward, protecting market integrity will continue to be one of our key priorities. Market participants should understand that we will use all the tools at our disposal to do so.

Information Technology and Data Management

It is also vital that the CFTC have up to date information technology systems. Handling massive amounts of swaps data and effective market oversight both depend on the agency having up-to-date technology resources, and the staff – including analysts and economists, as well as IT and data management professionals – to make use of them. The financial markets today are driven by sophisticated use of technology, and the CFTC cannot effectively oversee these markets unless it can keep up.

Cyber-security is a related area where we must remain vigilant. As required by Congress, we have implemented new requirements related to exchanges’ cyber-security and system safeguard programs. The CFTC conducts periodic examinations that include review of cyber-security programs put in place by key market participants, and there is much more we would like to do in this area. Going forward, the Commission’s examination expertise will need to be expanded to keep up with emerging risks in information security, especially in the area of cyber-security.

Resources and Budget

All of these tasks represent the significant increases in responsibility that came with Dodd Frank. They require resources. But the CFTC does not have the resources to fulfill these tasks as well as all the responsibilities it had – and still has – prior to the passage of Dodd Frank. The CFTC is lucky to have a dedicated and resourceful professional staff. Although I have been at the agency a relatively short time, I am already impressed by how much this small group is able to accomplish. Still, as good as they are, the reality of our current budget is evident.

I recognize that there are many important priorities that Congress must consider in the budgeting process. I appreciate the importance of being as efficient as possible. I have also encouraged our staff to be creative in thinking about how we can best use our limited resources to accomplish our responsibilities. We will keep the Teddy Roosevelt adage in mind, that we will do what we can, with what we have, where we are.

But I hope to work with members of Congress to address our budget constraints. Our current financial resources limit our ability to fulfill our responsibilities in a way that most Americans would expect. The simple fact is that Congress’s mandate to oversee the swaps market in addition to the futures and options markets requires significant resources beyond those the agency has previously been allocated. Without additional resources, our markets cannot be as well supervised; participants cannot be as well protected; market transparency and efficiency cannot be as fully achieved.

Specifically, in the absence of additional resources, the CFTC will be limited in its ability to:

Perform adequate examinations of market intermediaries, including systemically important DCOs and the approximately 100 swap dealers that have registered with the Commission under the new regulatory framework required by Dodd-Frank.

Use swaps data to address risk in a marketplace that that has become largely automated, and to develop a meaningful regulatory program that is required to promote price transparency and market integrity.

Conduct effective daily surveillance to identify the buildup of risks in the financial system, including for example, review of CFTC registrant activity reports submitted by Commodity Pool Operators and banking entities, as well as to monitor compliance with rules regarding prohibitions and restrictions on proprietary trading.

Investigate and prosecute major cases involving threats to market integrity and customer harm and strengthen enforcement activities targeted at disruptive trading practices and other misconduct of registered entities such as precious metals schemes and other forms of market manipulation.
Conclusion

A few core principles must motivate our work in implementing Dodd-Frank. The first is that we must never forget the cost to American families of the financial crisis, and we must do all we can to address the causes of that crisis in a responsible way. The second is that the United States has the best financial markets in the world. They are the strongest, most dynamic, most innovative, most competitive and transparent. They have been a significant engine of our economic growth and prosperity. Our work should strengthen our markets and enhance those qualities. We must be careful not to create unnecessary burdens on the dynamic and innovative capacity of our markets. I believe the CFTC's work can accomplish these objectives. We have made important progress but there is still much to do. I look forward to working with the members of this Committee and my fellow regulators on these challenges.

Thank you again for inviting me today. I look forward to your questions.

Last Updated: September 9, 2014