CFTC COMMISSIONER BOWEN'S SPEECH BEFORE 2015 COMPLIANCE CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 

Commissioner Bowen Speech before the Managed Funds Association, 2015 Compliance Conference

May 5, 2015

Thank you John for the introduction and good morning everyone. It’s a pleasure to be here today at the Managed Funds Association’s 2015 Compliance Conference. I would like to give a few very brief remarks before we move into my fireside chat with Adam Cooper. I have known Adam through our membership on the Northwestern Law School Board, which I chaired several years ago. I look forward to our conversation at the end of my brief remarks this morning. Of course, my remarks today are my own and do not reflect the views of my fellow Commissioners or the CFTC staff.

In my eleven months as a Commissioner, I’ve spoken about a few topics that are at the top of my agenda and which I hope the Commission will address early during my term. One of those is the need for increased regulation of retail foreign exchange transactions, which I believe is necessary to protect the retail investors who trade in that market. Another is the need for full funding of the Commodity Futures Trading Commission (CFTC) so that we will have strong, comprehensive oversight of the swaps and futures markets. Still another is the need to finalize the remaining regulations required by the Dodd-Frank Wall Street Reform and Consumer Protection Act, aka Dodd-Frank.

Finally, I have also spoken about my belief that we need to ensure that our system of regulation, including our universe of self-regulatory organizations, works efficiently and effectively. In fact, I would like to talk to you today about a subject that confirms my belief that we need to finish our Dodd-Frank rules, while enhancing our overall comprehensive regulations. Specifically, I want to talk to you about the topic of governance.

As compliance professionals, I know that you all understand how good governance protocols and rules are at the heart of how any fund or corporation operates. What some of you may not know is that the CFTC was tasked to issue regulations on this subject under Dodd-Frank. Per Section 726 of Dodd-Frank, “In order to mitigate conflicts of interest,” the CFTC was supposed to issues rules within six months of the law’s passage that could potentially “include numerical limits on the control of, or the voting rights with respect to, any derivatives clearing organization that clears swaps, swap execution facility, or board of trade” that is sufficiently involved in the swaps market.1 Additionally, we were mandated to adopt those rules if we determined that “such rules are necessary or appropriate to improve the governance of” a derivatives clearing organization (DCO), a contract market, or certain swap execution facilities (SEFs).2

This rulemaking requirement was one of the first things we acted on. Back in October 2010, almost three months after Dodd-Frank became law, we issued a proposed rule on this subject. It provided guidelines on conflicts of interest over these entities and also crafted a system to improve the governance of DCOs and SEFs.3 Ironically, however, we have not finalized that governance proposal in the intervening five years nor have we issued a new proposal.

So, to some extent, one of the first regulations out of the gate has become one of the last ones to be completed. In fact, the governance rulemaking is one of three major rules we have to complete, along with such well-known regulations as position limits and capital for swap dealers and margin for uncleared swaps. And honestly, I believe that it is as important for us to complete and promulgate a rule on governance, as it is for us to complete those two rules.

The reason I believe completing the rule on governance is critical is two-fold. First, the governance of designated contract markets (DCMs) and SEFs is critical to how the overall markets we regulate function. As a reminder, the governance proposal covered a number of major topics - from compensation policies for public boards of directors4 to an expertise standard for other members of public boards.5 The proposal even required that boards of directors of registered entities engage in an annual performance review.6 Some of those concepts might seem self-evident, but it’s critical that all such entities have such policies in place.

Second, I believe this rule can and should be part of a broader effort to address another key issue at present: improving culture. As I have mentioned previously and as seems self-evident, we have a culture problem in finance at present.7 As a Commissioner at the CFTC, I’ve seen a significant number of settlements and alleged violations of our laws in the last eleven months. Sometimes those violations are from individuals deliberately seeking to defraud investors. Other times, however, the violations come from large organizations that have previously violated the rules. And that is something that should trouble us.

I believe the governance rule is a major tool to deter rule-breaking. Culture comes from the top – when you have a strong, independent, and involved board of directors, it’s more likely that issues will be fixed before they become problems or cause a regulation or law to be broken.

I think completing this governance rule is important because it is a critical step in the process of addressing our mandate. We need to be able to release a strong rule on governance practices for SEFs and DCMs if we’re going to fix the broader culture problem on Wall Street. We all expect that the governance of our DCMs and SEFs will be superior – after all, these markets revolve around trust. If market participants don’t trust that decisions are made fairly on an exchange, they are less likely to trade on that exchange.

It is because of that key fact that I believe there is support for strong governance rules on these entities because they’re the intermediaries between industry players. They’re a big part of the marketplace. And if we want to fix a big problem like culture, this is a good place to start. If we can establish strong, robust governance practices on DCMs and SEFs, that may not be a panacea to our cultural ills, but it could be a small dose of medicine.

To return to the particular rule at hand, the 2010 governance proposal was filled with a number of good, worthy ideas. I want to offer my thoughts on how to enhance this governance rulemaking. My hope is that with these and possibly other enhancements, we can at least be closer to introducing model rules and best practices that serve as a template to improve the culture in the financial industry.

First, we need to have some qualitative standard for board membership. The previous proposal required that 35% of the members of boards of directors of our registrants be public directors and that those boards have a minimum of two public directors.8 I see why that was done that way – specific numerical standards are easy to implement. But I think we can do better. After all, a person being a public director doesn’t immediately make them a good director. We want people who are fully invested in their firms and who will diligently oversee management accountability.

To put a finer point on it, I do think you need a sufficient number of public directors to achieve meaningful independence. We could approach an independence standard through a holistic review of the board’s independence or we may require certifications by the public directors each year to the stockholders that they are truly independent. Alternatively, we could ask that the board certify that it is providing adequate resources to improve culture and the tone at the top or that it craft plans for improving the overall culture of a company. Clearly the standard needs to be more dynamic than just a number. It also has to be one that can clearly be consistently met by a registrant.

