CFTC CHAIRMAN MASSAD'S REMARKS BEFORE DERIVOPS NORTH AMERICA 2015

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

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

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

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

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

The New Regulatory Framework

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

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

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

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

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

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

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

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

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

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

Agenda Going Forward

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

Trading Issues

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

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

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

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

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

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

Error Trades

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

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

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

Uncleared Swaps – SEF Confirmations and Confirmation Data Reporting

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

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

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

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

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

Data

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

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

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

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

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

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

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

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

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

Conclusion

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

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

Thank you for inviting me.

CFTC CHAIRMAN MASSAD 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 GARY GENSLER'S REMARKS AT 2013 ANNUAL GLAUBER LECTURE AT HARVARD UNIVERSITY

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Remarks of Chairman Gary Gensler at the 2013 Annual Glauber Lecture at Harvard University
October 29, 2013

Thank you, Bob, for that kind introduction. I also would like to thank you and Harvard University for the invitation to speak today. I’m particularly pleased to be here as Bob and I are both examples that there is life after serving as an undersecretary of the Treasury.

Five years ago, the U.S. economy was in a free fall.

Five years ago, the swaps market was at the center of the crisis. It cost middle-class Americans – and hardworking people around the globe – their jobs, their pensions and their homes.

Five years ago, the swaps market contributed to the financial system failing corporate America and the economy as a whole. Thousands of businesses closed their doors.

President Obama met in 2009 with the G-20 leaders in Pittsburgh. They committed to bringing the swaps market into the light through transparency and oversight.

The President and Congress in 2010 gave the task of implementing swaps market reform to the Commodity Futures Trading Commission (CFTC) and security-based swaps market reform to the Securities and Exchange Commission.

With the CFTC’s near completion of these reforms, the shift to a transparent, regulated marketplace benefitting investors, consumers and businesses is fully in motion.

The CFTC’s 62 final rules, orders and guidance have brought traffic lights, stop signs, and speed limits to the once dark and unregulated swaps roads.

There are bright lights and robust safety measures in place that didn’t exist in 2008.

With these reforms, farmers, ranchers, producers and commercial companies can continue to rely on transparent, competitive markets to lock in a price or a rate and focus on what they do best – innovating, producing goods and services for the economy, and creating jobs.

These reforms are not based on new ideas. Economists have written about them for centuries. Just start with Adam Smith in the Wealth of Nations where he wrote about the benefits of lowering the price of information and the price of access. In essence, if you make information free, the economy benefits. Similarly, if access to the market is free, everybody gets to compete.

Transparency

Thus, in line with Adam Smith, the first critical component of swaps market reform is transparency.

Today, the public can see the price and volume of each swap transaction as it occurs on a website, like a modern-day tickertape.

This transparency lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition.

Regulators have benefited as well. Nearly $400 trillion in market facing swaps are being reported into data repositories.

This transparency spans the entire marketplace – cleared as well as bilateral or customized swaps. Every product, without exception, now must be reported.

Further, starting this month, the public is benefitting as swap trading platforms come under new common-sense rules of the road.

Over time, market participants will benefit from the enhanced pre-trade transparency and competition of these new trading platforms, called swap execution facilities (SEFs).

SEFs are required to provide all market participants – dealers and non-dealers alike – with impartial access, once again following Adam Smith’s observations on how to benefit the economy.

Further, SEFS provide the ability to compete by leaving live, executable bids or offers in an order book.

Requiring trading platforms to be registered and overseen by regulators was central to the swaps market reform President Obama and Congress included in the Dodd-Frank Wall Street Reform and Consumer Protection Act. They expressly repealed exemptions, such as the so-called “Enron Loophole,” for unregistered, multilateral swap trading platforms.

Seventeen SEFs are temporarily registered. This is truly a paradigm shift – a transition from a dark to a lit market. It’s a transition from a mostly dealer-dominated market to one where others have a greater chance to compete.

Clearing

Another key component of completed swaps reforms is bringing transactions among financial institutions into central clearing.

This month, mandatory clearing of interest rate and credit index swaps is a reality for swap dealers, hedge funds and other financial institutions.

Clearinghouses lower risk and promote access for market participants.

As of October 25, 80 percent of new interest rate swaps were cleared. In total, over $190 trillion of the approximately $340 trillion market facing interest rate swaps market, or 57 percent, was cleared. This compares to only 21 percent of the market in 2008.

Earlier this month, the guaranteed affiliates and branches of U.S. persons were required to come into central clearing. Further, hedge funds and other funds whose principal place of business is in the United States or that are majority owned by U.S. persons are required to clear as well. No longer will a hedge fund with a P.O. Box in the Cayman Islands for its legal address be able to skirt the important reforms Congress put in place.

Swap Dealer Oversight

The third key component of swaps market reform is bringing oversight to swap dealers.

In 2008, swaps activity was basically not regulated in the United States, Europe or Asia. Among the reasons for this, it was claimed that financial institutions did not need to be specifically regulated for their swaps activity, as they or their affiliates already were generally regulated as banks, investment banks or insurance companies.

AIG’s downfall was a clear example of what happens with such limited oversight.

Today, we have 88 swap dealers and two major swap participants registered. This group includes the world’s 16 largest financial institutions in the global swaps market, commonly referred to as the G16 dealers. It also includes a number of energy swap dealers.

Swap dealer oversight helps protect the public. It lowers risk and increases market integrity. Swap dealers throughout this year have had to report their transactions and comply with sales practice and other business conduct standards.

International Coordination on Swap Market Reform

Since the 2009 meeting in Pittsburgh, the CFTC has been consistently coordinating with our international counterparts on swaps market reform. The United States, Europe, Japan and the largest provinces in Canada all have made substantial progress.

As the CFTC and the international regulatory community move forward with reform, we all recognize that risk knows no geographic border. AIG nearly brought down the U.S. economy through the operations of its offshore guaranteed affiliate.

It wasn’t the only U.S. financial institution that brought risk back home from its far-flung operations during the 2008 crisis.

It was also true at Lehman Brothers, Citigroup, and Bear Stearns. Ten years earlier, it was true at Long-Term Capital Management.