Second, I think we should use this rule to ensure that issues of culture will merit the active attention of the board. The previous proposal had provisions that mandated the board of directors to do certain things. For instance, it mandated an annual self-review and required that a registered entity establish procedures to remove a member of the board. I think this rule can be enhanced with a requirement that issues of culture be considered by the board.

There are several ways this could work. As I mentioned in my OpRisk speech, “If there isn’t a dedicated person in the company trying to improve the culture – both through communication and making it clear that the rules need to be constantly followed – the culture won’t broadly improve.”9

Third, we need to try and standardize governance across entities as much as possible. Good governance principles should apply across entities, financial or non-financial, because they provide simple incentives designed to protect the company and its shareholders from issues; inadvertent errors as well as deliberate ones. Entities should strive to ensure that a board is independent and that it is really taking a separate hard-look at the company’s actions, just as entities should strive to prevent conflicts of interest from arising.

Yet, we should not be micro-managing the process. If we’re crafting rules that are too entrenched in the particulars of how a DCM operates, we’re making two mistakes. First, having standards that aren’t largely uniform will lead to additional legal and compliance expenses for those entities. Differing standards could lead to confusion and result in entities making mistakes. Second, we’re missing the chance to actually establish standards that could be a model for others to use, and that would be a clear missed opportunity to improve the culture in finance and increase board independence.

If we can seek standardization and harmonization on the particulars of data standards or determine which country has the jurisdiction over a particular trade, we shouldn’t shy away from the chance to seek standardization on this subject. And I hope and believe that if we can establish strong rules on these entities -- rules that work -- there will be other private sector entities that will voluntarily adopt these rules as well.

I would hope that many entities which are not SEFs or DCMs would view a new governance rule as a model and adopt it voluntarily. But even if they do not, I believe we have the ability to set governance rules on a number of swap dealers and major swap participants, and that we should consider whether it makes sense to apply this rule to those entities.

If you’re going to have an optimally effective organization, you’ve got to have good governance. It’s a condition that is absolutely necessary for success. I believe the time has come for the CFTC to finish this rule, ideally before the end of this calendar year. Thank you and I look forward to my fireside chat with Adam and questions from the audience. Obviously, time is a constraint, so feel free to reach out to me or my staff if you do not have the opportunity to ask a question or raise issues this morning.

1 Dodd-Frank Wall Street Reform and Consumer Protection Act, § 726(a), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf at page 320.

2 Dodd-Frank Wall Street Reform and Consumer Protection Act, § 726(b), available at http://www.cftc.gov/ucm/groups/public/@swaps/documents/file/hr4173_enrolledbill.pdf at page 320.

3 Commodity Futures Trading Commission, “Requirements for Derivatives Clearing Organizations, Designated Contract Markets, and Swap Execution Facilities Regarding the Mitigation of Conflicts of Interest, 17 CFR Parts 1, 37, 38, 39 & 40, October 18, 2010, 75 Fed. Reg. 63732, [hereinafter “Proposed CFTC Governance Rule”], available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

4 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(4), at 75 Fed. Reg. 63752, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

5 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(3), at 75 Fed. Reg. 63751, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

6 Proposed CFTC Governance Rule, 17 C.F.R. Part 40.9(b)(5), at 75 Fed. Reg. 63752, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

7 Commissioner Sharon Y. Bowen, Commodity Futures Trading Commission, “Remarks of CFTC Commissioner Sharon Y. Bowen Before the 17th Annual OpRisk North America,” March 25, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-2.

8 Proposed Governance Rule, 17 C.F.R. Part 40.9(b)(1)(i), at 75 Fed. Reg. 63751, available at http://www.cftc.gov/ucm/groups/public/@lrfederalregister/documents/file/2010-26220a.pdf.

9 Commissioner Sharon Y. Bowen, Commodity Futures Trading Commission, “Remarks of CFTC Commissioner Sharon Y. Bowen Before the 17th Annual OpRisk North America,” March 25, 2015, available at http://www.cftc.gov/PressRoom/SpeechesTestimony/opabowen-2.

Last Updated: May 5, 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

SEC CHAIRMAN WHITE'S ADDRESS AT SEC SPEAKS 2014

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Chairman’s Address at SEC Speaks 2014
 Chair Mary Jo White
Washington, D.C.

Feb. 21, 2014

Good morning.  I am very honored to be giving the welcoming remarks and to offer a few perspectives from my first 10 months as Chair.  Looking back at remarks made by former Chairs at this event, the expectation seems to be for me to talk about the “State of the SEC.”  I will happily oblige on behalf of this great and critical agency.

In 1972, 42 years ago at the very first SEC Speaks, there were approximately 1,500 SEC employees charged with regulating the activities of 5,000 broker-dealers, 3,500 investment advisers, and 1,500 investment companies.

Today the markets have grown and changed dramatically, and the SEC has significantly expanded responsibilities.  There are now about 4,200 employees – not nearly enough to stretch across a landscape that requires us to regulate more than 25,000 market participants, including broker-dealers, investment advisers, mutual funds and exchange-traded funds, municipal advisors, clearing agents, transfer agents, and 18 exchanges.  We also oversee the important functions of self-regulatory organizations and boards such as FASB, FINRA, MSRB, PCAOB, and SIPC.  Only SIPC and FINRA’s predecessor, the NASD, even existed back in 1972.

Today the agency also faces an unprecedented rulemaking agenda.  Between the Dodd-Frank and JOBS Acts, the SEC was given nearly 100 new rulemaking mandates ranging from rules that govern the previously unregulated derivatives markets, impose proprietary trading restrictions on many financial institutions, increase transparency for hedge funds and private equity funds, give investors a say-on-executive pay, establish a new whistleblower program, lift the ban on general solicitation, reform and more intensely oversee credit rating agencies, and so many others.  These rulemakings, coupled with the implementation and oversight effort that each one brings, have added significantly to our already extensive responsibilities and challenge our limited resources.  These mandates also present the risk that they will crowd out or delay other pressing priorities.  But we must not let that happen.

All of this is upon us at a time when our funding falls significantly short of the level we need to fulfill our mission to investors, companies, and the markets.  As Chair, I owe a duty to Congress, the staff, and to the American people to use the funds we are appropriated prudently and effectively.  But it also is incumbent upon me to raise my voice when the SEC is not being provided with sufficient resources.  The SEC is deficit neutral.  Our appropriations are offset by modest transaction fees we collect from SROs.  What does that mean?  It means that if Congress provides us with increased funding, it will not increase the budget deficit or take resources from other programs or agencies, but it would go directly to protecting investors and strengthening our markets.  Given the critical role we play for investors and our expanded responsibilities, obtaining adequate funding for the SEC is and must be a top priority.

Fortunately, what has remained a constant over the years at the SEC is its magnificent and dedicated staff.  Indeed, it was the commitment, expertise, and moral, apolitical compass of the staff that led me here.  The SEC staff is a deep reservoir of extraordinary talent and expertise with a strong and enduring commitment to public service and independence.  And that is what has sustained the excellence of this agency since its founding.

Exercising my prerogative as Chair, I would now like to ask each SEC employee in the audience to stand and be recognized.  Please remain standing while I ask that everyone here today who once worked at the SEC to please also stand to be recognized.  In our most challenging moments, I urge all of us to think about the colleagues we just recognized, marvel at their public service and say thank you.

Back to the state of the SEC in 2014.

When I arrived at the SEC last April, I initially set three primary priorities: implementing the mandatory Congressional rulemakings of the Dodd-Frank and the JOBS Acts; intensifying the agency’s efforts to ensure that the U.S. equity markets are structured and operating to optimally serve the interests of all investors; and further strengthening our already robust enforcement program.  Ten months later, I am pleased with what we have accomplished.

Rulemaking
When I arrived, it was imperative to set an aggressive rulemaking agenda.  Congress had seen to that and our own core mission demanded it.  And, through the tireless work of the staff and my fellow Commissioners, we made significant progress.

On the day I was sworn in as Chair, we adopted identity theft rules requiring broker-dealers, mutual funds, investment advisers, and others regulated by us to adopt programs to detect red flags and prevent identity theft.[1]

A month later, we proposed rules to govern cross-border swap transactions in the multi-trillion dollar global over-the-counter derivatives markets.[2]

A month after that, we proposed rules to reform and strengthen the structure of money market funds. [3]

Last summer and fall, we made significant progress in implementing the reforms to the private offering market mandated by Congress in the JOBS Act.  We lifted the ban on general solicitation[4] and we proposed rules that would provide new investor protections and important data about this new market.[5]  We also proposed new rules that would permit securities-based crowdfunding and update and expand Regulation A.[6]

We adopted a Dodd-Frank Act rule disqualifying bad actors from certain private offerings.[7]

We adopted some of the most significant changes in years to the financial responsibility rules for broker-dealers.[8]

We adopted rules governing the registration and regulation of municipal advisors.[9]

We adopted rules removing references to credit agency ratings in certain broker-dealer and investment company regulations.[10]

In December, together with the banking regulators and the CFTC, we adopted regulations implementing the Volcker Rule.[11]

And, just last week we announced the selection of Rick Fleming, the deputy general counsel at the North American Securities Administrators Association, as the first Investor Advocate, a position established by Dodd-Frank.[12]

As even this partial list shows, we have made significant progress on our rulemakings, although more remains to be done.  But we must always keep the bigger picture in focus and not let the sheer number nor the sometimes controversial nature of the Congressional mandates distract us from other important rulemakings and initiatives that further our core mission as we set and carry out our priorities for the year ahead.

Other Critical Initiatives
To be more specific, in 2014, in addition to continuing to complete important rulemakings, we also will intensify our consideration of the question of the role and duties of investment advisers and broker dealers, with the goal of enhancing investor protection.  We will increase our focus on the fixed income markets and make further progress on credit rating agency reform.  We will also increase our oversight of broker-dealers with initiatives that will strengthen and enhance their capital and liquidity, as well as providing more robust protections and safeguards for customer assets.

We also will continue to engage with other domestic and international regulators to ensure that the systemic risks to our interconnected financial systems are identified and addressed – but addressed in a way that takes into account the differences between prudential risks and those that are not.  We want to avoid a rigidly uniform regulatory approach solely defined by the safety and soundness standard that may be more appropriate for banking institutions.

In 2014, we also will prioritize our review of equity market structure, focusing closely on how it impacts investors and companies of every size.  One near-term project that I will be pushing forward is the development and implementation of a tick-size pilot, along carefully defined parameters, that would widen the quoting and trading increments and test, among other things, whether a change like this improves liquidity and market quality.

In 2013, our Trading and Markets Division continued to develop the necessary empirical evidence to accurately assess our current equity market structure and to consider a range of possible changes.  Today we have better sources of data to inform our decisions.  For example, something we call MIDAS collects, nearly instantaneously, one billion trading data records every day from across the markets.  We have developed key metrics about the markets using MIDAS and placed them on our website last October so the public, academics, and all market participants could share, analyze, and react to the information that allows us to better test the various hypotheses about our markets to inform regulatory changes.[13]

The SEC, the SROs, and other market participants are also proceeding to implement the Consolidated Audit Trail Rule,[14] which when operational will further enhance the ability of regulators to monitor and analyze the equity markets on a more timely basis.  Indeed, it should result in a sea change in the data currently available, collecting in one place every order, cancellation, modification, and trade execution for all exchange-listed equities and equity options across all U.S. markets.  It is a difficult and complex undertaking, which must be accorded the highest priority by all to complete.

We also are very focused on ensuring the resilience of the systems used by the exchanges and other market participants.  It is critically important that the technology that connects market participants be deployed and used responsibly to reduce the risk of disruptions that can harm investors and undermine confidence in our markets.  A number of measures have already been taken and, in 2014, we will be focused on ensuring that more is done to address these vulnerabilities.  One significant vulnerability that must be comprehensively addressed across both the public and private sectors is the risk of cyber attacks.  To encourage a discussion and sharing of information and best practices, the SEC will be holding a cybersecurity roundtable in March.[15]

Enforcement
Let me turn to enforcement at the SEC in 2014 because vigorous and comprehensive enforcement of our securities laws must always be a very high priority at the SEC.  And it is.