The nature of modern finance is that financial institutions commonly set up hundreds, or even thousands, of legal entities around the globe. When a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk crosses international borders.

The U.S. Congress was clear in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) that the far-flung operations of U.S. enterprises are to be covered by reform.

The CFTC, coordinating closely with global regulators, completed guidance on the cross-border application of the Dodd-Frank Act in July. Swaps market reform covers transactions between non-U.S. swap dealers and guaranteed affiliates of U.S. persons, as well as swaps between two guaranteed affiliates.

The guidance embraces the concept of substituted compliances, or relying on another country’s rules when they are comparable and comprehensive.

This guidance is critical to protecting the public from the risk of foreign-affiliate failures in the future.

Benchmark Interest Rates

Today, the CFTC announced its fifth settlement against a bank for pervasively rigging key interest rate benchmarks, LIBOR and Euribor.

LIBOR and Euribor are critical reference rates for global futures and swaps markets. In the U.S., LIBOR is the reference rate for 70 percent of the futures market and more than half of the swaps market. It is the reference rate for more than $10 trillion in loans.

Unfortunately, we once again see how the public trust can be violated through bad actors readily manipulating benchmark interest rates.

Through hundreds of manipulative acts spanning six years, in six offices, and on three continents, more than two dozen Rabobank employees, including a senior manager, manipulated, attempted to manipulate and falsely reported crucial reference rates in global financial markets. Rabobank employees also aided and abetted other banks to manipulate benchmark interest rates.

I wish I could say that this won’t happen again, but I can’t.

LIBOR and Euribor are not sufficiently anchored in observable transactions. Thus, they are basically more akin to fiction than fact. That’s the fundamental challenge so sharply revealed by Rabobank and our prior cases.

This fifth instance of benchmark manipulative conduct highlights the critical need to find replacements for LIBOR and Euribor – replacements truly anchored in observable transactions.

Though addressing governance and conflicts of interest regarding benchmarks is critical, that will not solve the lack of transactions in the market underlying these benchmarks.

That is why the work of the Financial Stability Board to find alternatives and consider potential transitions to these alternatives is so important. The CFTC looks forward to continuing to work with the international community on much-needed reforms.

Resources

I’d like to close on one of the greatest challenges to well-functioning swaps and futures markets. That challenge is that the agency tasked with overseeing these markets is not sized to the task at hand.

At 675 people, we are only slightly larger than we were 20 years ago. Since then though, Congress gave us the job of overseeing the $400 trillion swaps market, which is more than 10 times the market we oversaw just four years ago. Further, the futures market itself has grown fivefold since the 1990s.

You might not have liked the umpire’s call in the game this week on obstruction, but would you want Major League Baseball to expand tenfold and not add to its corps of umpires?

We’ve basically completed the task of writing all the reforms and are past the initial market implementation dates. We’ve brought the largest and most significant enforcement cases in the Commission’s history.

These successes, however, should not be confused with the agency having sufficient people and technology to oversee these markets.

We need people to examine the clearinghouses, trading platforms and dealers. We need surveillance staff to actually swim in the new data pouring into the data repositories. We need lawyers and analysts to answer the many hundreds of questions that are coming in from market participants about implementation. We need sufficient funding to ensure this agency can closely monitor for the protection of customer funds. And we need more enforcement staff to ensure this vast market actually comes into compliance and go after bad actors in the futures and swaps markets.

The President has asked for $315 million for the CFTC. This year we’ve been operating with only $195 million.

Worse yet, as a result of continued funding challenges, sequestration and a required minimum level Congress set for the CFTC’s outside technology spending, the CFTC already has shrunk 5 percent, and just last week, was forced to notify employees that they would be put on administrative furlough for up to 14 days this year.

I recognize that Congress and the President have real challenges with regard to our federal budget. I believe, though, that the CFTC is a good investment for the American public. It’s a good investment to ensure the country has transparent and well-functioning markets.

Thank you, and I look forward to your questions.

CFTC CHAIRMAN GENSLER'S REMARKS BEFORE AMERICANS FOR FINANCIAL REFORM

FROM: U.S. COMMODITY FUTURES EXCHANGE COMMISSION 
Keynote Remarks of Chairman Gary Gensler before the Americans for Financial Reform and Georgetown University Law Center’s Financial Transparency Symposium

Note: this transcript was edited and abbreviated for clarity

October 11, 2013

I want to thank the Americans for Financial Reform and Georgetown Law Center for this invitation. We’re in the midst of a government shutdown so I’m going to give a presentation from some notes, not the usual prepared text speech.

Five years ago, the U.S. economy was in free fall.

Five years ago the swaps market was at the center of this crisis. It cost middle class Americans – and hardworking people around the globe – their jobs, their pensions and their homes.

President Obama and Congress came together and they responded with historic reforms to bring the swaps market into the light through transparency and oversight.

And now, with the Commodity Futures Trading Commission’s (CFTC) near completion of these reforms, a true paradigm shift has resulted.

A paradigm shift to a transparent, regulated marketplace that benefits investors, consumers and businesses in this country and around the globe.

The CFTC, through 61 final rules, orders, and guidances, has brought traffic lights, stop signs, and speed limits to this once dark and unregulated market.

Through these reforms, we have stood up an entire comprehensive regime covering:

Transparency and access – which helps promote greater competition and market efficiency;
Clearing – promoting access and lowering risk;
Oversight of intermediaries and customer protection – to better protect the public;
Registration requirements – ensuring there is actual compliance with the reforms; and
New enforcement tools – to guard against market abuses.
These completed reforms have resulted from an active public debate –

First in Congress and the Administration, and then
Subsequently through our public rule making. We have received nearly 40,000 comment letters on these various rules – and that’s not even counting the 19,000 comments on the Volcker Rule. We’ve conducted 2,200 plus meetings that we’ve put on our website.
I thought I would review where we stand today in this critical reform in the context of a dozen debates that have gone on around this reform.

The first three debates relate to the scope of reform.

First, which products should be covered?