When I arrived in April, I found what I expected to find – a very strong enforcement program.  Through extraordinary hard work and dedication, the Commission’s Enforcement Division achieved an unparalleled record of successful cases arising out of the financial crisis.  To date, we have charged 169 individuals or entities with wrongdoing stemming from the financial crisis – 70 of whom were CEOs, CFOs, or other senior executives.  At the same time, the Commission also brought landmark insider trading cases and created specialized units that pursued complex cases against investment advisers, broker dealers and exchanges, as well as cases involving FCPA violations, municipal bonds and state pension funds.  In 2013 alone, Enforcement’s labors yielded orders to return $3.4 billion in disgorgement and civil penalties, the highest amount in the agency’s history.  But there is always more to do.

Admissions
Last year, we modified the SEC’s longstanding no admit/no deny settlement protocol to require admissions in a broader range of cases.  As I have said before,[16] admissions are important because they achieve a greater measure of public accountability, which, in turn, can bolster the public’s confidence in the strength and credibility of law enforcement, and the safety of our markets.

When we first announced this change, we said that we would consider requiring admissions in certain types of cases, including those involving particularly egregious conduct, where a large numbers of investors were harmed, where the markets or investors were placed at significant risk, where the conduct undermines or obstructs our investigative processes, where an admission can send a particularly important message to the markets or where the wrongdoer poses a particular future threat to investors or the markets.  And now that we have resolved a number of cases with admissions, you have specific examples of where we think it is appropriate to require admissions as a condition of settlement.[17]  My expectation is that there will be more such cases in 2014 as the new protocol continues to evolve and be applied.

Financial Fraud Task Force
Last year, the Enforcement Division also increased its focus on accounting fraud through the creation of a new task force.[18]  The Division formed the Financial Reporting and Audit Task Force to look at trends or patterns of conduct that are risk indicators for financial fraud, including in areas like revenue recognition, asset valuations, and management estimates.  The task force draws on resources across the agency, including accountants in the Division of Corporation Finance and the Office of the Chief Accountant and our very talented economists in the Division of Economic Risk and Analysis (DERA).  The task force is focused on more quickly identifying potential material misstatements in financial statements and disclosures.  The program has already generated several significant investigations and more are expected to follow.

In addition to the new admissions protocol and the Financial Fraud Task Force, the Enforcement Division also has other exciting new initiatives including a new Microcap Task Force[19] and a renewed focus on those who serve as gatekeepers in our financial system, just to name a few.

* * *

We have talked about our rulemaking agenda, some of our ongoing market structure initiatives, and a bit about what is new and developing in Enforcement.  But what else lies ahead?

Corporation Finance: JOBS Act and Disclosure Reform
As we move to complete our rulemakings in the private offering arena, it is important for the SEC to keep focused on the public markets as well.  Our JOBS Act related-rulemaking will provide companies with a number of different alternatives to raise capital in the private markets.  Some have even suggested that if the private markets develop sufficient liquidity, there may not be any reason for a company to go public or become a public company in the way we think of it now.  That would not be the best result for all investors.

While the JOBS Act provides additional avenues for raising capital in the private markets and may allow companies to stay private longer, the public markets in the United States also continue to offer very attractive opportunities for capital.  They offer the transparency and liquidity that investors need and, at the same time, provide access to the breadth of sources of capital necessary to support significant growth and innovation.  For our part, we must consider how the SEC’s rules governing public offerings and public company reporting and disclosure may negatively impact liquidity in our markets and how they can be improved and streamlined, while maintaining strong investor protections.

Last year, I spoke about disclosure reform[20] and in December the staff issued a report that contains the staff’s preliminary conclusions and recommendations as to how to update our disclosure rules.[21]

What is next?

This year, the Corp Fin staff will focus on making specific recommendations for updating the rules that govern public company disclosure.  As part of this effort, Corp Fin will be broadly seeking input from companies and investors about how we can make our disclosure rules work better, and, specifically, investors will be asked what type of information they want, when do they want it and how companies can most meaningfully present that information.

Investment Management: Enhanced Asset Manager Risk Monitoring
The SEC of 2014 is an agency that increasingly relies on technology and specialized expertise.  This is particularly evident in the SEC’s new risk monitoring and data analytics activities.  One important example is the SEC’s new focus on risk monitoring of asset managers and funds.

Last year featured a very concrete success from these risk monitoring efforts when the SEC brought an enforcement case against a money market fund firm charging that it failed to comply with the risk limiting conditions of our rules.[22]

In the past year, the SEC has established a dedicated group of professionals to monitor large-firm asset managers.  These professionals who include former portfolio managers, investment analysts, and examiners track investment trends, review emerging market developments, and identify outlier funds.

The tools they use include analytics of data we receive, high-level engagement with asset manager executives and mutual fund boards, data-driven, risk-focused examinations, and with respect to money market funds certain stress testing results.

What is next?

I asked the IM staff for an “action plan” to enhance our asset manager risk management oversight program.  Among the initiatives under near-term consideration are expanded stress testing, more robust data reporting, and increased oversight of the largest asset management firms.  To be an effective 21st century regulator, the SEC is using 21st century tools to address the range of 21st century risks.

OCIE: Innovation in Exam Planning
We also are using powerful new data analytics and technology tools in our National Exam Program to conduct more effective and efficient risk-based examinations of our registrants.

OCIE’s Office of Risk Assessment and Surveillance aggregates and analyzes a broad band of data to identify potentially problematic behavior.  In addition to scouring the data that we collect directly from registrants, we look at data from outside the Commission, including information from public records, data collected by other regulators, SROs and exchanges, and information that our registrants provide to data vendors.  This expanded data collection and analysis not only enhances OCIE’s ability to identify risks more efficiently, but it also helps our examiners better understand the contours of a firm’s business activities prior to conducting an examination.

What is next?