Congress and the Administration chose not to limit regulatory reform only to those products or entities that received the most attention during the financial crisis, which were credit derivatives. The comprehensive regulatory framework now covers the full suite of swaps products. This includes interest rate swaps, currency swaps, commodity swaps, equity swaps, credit default swaps – the center of the crisis – as well as derivative products that may be developed in the future.

Credit default swaps may have been the leading culprit in the crisis, but omitting the markets for interest rate, currency swaps and commodity swaps would have left, the market still opaque and inefficient. And we needed to shine the same light and lower risk in all of the OTC derivatives markets, not just credit derivatives.

Now there was some debate about foreign currency forwards and swaps. Though they are exempted from clearing and the trade execution mandate, Congress and the CFTC worked to ensure that they have to be reported into trade repositories, and also that they come under business conduct standards. We’ve worked closely with the foreign currency community, and they have changed their back office documentation as of June of this year.

Second, which participants should be covered through reforms?

Congress and our rules ended up with a three-tiered system of participant reforms: swap dealers at the center; then financial institutions; and finally, non-financial institutions, or so-called end-users.

It is only with comprehensive regulation of the dealers at the center of this market that we can really oversee and regulate the entire derivatives markets. This was one of the key reforms that we laid out with Secretary Geithner and Mary Schapiro during the presidential transition five years ago. Subsequently, we worked with then Chairman Harkin of the Senate Agriculture Committee and others to ensure that there would be oversight of the dealers themselves.

Through regulating the dealers, we ensure that reform applies to both standardized and customized products.

You might remember the debate. Would there be an allowance for a bilateral or customized swap, ensuring the economy could get the benefit of all these hedging products? The answer was yes. Customized products would continue, but we would need to oversee the dealers that are offering those swaps.

By giving the CFTC clear authority to set business conduct standards, swap dealers and their nearly 10,000 counterparties around the globe have changed their swap documentation, lowering risk.

Today, we have 86 registered swap dealers and two major swap participants. This group includes the world’s 16 largest financial institutions in the global swaps market or what’s called the G16. It also includes a number of energy swap dealers.

The second group of market participants was financial institutions. There was a debate four years ago as to whether financial institutions were to be covered by reform. Our thinking was that if we didn’t include hedge funds, insurance companies, mortgage companies and the like, we would leave a significant part of the interconnected financial system outside of reform. Though not required to register as dealers, they came under two of the very critical reforms – the required clearing and the required trade execution. Congress did that, and we’ve executed on that plan.

The third group of market participants is the non-financial participants – the so-called “end-users.” It’s really the end-users, the non-financial side of our economy, that provide 94 percent of private-sector jobs in America. They only make up a small, single-digit percent of the swaps market. End-users were exempted from clearing and many other rules. For instance, the Commission’s proposed rule on margin provides that end-users do not have to post margin. They do have some responsibilities for recordkeeping and reporting.

Third, what would be the cross-border scope of reform?

Would reform just be territorial, such that only that which happened within the borders of the United States were covered? Or would it extend further?

Congress recognized that risk knows no geographic border. Look at AIG – it nearly brought down the economy – its operations were in London. It was actually registered as a French bank with a branch in London.

AIG wasn’t the only one. Lehman Brothers, Citigroup, Bear Stearns – Bear Stearns hedge funds, by the way, were incorporated in the Cayman Islands, as well as Citigroup’s off-balance-sheet Structured Investment Vehicles (SIVs). Ten years earlier, there was Long-Term Capital Management, a hedge fund operated out of Connecticut. You would have thought, as I did on a certain Sunday in September of 1998 when I visited it, that it was a U.S. person, even though it was booking its $1.2 trillion derivatives book in its Cayman Island affiliate.

Congress knew that the nature of modern finance is that financial institutions commonly set up hundreds, even thousands of institutions around the globe. When Lehman Brothers went down, it had 3,300 legal entities. When a run starts at any part of an overseas affiliate or branch in modern financial institution days, risk knows no geographic boundary. It comes right back here, just as our housing risk went offshore to other countries.

What Congress made clear in reform was that the far-flung operations of U.S. enterprises are to be covered. Congress said this in key words. We really need to thank Chairman Frank because he reached out to our agency and asked how to deal with what he called “risk importation?”

Our remarkable staff at the CFTC worked with his staff on the key words in the statute that say if it has “a direct and significant connection with activities in or effect on Commerce of the United States” it’s covered by reform. We were not going to just take a territorial approach. That’s really because Chairman Frank had the vision and foresight, asked for advice, got advice, and included, in a bipartisan way at the time, these key words in the statute.

The CFTC, coordinating closely with global regulators, completed cross-border guidance in July. Swaps market reform would cover transactions between non-U.S. dealers and guaranteed affiliates of U.S. persons. Why guaranteed affiliates? Because their risk can come right back here. Reforms also cover swaps entered into between two guaranteed affiliates or with the offshore branches of U.S. banks. Another more recent lesson comes from the events surrounding JPMorgan Chase’s Chief Investment Office, which booked their credit index swap trades through their London branch, which was fully part of the bank.

After allowing time for market participants to phase in compliance, this week, much of our cross-border guidance became effective. Yesterday, the final U.S. person guidance became effective. Based on that, hedge funds and other funds whose principal place of business is in the U.S. or majority owned by U.S. persons will clear and come into many other reforms.

Hedge funds like Long-Term Capital Management today would now clear standardized swaps. So no longer would a P.O. Box in the Cayman Islands or another nice vacation holiday spot be good enough to get out of reform.

Further, yesterday foreign branches of U.S. persons, that means branches of big U.S. banks, and guaranteed affiliates of U.S. financial institutions now have to comply with the clearing requirement.

Now, let me turn to the big decisions on substance.

Let me start with transparency.

Key to promoting efficiency in markets is transparency and access. Adam Smith in the Wealth of Nations wrote about this over 200 years ago. He contended that if the price of information is lowered or you make information free, in promoting such transparency, the economy benefits. Similarly, if access to the market is free, everybody gets to compete.

Transparency and access was not the swaps market as we knew it in 2008. It was opaque. Most people in the market couldn’t see the pricing, and access was really dominated by large dealers with trillion dollar plus balance sheets.