The Office of Risk Assessment and Surveillance is developing exciting new technologies – text analytics, visualization, search, and predictive analytics – to cull additional red flags from internal and external data and information sources.  These tools will help our examiners be even more efficient and effective in analyzing massive amounts of data to more quickly and accurately hone in on areas that pose the greatest risks and warrant further investigation.  In an era of limited resources and expanding responsibilities, it is essential to identify and target these risks more systematically.  And we are doing that.

Conclusion
Let me stop here.  Hopefully, I have at least given you a window into the strong, busy, and proactive state of the SEC in 2014.  More importantly, throughout the next two days, you will hear directly from our staff about the many ways we are meeting the current challenges that we all face in our complex and rapidly changing markets and how we are preparing for tomorrow’s challenges.

This year as in every year, we look forward to hearing your ideas and input on our rulemakings and other initiatives.  Your views are very important to us and assist us to implement regulations that are true to our mission, effective, and workable.

Thank you and enjoy the conference.


[1] See Identity Theft Red Flags Rule Release No. 34-69359, (Apr. 10, 2013), available at http://www.sec.gov/rules/final/2013/34-69359.pdf.

[2] See Title VII of the Dodd-Frank Act and Cross-Border Security-Based Swap Activities; Re-Proposal of Regulation SBSR and Certain Rules and Forms Relating to the Registration of Security-Based Swap Dealers and Major Security-Based Swap Participants Release No. 34-69490, (May 1, 2013), available at http://www.sec.gov/rules/proposed/2013/34-69490.pdf.

[3] See Money Market Fund Reform; Amendments to Form PF Release No. 33-9408, (Jun. 5, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9408.pdf.

[4] See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Release No. 33-9415 (Jul. 10, 2013), available at http://www.sec.gov/rules/final/2013/33-9415.pdf.

[5] See Release No. 33-9416, Amendments to Regulation D, Form D and Rule 156 (Jul. 10, 2013).

[6] See Crowdfunding, Release No. 33-9470 (Oct. 23, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9470.pdf and Proposed Rule Amendments for Small and Additional Issues Exemptions Under Section 3(b) of the Securities Act, Release No. 33-9497 (Dec. 18, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9497.pdf.

[7] See Release No. 33-9414, Disqualification of Felons and Other “Bad Actors” (Jul. 10, 2013), available at http://www.sec.gov/rules/final/2013/33.9414.pdf.

[8] See Release No. 34-70072, Financial Responsibility Rules for Broker-Dealers (Jul. 30, 2013), available at http://www.sec.gov/rules/final/2013/34-70072.pdf.

[9] See Release No. 34-70462, Registration of Municipal Advisors (Sep. 20, 2013), available at http://www.sec.gov/rules/final/2013/34-70462.pdf.

[10] See Release No. 34-71194, Removal of Certain References to Credit Ratings Under the Securities Exchange Act of 1934 (Dec. 27, 2013), available at http://www.sec.gov/rules/final/2013/34-71194.pdf; Release No. 33-9506, Removal of Certain References to Credit Ratings Under the Investment Company Act (Dec. 27, 2013), available at http://www.sec.gov/rules/final/2013/33-9506.pdf.

[11] See Release No. BHCA-1, Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships With, Hedge Funds and Private Equity Funds Bank Holding Company Act (Dec. 10, 2013), available at http://www.sec.gov/rules/final/2013/bhca-1.pdf.

[12] See Press Release No. 2014-27, SEC Names Rick Fleming as Investor Advocate (Feb. 12, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540780377.

[13] The MIDAS web site and interactive tools are available at http://www.sec.gov/marketstructure.

[14] See Release No. 34-67457, Consolidated Audit Trail (Jul. 18, 2012), available at http://www.sec.gov/rules/final/2012/34-67457.pdf.

[15] See Press Release No. 2014-32, SEC to Hold Cybersecurity Roundtable (Feb. 14, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540793626.

[16] The Importance of Trials to the Law and Public Accountability, remarks at the 5th Annual Judge Thomas A. Flannery Lecture (Nov. 14, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540374908.

[17] See Press Release No. 2013-159, Philip Falcone and Harbinger Capital Agree to Settlement (Aug. 19, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539780222; Press Release No. 2013-187, JPMorgan Chase Agrees to Pay $200 Million and Admits Wrongdoing to Settle SEC Charges (Sep. 19, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370539819965; Press Release No. 2013-266, SEC Charges ConvergEx Subsidiaries With Fraud for Deceiving Customers About Commissions (Dec. 18, 2013), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540521484; Press Release No. 2014-17, Scottrade Agrees to Pay $2.5 Million and Admits Providing Flawed ‘Blue Sheet’ Trading Data (Jan. 29, 2014), available at http://www.sec.gov/News/PressRelease/Detail/PressRelease/1370540696906.

[18] See SEC Spotlight on the Financial Reporting and Audit Task Force, available at https://www.sec.gov/spotlight/finreporting-audittaskforce.shtml.

[19] See SEC Spotlight on Microcap Fraud, available at http://www.sec.gov/spotlight/microcap-fraud.shtml.

[20] The Path Forward on Disclosure, remarks at the National Association of Corporate Directors Leadership Conference 2013 (Oct. 15, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370539878806.  See also The SEC in 2014, remarks at the 41st Annual Securities Regulation Institute (Jan. 27, 2014), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540677500.

[21] Report on Review of Disclosure Requirements in Regulation S-K (Dec. 2013), available at http://www.sec.gov/news/studies/2013/reg-sk-disclosure-requirements-review.pdf.

[22] In the Matter of Ambassador Capital Management, LLC, and Derek H. Oglesby, Admin. Proc. File No. 3-15625 (2013), available at http://www.sec.gov/litigation/admin/2013/ia-3725.pdf.

LABOR, SEC RENEW MEMORANDUM OF UNDERSTANDING REGARDING SHARED INFORMATION ON RETIREMENT AND INVESTMENTS

FROM:   U.S. DEPARTMENT OF LABOR

US Labor Department renews its memorandum of understanding with Securities and Exchange Commission

WASHINGTON — The U.S. Department of Labor announced that it has renewed a memorandum of understanding with the U.S. Securities and Exchange Commission on sharing information on retirement and investment matters. The memorandum was signed by Secretary of Labor Tom Perez and SEC Chair Mary Jo White.