In bringing forward reform, there was a debate about whether transparency to regulators was enough or if we also needed public market transparency. Congress and the Administration determined that regulatory transparency wasn’t enough. We have put in place swap data repositories (SDRs) to provide transparency to regulators, and as of two weeks ago, there was $400 trillion notional of swaps in the data repositories (market facing and single counted swaps).

But that’s not enough. Adam Smith was about promoting transparency to the public, and that’s what Congress believed as well.

First, Congress responded that we need post-trade transparency. As of December 31 of this past year, we started putting it in place, and as of September 30, the last compliance date, the public and end-users can see the price and volume of each transaction as it occurs on a website, like a modern-day ticker tape.

Due to an amendment sponsored by Sen. Jack Reed during the conference, this post-trade transparency covers not only those transactions on an exchange or on a registered platform, it covers the entire marketplace – including customized swaps and off-exchange swaps.

Also Congress adopted an initiative to make sure there is transparency before the transaction. This covers the portion of the market for swap dealers and financial institutions trading swaps that are required to be cleared and made available for trading on a platform.

Starting this past week, on October 2, the public began to benefit as swap trading platforms, called swap execution facilities (SEFs), came under common-sense rules of the road. SEFs will require that the dealers and non-dealers alike are able to get impartial access -- another part of Adam Smith’s writings from 200 years ago.

Seventeen SEFS are currently registered and operating. It is truly a paradigm shift. It’s still early, but just to give you a few numbers, the first day there was about 1,200 trades on this collection of SEFS. Two or three days ago, it was 1,800 trades.

We do understand that there are going to be issues that arise. Just as we have for other reforms, we are going to try to work with market participants to smooth the transition. But let there not be any doubt – over time, market participants will benefit from enhanced pre-trade transparency because it brings competition into the marketplace.

A fifth key decision was regarding requiring central clearing.

Clearing has existed since the 1890s. It lowers risk to the market. The debate was not whether there was going to be clearing. It was who was going to be covered by it. Where Congress came out is that financial actors would be covered as well as the dealers.

The dealers in 2009 came together, and it’s been well reported, and said they could live with clearing, but they were contending it should be mandated only for between dealers. That was because they wanted to lower their risk between themselves. Congress responded and said no, it needs to cover 90-plus percent of the market. It has to cover financial enterprises as well to lower the risk of that interconnected market.

This month, with the completion of phased implementation, mandatory clearing of interest rate and credit index swaps is a reality for dealers, hedge funds, and other financial institutions. And with yesterday’s phase-in, it’s now also a reality for these P.O. Box hedge funds as well, and for the branches and guaranteed affiliates around the globe. In mid-September, 72 percent of new interest rate swaps were being cleared.

In the data repositories, there are currently $330 trillion of interest rate swaps, and $182 trillion, or 54 percent, were cleared.

The sixth key debate was regarding access.

Back to Adam Smith’s writings, how do you make a market competitive? You make information free, and you make access free. Congress got this right. It required, and the CFTC has followed, impartial access to trading venues. As these 17 SEFs have gone live, we are looking at each of their rulebooks to ensure they really provide impartial access -- that it’s not just a dealer-dominated platform, but other financial institutions and market participants can have access and compete in the marketplace.

When we come out of the shutdown, we’ll be calling up a few of these platforms and saying “I don’t think that’s consistent with the spirit of what Congress put in place.” Impartial access really means that the non-dealers as well as the dealers, the non-clearing members as well as the clearing members, have access. All of these parties can make bids and offers on a central-limit order book. All can respond as well as request quotes in an RFQ system. There’s not supposed to be two rooms in a swap execution facility, one for the insiders and one for the less dealer-oriented group.

Open access to clearing was a key piece that Congress included in reform as well. That means that the clearinghouses have to take swaps trades even if it’s not from their sister or affiliated trading platform. Of the 17 registered SEFs, only one of them is affiliated directly with a clearinghouse, and the other 16 are not. They all actually do have access to the main clearinghouses. This is significant.

We also put in place something called straight-through processing. It’s highly technical, but it was significantly debated. What it comes down to is – will there be real-time processing of a trade to a clearinghouse. Why is it critical? Because it creates great access when everybody knows that if they intend to clear a trade, they don’t have to worry about their counterparty’s credit risk. In the 1980s and 1990s and into the next decade, swaps became centered and concentrated with the bank sector because the banks are in the business of extending credit, and they have very large balance sheets. To bring access to everybody else, you need this highly technical, specialized thing called straight-through processing or real-time processing.

With regard to SEFs, we put out guidance on September 26 to ensure that straight-through processing is a reality, that it’s not just something in the CFTC rulebooks. That’s what we do, every step of the way. We’re trying to ensure that the vision of Congress, the vision of the Administration happens.

A seventh key decision related to intermediaries.

Were we going to register them or not? Registration or licensing means if you go on the roads, you have passed some test. You also are consenting in various states to the jurisdiction or the authority of the police. Registration is a critical part of reform – for dealers as well as to many others. I see Pat McCarty back there who worked for Sen. Blanche Lincoln. He ensured the word “swap” was put into each and every statutory definition for intermediaries – commodity pool operators, futures commission merchants, introducing brokers, every spot. The registration regime had to include swaps, not just futures.

An eighth key decision was on customer protection. This was not so much a decision Congress had – that was straightforward at the time. But after Dodd-Frank passed, we had to go back and ask -- what do we do to better protect customers? There were a lot of debates. We decided to reverse the loosening made in 2003-2005 on the investment of customer funds, in Rule 1.25. We required clearinghouses to move to something called gross margining -- they can no longer net two customers’ positions against each other. But there’s more that we need to do on customer protection when you look at the events in the last two years and the failings of a couple of big firms in that area.

A ninth key decision that Congress made was repealing what was called the “Enron loophole.”