"The department views our work with the SEC on shared interests in recent years as a tremendous success. By renewing this memorandum of understanding, we will continue to better serve all of America's workers who depend on private-sector retirement plans," said Assistant Secretary of Labor for Employee Benefits Security Phyllis C. Borzi. "Our experience with the SEC helps to boost the department's enforcement program and ensure that our regulatory and other programs work in tandem with the SEC's initiatives to provide meaningful protections for workers' retirement savings."

The memorandum sets forth a process for the department's Employee Benefits Security Administration and SEC staffs to share information and meet regularly to discuss topics of mutual interest. The memorandum also will facilitate the sharing of non-public information regarding subjects of mutual interest between the two agencies. Additionally, both agencies will cross-train staff with the goal of enhancing each agency's understanding of the other's mission and investigative jurisdiction.

As more and more investors turn to the markets to help secure their futures, pay for homes and send children to college, the shared investor protection mission of the SEC and the Department of Labor is more vital for America's workers than ever before. The renewed memorandum reinforces the agencies' historical commitment to share information and work together on a variety of regulatory, enforcement, public outreach, research and information technology matters.
EBSA's mission is to assure the retirement, health and other workplace-related benefits of America's workers, retirees and their families. In the retirement area, EBSA has authority over private-sector retirement plans including 401(k) plans and IRAs, plan fiduciaries, and service providers.

CFTC COMMISSIONER CHILTON AND DOCTORS NO,WHO AND ALL THE REST .

FROM:  COMMODITY FUTURES TRADING COMMISSION
“The Good Doctors”
Keynote Address of Commissioner Bart Chilton to the Mutual Fund Directors Forum, 2012 Policy Conference, Washington, DC
June 19, 2012
 Introduction
Good evening and thanks for that kind introduction.  It’s great to be with you.  I'm always impressed with people like you who take the time and travel away from your businesses and families to visit Washington and make your case on issues. That's an important thing, and it doesn't matter on which side of issues you fall. It’s a privilege to have an opportunity to be with you for some of your time in D.C. Even after 26 years in this town, it is still intriguing to hear that magical word “policy.”  I hope this year’s policy conference goes well for you.

Regulatory Health
Let’s discuss some policy issues, but do it within the construct of financial market regulatory health.

Before I get to it, is there a doctor in the house? The older I get, the nicer it is to know if we are close to a doctor. Any medical doctors, PhDs, doctors of love, as Gene Simmons says, anyone? Okay, great.

The financial health of markets: aren’t these markets astonishing? Aren't you sometimes simply in awe—in awe—of what they do and how they do it. They are pulsing every day and all night around the world to the beat of 160 million transactions a day.  It’s incredible they work as well as they do.  At the same time, though, we all know that once-in-a-while, they need a doctor. There is often a shock associated with that awe. Maybe that’s because of a Flash Crash, a major bankruptcy, a massive trading loss or any number of other problems. And yes, when there’s talk about needing a doctor—or, in this context—needing a little regulatory check-up, some people’s blood pressure starts to rise.  Chill pills are for that stuff, dude. Let’s just review how not taking very good care of our financial markets got us to where we are today.

 Dr. Drew
We don’t need to guzzle ginkgo biloba beverages to recall 2008 and the collapse of Bear Stearns, Lehman Brothers and AIG; the resulting dreadful bailout and the devastating effect on our own and a large part of the global economy.  Thinking about all of that raises a little financial PTSD for some people.
“Doctor my eyes,
Tell me was I wrong.
Was I unwise to leave them open for so long?”

Well, as hard as it is to think about 2008, there is that whole “learning from our experiences” or rather—mistakes—thing.

Who is familiar with CNN's Dr. Drew Pinsky, Dr. Drew—the former Love Line co-host?  If you’ve ever watched the show, he deals a lot with addictions—drug addictions, alcohol addictions, food addictions, sex addictions—you name it.  He is an impressive guy and he's helped a lot of people. One thing he always says is that the first step to recovery is admitting you have issues.

Well, in 2008 and the years leading up to it, we had issues. We had a problem, and we’re still in recovery today.  The point there is that we are recovering.  We are getting better, thank you very much. Congress recognized that we had a problem and passed the Dodd-Frank Wall Street Reform and Consumer Protection Act about two years ago right now.  That’s good, because we clearly needed something: therapy, recovery, whatever. As they often say in this town, "mistakes were made."

 Dr. Seuss
Once you’ve acknowledged the problem, therapists would suggest dissecting it to understand what went wrong. There were a couple of causes to the financial illness—the economic crisis—“Things,” if you will—that led to the system pretty much failing us.
 Thing One—shout out to good Dr. Seuss—were lax or non-existent laws and regulations that allowed the free markets to rock ‘n’ roll so much that they rolled right over our economies—and our citizens.

There is an old saying about how the best things in life are free. Well, the worst things in life are also sometimes free, like disease and famine and, yes, unbridled free markets with zero, zip, zilch oversight.  Of course, it wasn’t just the lax laws, rules and regulations.  Nope, Thing One just allowed for unprotected and risky behavior...and risky business.
CHFT
Thing Two were the active agents:  the captains of Wall Street—that’s how the FCIC, the Financial Crisis Inquiry Commission, described them. They wholly developed these very pioneering products, these innovative investments to be traded and re-traded.

Light markets, dark markets, big markets, small,
Green, red and black markets, they traded them all,
Burning up the fiber and fires on the phones,
And then what they did, was trade bundles of loans,
The markets were rising with new dough, don't you know,
And cheetah technology, that just never went slow,
The risk was so portable, so easy to move,
That sometimes they wondered, just whose risk they might lose Trading and trading is what kept them alive
And they did so, this trading, 24-7...365.
Thing One and Thing Two:  those harmless numskulls, what could go possibly go wrong?