You might remember that a law passed in 2000, the Commodity Futures Modernization Act, which included provisions that various trading platforms didn’t have to register with the CFTC. They didn’t have to have that driver’s license to be a trading platform. These platforms, whether they were for energy, foreign currency or interest rates, they didn’t have any oversight at all. Congress debated it, and it was a long debate. It reached its crescendo in the summer of 2008. There was a farm bill that passed that year that moved to close the “Enron loophole” that was partially successful. I’d even note that in June of 2008, then Senator Obama put out a release calling for fully closing the “Enron loophole.”

Why do I focus on this? Because it spilled over into the debate about SEFs. A footnote in the SEF rule, Footnote 88, has gotten much attention, both by the media and market participants. This Footnote 88 is just confirming what Congress did -- Congress closed the “Enron loophole.” I don’t see what the discussion is here. We put a footnote in confirming that Congress had closed this loophole. What it means is that all the platforms as of October 2 needed to register.

Now there are some questions that have come up about jurisdiction. What will trigger this registration? Which platforms will trigger it? I think that if anybody is asking the question, they may want to read the guidance we did on cross-border in July.

My own conservative advice is that if a multilateral trading platform itself is a U.S. person, they probably ought to register. If a platform itself is operating in New York or Chicago or elsewhere in the U.S., you’ve got to think that you’ve got a connection to activities or commerce in the U.S.

I would also say that if you permit U.S. persons or persons located in the U.S. – you’ve got a lot of folks located in New York or Connecticut or Chicago that are using your platform – you’d think that the platform has a direct and significant connection to the activities in the U.S., whether you’ve given direct or indirect access. My conservative advice would be that you would want to register.

I recognize that this approach would trigger some SEF registrations for foreign-based platforms that are already registered with their home country. We’ve had one such platform actually reach out to us from Australia. It’s going to register with us, and we’re working with the Australian home country regulators. We’re prepared to figure out where we might defer to those home country regulators. But the registration itself is important so that we have some oversight, some licensing if I can use that analogy.

We also along the way registered many commodity pools that had previously not registered with the CFTC because of exemptions from 2003. The repeal of these exemptions was actually the case that went to the DC Circuit.

A tenth key decision was on enforcement tools.

Prior to Dodd-Frank, our enforcement authority was more narrow. In particular, our anti-manipulation rules required us to prove that someone intentionally created an artificial price. Dodd-Frank filled gaps in our authority. As a result of Senator Cantwell’s amendment and our new rules, we have broad powers to prohibit reckless, fraud-based and other manipulative conduct. We also can use this new broad provision against any deceptive conduct in connection with futures and swaps. These authorities bring us in line with some similar authorities the SEC has had for years, as well as the Federal Energy Regulatory Commission. These authorities expand our arsenal of enforcement tools and strengthen the Commission’s ability to effectively deal with threats to market integrity. We will use these tools to be a more effective cop on the beat to promote market integrity and protect market participants.

An eleventh decision was about compliance dates, phased compliance.

We as an agency were given by Congress one year to get everything done. We didn’t quite make that. We basically did it in three years – these 61 completed rules, orders and guidances. Congress also gave us another authority. They said nothing we put in place could be effective shorter than, I think it is 60 days after we have a completed rule. We chose to use the congressional authority to give more time. Sometimes we’d give a year. Sometimes we’d only give the two months. But we also sought public input on phased compliance to lower the costs of this change but also to make it work.

Phased compliance started with the anti-manipulation rules that went into effect in 2011. The next piece was that swap data repositories had to register with us. The big compliance date was one year ago, October 12 of 2012, when the whole reform went live, the definitions were in place. Dealers then registered in December. We started with 66. We have had 20 more -- 86 dealers have registered. Clearing was phased through this whole year. Real-time reporting was phased through this whole year. Now swap execution facilities are in place. We very much believe phased compliance smoothes this through because it is a monumental change.

Lastly, decision twelve, which was not directly in Dodd-Frank. A number of years ago, we decided to focus on reforms on the benchmarks that underlie the vast majority of the swaps market.

There are interest rate benchmarks called LIBOR, Euribor and others, if I can just call them the “ibors,” that are critical reference rates for our markets. In the U.S., LIBOR is the reference rate for 70 percent of the futures market and more than half of the swaps market. Thus, it is the most significant reference rate for the swaps market, which we’ve brought under reform.

A benchmark that is an underlying reference to a market, like these interest rate benchmarks, can only have market integrity if it is based on fact, not fiction. Unfortunately, what we have found with regard to LIBOR and Euribor is the underlying market, the so-called interbank market for unsecured lending between banks, has essentially dried up and no longer exists. Why is that? Well why does a bank really want to lend to another bank with an open line of credit, like a credit card loan? They only want to lend to each other like an auto loan or a mortgage. They want collateral to back that loan up. That market has shifted dramatically over the last ten or so years.

We’ve brought four big enforcement cases with regard to this, along with the Justice Department and international regulators. We’ve worked with international standard setters called International Organization of Securities Commissions to put in place a new paradigm for how benchmarks should be based on observable transactions – they need to be anchored in observable transactions. There needs to be a there, there. These benchmarks need better governance to ensure against conflicts of interest.

The Financial Stability Oversight Council, a reform out of Dodd-Frank, has spoken to need for benchmark reform and recommended that U.S. regulators work with foreign regulators and international bodies and market participants to really address two questions:

To promptly identify interest rate benchmarks anchored in observable transactions and supported by appropriate governance; and
To develop a plan to accomplish a transition.
It’s not going to be without challenges. These are the underlying benchmarks of $300 trillion plus in derivatives. But we have the ingenuity and the human spirit that we can make change. We cannot leave the system so frail that it has an underlying benchmark that is essentially fiction, not fact.

Those are the 12 big decisions that we’ve made along the way.

The government shutdown and resources are a challenge. Looking forward, our greatest challenge at the agency is not the shutdown. We’ll get through that. It is surreal having only 30 or so people at the agency, but we’ll get through the shutdown. We are a skeletal crew right now and at best we have a cursory oversight of the markets. Though we are dark, we have brought additional lightness to the markets with these new swap execution facilities and the cross-border guidance going into effect yesterday.

Looking past the shutdown, we’re only an agency of about 680 people. Far too small to oversee the markets that we’ve been tasked with from Congress. I think that’s a significant challenge for reform going forward.

I think the other significant challenge going forward is that as market participants look to maximize their revenues and customer support, as they should, they, at times, may look to arbitrage our rules versus other rules around the globe, or just arbitrage our rules against our rules, if they can.

I think that we’re in very firm setting on clearing, on data reporting, on real-time reporting, on some of the business conduct areas, reforms that all have been implemented. Right now, with this week’s implementation of cross-border and last week’s standing up of SEFs and, there’s bound to be challenges with regard to these reforms and we’ll get through them as they arise.

Lastly, just as Congress came together on new reforms in 2010, our regulations will need to evolve. They will need to evolve to stay abreast of market participants’ practice. We are hopeful that we got things right, but I think we always need to stay open that there may be things down the road that need to change.

Thank you. I’m pleased to take questions.

CFTC CHAIRMAN SAYS SWAPS MARKET PLAYED CENTRAL ROLE IN FINANCIAL CRISIS

The following remarks were made by CFTC Chairman Gary Gensler to the House Committee on Financial Services. The remarks are an excerpt from the CFTC website:

June 16, 2011
Good morning Chairman Bachus, Ranking Member Frank and members of the Committee. I thank you for inviting me to today’s hearing on the international context of financial regulatory reform. I also thank my fellow Commissioners and CFTC staff for their hard work and commitment on implementing the legislation.
I am pleased to testify alongside my fellow regulators.
Global Crisis
It has now been more than two years since the financial crisis, when both the financial system and the financial regulatory system failed. So many people – not just in the United States, but throughout the world – who never had any connection to derivatives or exotic financial contracts had their lives hurt by the risks taken by financial actors. The effects of the crisis remain. All over the world, we still have high unemployment, homes that are worth less than their mortgages and pension funds that have not regained the value they had before the crisis. We still have significant uncertainty in the financial system.
Though the crisis had many causes, it is clear that the swaps market played a central role. Swaps added leverage to the financial system with more risk being backed up by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market and helped to accelerate the financial crisis. They contributed to a system where large financial institutions were thought to be not only too big to fail, but too interconnected to fail. Swaps – initially developed to help manage and lower risk – actually concentrated and heightened risk in the economy and to the public.
At the conclusion of the September 2009 G-20 summit held in Pittsburgh, leaders of 19 nations and the European Union concurred that “[a]ll standardized OTC derivative contracts should be traded on exchanges or electronic trading platforms, where appropriate, and cleared through central counterparties by end-2012 at the latest. OTC derivative contracts should be reported to trade repositories. Non-centrally cleared contracts should be subject to higher capital requirements.”
We now are working across borders to achieve that goal.
Derivatives Markets
Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives market – including both the historically regulated futures market and the heretofore unregulated swaps market – is essential so that producers, merchants and other end-users can manage their risks and lock in prices for the future. Derivatives help these entities focus on what they know best – innovation, investment and producing goods and services – while finding others in a marketplace willing to bear the uncertain risks of changes in prices or rates.
With notional values of approximately $300 trillion in the United States – that’s more than $20 of swaps for every dollar of goods and services produced in the U.S. economy – and approximately $600 trillion worldwide, derivatives markets must work for the benefit of the public. Members of the public keep their savings with banks and pension funds that use swaps to manage their interest rate risks. The public buys gasoline and groceries from companies that rely upon futures and swaps to hedge their commodity price risks.
That’s why international oversight must ensure that these markets function with integrity, transparency, openness and competition, free from fraud, manipulation and other abuses. Though the CFTC is not a price-setting agency, recent volatility in prices for basic commodities – agricultural and energy – are very real reminders of the need for common sense rules in the derivatives markets.
International Coordination
To address changes in the derivatives markets as well as the real weaknesses in swaps market oversight exposed by the financial crisis, the CFTC is working to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act’s derivatives oversight reforms. Our international counterparts also are working to implement reform.
Japan has acted and is now working to implement its reforms. In September of last year, the European Commission (E.C.) released its swaps proposal. The European Council and the European Parliament are now considering the proposal. Asian nations, as well as Canada, also are working on their reform packages.
As we work to implement the derivatives reforms in the Dodd-Frank Act, we are actively coordinating with international regulators to promote robust and consistent standards and avoid conflicting requirements in swaps oversight. The Commission participates in numerous international working groups regarding swaps, including the International Organization of Securities Commissions Task Force on OTC Derivatives, which the CFTC co-chairs with the Securities and Exchange Commission (SEC). The CFTC, SEC, European Commission and European Securities Market Authority are intensifying discussions through a technical working group.
As we do with domestic regulators, we are sharing many of our memos, term sheets and draft work product with international regulators. We have been consulting directly and sharing documentation with the European Commission, the European Central Bank, the UK Financial Services Authority, the new European Securities and Markets Authority, the Japanese Financial Services authority and regulators in Canada, France, Germany and Switzerland. Two weeks ago, I met with Michel Barnier, the European Commissioner for Internal Market and Services, to discuss ensuring consistency in swaps market regulation.
The Dodd-Frank Act recognizes that the swaps market is global and interconnected. It gives the CFTC the flexibility to recognize foreign regulatory frameworks that are comprehensive and comparable to U.S. oversight of the swaps markets in certain areas. In addition, we have a long history of recognition regarding foreign participants that are comparably regulated by a home country regulator. The CFTC enters into arrangements with our international counterparts for access to information and cooperative oversight. We have signed memoranda of understanding with regulators in Europe, North America and Asia.
Furthermore, Section 722(d) of the Dodd-Frank Act states that the provisions of the Act relating to swaps shall not apply to activities outside the U.S. unless those activities have “a direct and significant connection with activities in, or effect on, commerce” of the U.S. We are developing a plan for application of 722(d) and expect to receive public input on that plan.
I will highlight a few broad areas where both regulators in the U.S. and regulators abroad are implementing swaps oversight reform.
Broadening the Scope
Foremost, the Dodd-Frank Act broadened the scope of oversight. The CFTC and the SEC will, for the first time, have oversight of the swaps and security-based swaps markets. The CFTC’s remit is growing from a marketplace that has a notional value of approximately $40 trillion to one with a notional value of approximately $300 trillion.