 Dr. No
 Well, go wrong it did. We admitted and acknowledged we had a problem and received some treatment.  The problem, the condition if you will, today is: the recovery—the work—is not complete and there is temptation to do away with the very laws—the recovery program—we were admitted to in reaction to the 2008 financial crisis and the all-to-close-to collapse of national economies.  Let’s call that a near relapse.
There have been moves afoot in Congress to repeal some or all of Dodd-Frank, primarily by some of those who voted against it in the first place.  That's okay; they do and vote the best they see fit. Nobody is suggesting we all have to go about things the same way. Remember the James Bond antagonist, Dr. Julius No? Let’s call these folks Dr. Nos.  Many of this group voted no, or nay—on Dodd-Frank and on full funding for regulators.  The Dr. Nos would defund the precise market health professionals who were given the rather tough task of keeping an eye on Wall Street.  And, still others, including regulated entities themselves, like your group, are choosing to fight the new regulations in court. That’s fine. We are a litigious society. I'm not going to touch that one now. I'll leave that not to the doctors, but the lawyers.

The President requested, and the Senate Appropriations Committee passed, a CFTC funding level of $308 million. In the House, the Dr. Nos are proposing only $180 million. In Europe, they’d call that an “austerity measure.” But let’s call it what it is: a seriously substantial and severe budget reduction. Cutting our Agency’s oxygen off so that our nation can’t have market health professionals on the case or the technology we require to monitor those that we are supposed to be overseeing is not putting the financial health of the American people first.

Think about MF Global.  Think about JPMorgan.  Are these markets really any safer and healthier than they were when they did a code blue in 2008?  A little, I’d say.  However, we’re still in recovery mode for sure.  We still require a doctor.  And, it is still essential to pay for it.  There are some folks in this town and on Wall Street who wish Dr. Kevorkian was still around for us regulators. They are doing their best without him to administer a little euthanasia. The financial sector still has 10 lobbyists for every single member of Congress—more than any other sector. They are pretty effective at getting their way.

As regulators, we don't make the laws. If Dodd-Frank went away, I'd think it was a mammoth mistake, but the law is the law and we Commissioners swore an oath to uphold it. That is, however, what we are doing right now—upholding the law—the law. We owe it to taxpayers and consumers to insist that these markets remain healthy.

Dr. Phil
Most folks know TV's Dr. Phil.  He’s forever talking about setting limits, especially in relationships.  If somebody pushes your buttons: be it a parent, child, spouse, co-worker or friend, Dr. Phil will suggest setting some limits.  Don’t get sucked into their world or their drama.  Well, if limits are good enough for Dr. Phil, they’re good enough for me—especially when it seems like an appropriate prescription for a policy I have supported for many years.

 A fundamental part of Dodd-Frank, which only seems to gain public attention when gas prices are high, is speculative position limits.  (And yes, this is another one that’s being challenged in court).

As we all know, oil and gasoline prices were very high earlier this year. The highest prices were actually in the summer of 2008. The average national price of gasoline in July of that year was $4.10 a gallon. There was a lot of attention to the subject then, and there was earlier this year. Today, not so much, although limits are still an essential medication to reduce market manipulation.

Here’s why: numerous studies show a link between speculation and prices. Studies from the International Monetary Fund, the Federal Reserve, and numerous universities all show it.  There was a senior exchange official who a little more than a year ago said there wasn't any evidence that linked speculation to prices. There was even a former colleague of mine who kept saying there was no evidence. Wha wha what? It was amazing. Last year, I put 50 studies, papers and notable quotations from respected individuals on the CFTC web site. They are still there. I talk about them all the time, including right now. I can continue to explain this to people, but I can't comprehend it for them.
Why does a trader need so much concentration that they can push prices around?  I just don’t get it.

 Large concentrations in silver, gold, natural gas, crude oil and orange juice have existed in recent years. I've witnessed it, and at times, I've seen prices react.
In addition to the bankers' lawsuit which seeks to stop our position limits rule from being implemented, regulators have been derelict in not getting them in place sooner.  We keep hearing that imposition of limits is being held up because it's contingent upon our issuance of a swaps definition, and Dodd-Frank requires that we do that as a joint rulemaking with the SEC.  That's correct. Dr. Phil might ask, “How’s that workin’ out for ya?”  Well, I'd say, "Notsamuch, Doc."

I have respect for my regulatory colleagues, but I've gotta say, they’ve moved so slow that I think we need to check their pulse on this one.  Call me an impatient patient, but we have a responsibility to act here, and it's high time we do so to protect markets and consumers.
A man runs into the doctor’s office and says, “Doctor, you need to see me immediately, I think I’m shrinking!” The doctor says, “Calm down and take a seat. You will have to wait your turn and be a ‘little’ patient.” Well, we’ve been a little patient. We’ve been a lot patient.

Earlier this year, in March, I suggested we "consider" using a provision of Dodd-Frank that shifts unresolved jurisdictional disputes to the Financial Stability Oversight Council (FSOC) if an agreement can’t be found. We have been continually reassured we are going to consider this joint rule with the SEC "next month." We've been told that each month since my Agency approved limits. We were told it could happen last December and subsequently almost every month. I see no promise of movement from the SEC on this. We are two years into this new law, and position limits were supposed to be implemented after six months. The FSOC should resolve this.

Dr. Dolittle
Another policy issue I want to spend some time on is the issue of technology in trading.   I was going to call this section “Dr. Strangelove” since he was always fiddling around with technology—in his case nuclear weapons—or maybe “Dr. Leonard McCoy” from Star Trek. “Dammit Jim, I’m a doctor…” not a regulator.

There are a lot of people fiddling around with technology in financial markets today. But instead, I decided on Dr. Dolittle because I call these high frequency computer traders "cheetahs" due to their incredible speed as they travel through the market jungle.  They are out there all the time trying to scoop up micro-dollars in milliseconds. They are wicked smart and clever. I talked to the animals last week. By the way, they really are very agreeable and shrewd folks. I’m just jesting, of course. Nevertheless, I told them very clearly that they need to be regulated.