Similar to the Dodd-Frank Act, the European Commission’s proposal covers the entire product suite, including interest rate swaps, currency swaps, commodity swaps, equity swaps and credit default swaps. It is important that all standardized swaps are subject to mandatory central clearing. We are working with our counterparts in Europe to make sure that all swaps, whether bilateral or traded on platforms, are subject to such mandatory clearing.
Centralized Clearing
Another key reform of the Dodd-Frank Act is to lower interconnectedness in the swaps markets by requiring standardized swaps between financial institutions to be brought to central clearing. This interconnectedness was, in part, the reason for the $180 billion bailout of AIG.
Clearing is another area where the Dodd-Frank Act and the E.C.’s proposal generally are consistent. In both cases, financial entities, such as swap dealers, hedge funds and insurance companies, will be required to use clearinghouses when entering into standardized swap transactions with other financial entities. Non-financial end-users that are using swaps to hedge or mitigate commercial risk, however, will be able to choose whether or not to bring their swaps to clearinghouses.
Capital and Margin
The Dodd-Frank Act includes both capital and margin requirements for swap dealers to lower risk to the economy. Capital requirements, usually computed quarterly, help protect the public by lowering the risk of a dealer’s failure. Margin requirements, usually paid daily, help protect dealers and their counterparties in volatile markets or if either of them defaults. Both are important tools to lower risk in the swaps markets.
The Dodd-Frank Act authorizes bank regulators, the CFTC and the SEC to set both capital and margin “to offset the greater risk to the swap dealer or major swap participant and the financial system arising from the use of swaps that are not cleared.”
In Europe, Basel III includes capital requirements for swap dealers. The E.C.’s swaps proposal includes margin requirements for uncleared swaps to lower the risk that a dealer’s failure could cascade through its counterparties.
Data Reporting
The Dodd-Frank Act includes robust recordkeeping and reporting requirements for all swaps transactions. It is important that all swaps – both on-exchange and off – be reported to data repositories so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
There is broad international consensus on the need for data reporting on swaps transactions. The E.C. proposal includes similar requirements to the Dodd-Frank Act’s requirements. Regulators in Japan, Hong Kong and China also have indicated the need for reporting of swaps data.
Business Conduct Standards
The Dodd-Frank Act explicitly authorizes regulators to write business conduct standards to lower risk and promote market integrity. The E.C. proposal addresses similar protections through what it calls “risk mitigation techniques.” This includes documentation, confirmation and portfolio reconciliation requirements, which are important features to lower risk. Further, the Dodd-Frank Act provides regulators with authority to write business conduct rules to protect against fraud, manipulation and other abuses.
Promoting Transparency
In the U.S., the Dodd-Frank Act brings transparency to the derivatives marketplace. Economists and policymakers for decades have recognized that market transparency benefits the public.
The more transparent a marketplace is, the more liquid it is, the more competitive it is and the lower the costs for hedgers, borrowers and their customers.
The Dodd-Frank Act brings transparency in each of the three phases of a transaction.
First, it brings pre-trade transparency by requiring standardized swaps – those that are cleared, made available for trading and not blocks – to be traded on exchanges or swap execution facilities.
Second, it brings real-time post-trade transparency to the swaps markets. This provides all market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions.
Third, it brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties.
The Dodd-Frank Act also includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.
In Europe, the E.C. is considering revisions to its existing Markets in Financial Instruments Directive (MiFID), which includes a trade execution requirement and the creation of a report with aggregate data on the markets similar to the CFTC’s Commitments of Traders reports.
Furthermore, in February 2011, IOSCO issued a report on trading that included eight characteristics that trading platforms should have. Many of the IOSCO members participating in the report indicated a belief that added benefits are achieved through multi-dealer trading platforms. The IOSCO report concluded that, beyond the added benefits of pre-trade transparency, trading helps mitigate systemic risk and protect against market abuse.
Japan’s swaps reform promotes transparency through mandated post-trade reporting to a trade repository. Hong Kong is examining exchange-trading and electronic platform requirements as it pursues derivatives reform. China intends to mandate electronic trading of RMB FX forwards, RMB forward swaps and RMB currency swaps on trading platforms by the end of 2012.
Foreign Boards of Trade
The Dodd-Frank Act broadened the CFTC’s oversight to include authority to register foreign boards of trade (FBOTs) providing direct access to U.S. traders. To become registered, FBOTs must be subject to regulatory oversight that is comprehensive and comparable to U.S. oversight. This new authority enhances the Commission's ability to ensure that U.S. traders cannot avoid essential market protections by trading contracts on FBOTs that are linked with U.S. contracts.
Access to Data
The Dodd-Frank Act includes a provision that generally requires domestic and foreign authorities, in certain circumstances, to provide written agreements to indemnify SEC- and CFTC-registered trade repositories, as well as the SEC and CFTC, for certain litigation expenses as a condition to obtaining data directly from the trade repository regarding swaps and security-based swaps. In addition, the trade repository must notify the SEC or CFTC upon receipt of an information request from a domestic or foreign authority.
After having consulted with staff, SEC Chairman Shapiro and I wrote to European Commissioner Barnier to indicate our belief that the indemnification and notice requirements need not apply to requests for information from foreign regulators in at least two circumstances.
First, the indemnification and notice requirements need not apply when a trade repository is registered with the SEC or CFTC, is registered in a foreign jurisdiction and the foreign regulator, acting within the scope of its jurisdiction, seeks information directly from the trade repository. In such dual-registration cases, we acknowledged our belief that the Dodd-Frank Act's indemnification and notice requirements need not apply, provided that applicable statutory confidentiality provisions are met. Our staff is considering this, along with other recommendations, as it prepares final rules for the Commissions' consideration.
Second, as indicated in the SEC's and CFTC's proposed rules regarding trade repositories' duties and core principles, foreign regulators would not be subject to the indemnification and notice requirements if they obtain information that is in the possession of the SEC or CFTC. The SEC and CFTC have statutory authority to share such information with domestic and foreign counterparts and have made extensive use of this authority in the past to share information with our counterparts around the world. Furthermore, separate statutory authority exists to allow the SEC and CFTC to obtain information from a trade repository on behalf of a foreign regulator if that foreign regulator is investigating a possible violation of foreign law.
I anticipate that the CFTC staff will make additional recommendations for the Commission’s consideration to facilitate regulators’ access to information necessary for regulatory, supervisory and enforcement purposes.
Rule-Writing Process
The CFTC is working deliberatively, efficiently and transparently to write rules to implement the Dodd-Frank Act. The Commission on Tuesday scheduled public meetings in July, August and September to begin considering final rules under Dodd-Frank. We envision having more meetings throughout the fall to take up final rules.