Here are the problematic symptoms that led to my, umm, diagnosis. The largest futures exchange in the World is in Chicago.  Their third largest trader by volume there has been a cheetah based in Prague.  Bully for the exchange, which has touted this firm in their magazine.

As an aside, I’ll note the curious case of the vanishing articles. The story about this Prague cheetah was in the fall of 2010 and it appeared in the exchange magazine. While you can find the issue on their web site, that article about the cheetah disappeared. I was alerted to this by two reporters who were fact-checking my stuff about the cheetah. When they asked the exchange about it, they were told that the story didn't exist. So, I looked into it. After some digging, I found it again. But, what the exchange did was took it off their web site. As it turns out, there is another story missing from that same edition: one about Jon Corzine, in which he talks about taking more risks as the, then, new head of MF Global. I have both stories. Folks have a right to keep whatever they want on their websites. I just think it is curiously peculiar that they'd pull those two stories—strange, but true.

So, bully for the exchange. Bully for the cheetah.  Bully for Prague. Hooray for Prague!
However, if we, the U.S. regulators, simply want to look at books and records, perhaps because we are concerned about trading activities on a U.S. exchange—it could happen—that cheetah in Prague is not required to provide us with anything. Nada.  Furthermore, we don’t even have the ability to command books and records information from domestic cheetahs.  Nada. These cats are not required to provide a thing to U.S. regulators, under the current set of circumstances, unless we get a judge to issue a subpoena.  It is simply loco.  Nada? informaciónnes de los catos es un problemo.

At the very least, the cheetahs need to be registered.  Yet, no place in the Dodd-Frank law are these traders even mentioned.  That is how quickly the markets are metastasizing.

I believe there is some value to the cheetahs. However, their awesomeness isn't too difficult to contemplate. I wrote about these traders in a Financial Times op-ed a long time ago (September of 2010).  In it, I suggested, “There is a good argument to be made that ‘parasitical trading’ does not truly contribute to fundamental market functions.”  I’m not trying to get rid of them—make the cheetahs an endangered species.  There's no opposition to new technology here.  The cheetahs do provide liquidity—albeit what I’ve dubbed as "fleeting liquidity."  If you want someone to hedge your commercial risk for 3-5 seconds, I know just the cats for the job.

I also believe that these cheetahs have a disproportionate influence on markets simply because of their speed.  Their trading volume isn’t traditionally large—although in overnight illiquid trading even smaller size trades can move markets. We’ve seen that many times—but their swiftness as traders can send signals to the market when they’re in pursuit of their prey.  That, in and of itself, is fairly new and presents troublesome issues.
Consequently, I’m suggesting that in addition to the cheetah registration requirement, we require testing of their programs before they are engaged in the market production environment. The programs should have kill switches in case they go feral. We need to require quarterly reports on their wash sales (and that they undertake efforts to stop those from occurring). And finally, cheetah executives, the head of their pride, must be accountable for such reports.

I expect the Agency to issue a concept release related to technology very soon. My colleague, Commissioner O'Malia, has done a lot of good work on these issues as the Chair of our Technology Advisory Committee. I’m hopeful, and expect (certainly if I am to support it), that as part of this concept release, these ideas will be included and we will receive some public comments to facilitate us moving forward.

Dr. Jekyll
A doctor says to her patient, “You have a split personality, a mental disorder—you’re crazy.” To which the patient says, “I want a second opinion.” The doctor says, “Okay, you’re ugly, too.”
Remember Dr. Jekyll from The Strange Case of Dr. Jekyll and Mr. Hyde? It had to do with split personalities, within the same body.

Just like Dr. Jekyll, who had two personalities, we see that the banks themselves have a troublesome duplexity. This split personality was created when the Glass-Steagall Act was repealed in 1999. Currently, banks have two voices in their heads. They have an interest in their proprietary bottom line, and in their customers. When the two distinct personalities are opposed, just like Dr. Jekyll and Mr. Hyde, it can get unpleasant. And, it has. Here's what we know: with the banks, we understand which personality supersedes. They do—the banks. The customers’ interests can become secondary.

Some would argue that the two can exist in the same body, but the evidence doesn't support that—not at all. We saw Goldman Sachs and Citibank both establish what I've termed "fake-out funds," like when a player fakes in a ball game. Only this isn't a game. It involves real money for the bank customers.

The two banks each established these funds, recommended them to their own customers, and then the banks took the opposite position. That's pretty sinister, right? A dreadful mixture of contrasting motives played out in a crooked fashion. The Goldman case was settled with the SEC for $550 million. The Citibank settlement with the SEC, for $285 million, was actually thrown out by U.S. District Judge Jed Rakoff for being too lenient. He called it “a mild and modest cost of doing business.” Soon, he's expected to rule on the matter himself.

“Doctor, doctor, give me the news…” What’s the answer to…these policy blues? No pill is gonna kill this ill, it will take the… Volcker Rule.

Well, the Volker Rule is the law. If regulators are thoughtful and implement it appropriately, it will take the banks’ split personality, their troublesome duplexity, out of the equation. I believe we can, and will. Again, it is our responsibility to do so, under...the law.

Conclusion—Dr. Marcus Welby
Well listen, I should wrap this up.  I know you’ve got another big day tomorrow.  We will leave all of the rest of the doctors alone tonight. Doctor Who? Yeah, him, and the rest: our cowboy Docs Holliday and Scurlock, Docs Severinsen, Hollywood and Watson, Dr. Ruth and Sanjay Gupta, Doctor Frasier Crane and Dr. Laura, Doctors Dre, Evil, Feelgood and Demento. You can play at home. It’s fun for the whole family.
This will really date me, but Dr. Marcus Welby was played by actor Robert Young. He, Young the actor, used to do these television commercials that would start off with him saying something like: “I’m not a doctor, but I play one on TV.” Then, he'd endorse some health-related product, like aspirin. Well, I'm not a doctor. And, I DON'T play one on TV, but I sure have enjoyed speaking about the health of our financial markets and the ongoing need for preventative care by regulators to protect investors, hedgers and yes, most importantly consumers.

I’ve got to run to the ER. Thank you for the opportunity to be with you.  Nurse!