The Dodd-Frank Act has a deadline of 360 days after enactment for completion of the bulk of our rulemakings – July 16, 2011. The Dodd-Frank Act and the Commodity Exchange Act (CEA) give the CFTC the flexibility and authority to address the issues relating to the effective dates of Title VII. We are coordinating closely with the SEC on these issues.
The Dodd-Frank Act made many significant changes to the CEA. Section 754 of the Dodd-Frank Act states that Subtitle A of Title VII – the Subtitle that provides for the regulation of swaps – “shall take effect on the later of 360 days after the date of the enactment of this subtitle or, to the extent a provision of this subtitle requires a rulemaking, not less than 60 days after publication of the final rule or regulation implementing such provisions of this subtitle.”

Thus, those provisions that require rulemakings will not go into effect until the CFTC finalizes the respective rules. Furthermore, they will only go into effect based on the phased implementation dates included in the final rules. During Tuesday’s public Commission meeting, the CFTC released a list of the provisions of the swaps subtitle that require rulemakings.
Unless otherwise provided, those provisions of Title VII that do not require rulemaking will take effect on July 16. The Commission on Tuesday voted to issue a proposed order that would provide relief until December 31, 2011, or when the definitional rulemakings become effective, whichever is sooner, from certain provisions that would otherwise apply to swaps or swap dealers on July 16. This includes provisions that do not directly rely on a rule to be promulgated, but do refer to terms that must be further defined by the CFTC and SEC, such as “swap” and “swap dealer.”
The order proposed by the Commission also would provide relief through no later than December 31, 2011, from certain CEA requirements that may result from the repeal, effective on July 16, 2011, of some of sections 2(d), 2(e), 2(g), 2(h) and 5d.
The proposed order will be open for public comment for 14 days after it is published in the Federal Register. We intend to finalize an order regarding relief from the relevant Dodd-Frank provisions before July 16, 2011.
Conclusion
Though two years have passed, we cannot forget that the 2008 financial crisis was very real. Effective reform cannot be accomplished by one nation alone. It will require a comprehensive, international response. With the significant majority of the worldwide swaps market located in the U.S. and Europe, the effectiveness of reform depends on our ability to cooperate and find general consensus on this much needed regulation.
Thank you, and I’d be happy to take questions.

CFTC CHAIRMAN MAKES REMARKS ON TRANSPARENCY AND THE SWAPS MARKETS

The following remarks were made by Chairman Gary Gensler of the Commodity Futures Trading commission. These remarks are from the CFTC web site:

" Remarks, Bringing Transparency to the Swaps Markets, National Association of Corporate Treasurers Conference
Chairman Gary Gensler
June 2, 2011

Good afternoon. I thank the National Association of Corporate Treasurers and Tom Deas for inviting me to speak today. Both the Commodity Futures Trading Commission (CFTC) and I have benefited from your thoughtful input and constant attention to important issues with regard to the swaps marketplace during the legislative process and the rule-writing process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act.

The Dodd-Frank Act brings essential reform to the swaps markets that will benefit the American public and each of you in your roles as corporate treasurers.

Though I am speaking to you in my formal capacity as Chairman of a market regulatory agency, I also was once co-head of finance at a major firm. Like many of you, I helped oversee how a corporation funded itself, managed its risk and met its budget.

As the CFTC has been working to implement the Dodd-Frank Act, I also have had the opportunity to meet with numerous corporate end-users to discuss their perspectives on the derivatives marketplace.

A lot has changed in the 13 years since I last had a role similar to yours – and most of you are treasurers for non-financial organizations – but I think we share a view that the financial system needs to work for both corporate America and the economy as a whole. I think we also can agree that, in 2008, the financial system did not work for corporate America or the economy as a whole.

Derivatives in the 2008 Financial Crisis

The financial crisis was very real. I am sure that most of your organizations did not make budget in 2009 – or at least not your original budget. Many of you probably had trouble making budgets in 2010.

The effects of the crisis remain. We still have high unemployment, millions of homes that are worth less than their mortgages and pension funds that have not regained the value they had before the crisis. We still have significant uncertainty in the economy.

One reason we had the 2008 financial crisis was because we did not have the right financial regulations in place. The financial system and the financial regulatory system failed. They failed the American public and they failed American businesses. When AIG and Lehman Brothers failed, you paid the price. As Americans are still struggling, still out of work and still very careful with their spending, your businesses are directly affected.

Though there were many causes to the crisis, it is clear that swaps played a central role. They added leverage to the financial system with more risk being backed up by less capital. They contributed, particularly through credit default swaps, to the bubble in the housing market. They contributed to a financial system where institutions were thought to be not only too big to fail, but too interconnected to fail. U.S. taxpayers bailed out AIG with $180 billion when that company’s ineffectively regulated $2 trillion swaps portfolio, which was cancerously interconnected to other financial institutions, nearly brought down the financial system.

These events demonstrate how swaps – initially developed to help manage and lower risk – can actually concentrate and heighten risk in the economy and to the public.

Lowering Risk

A key piece of the derivatives reforms of the Dodd-Frank Act is to lower the risks to the overall economy that are posed by the swaps marketplace. As we were so surely reminded in 2008, your health – the health of corporate America – as well as the economic health of the country, is put at risk when the financial system falters. Therefore, though much of the Dodd-Frank Act was directed to the financial sector, its reforms are critical to the health of the overall economy and the health of your own prospects.

One of the challenges that the Dodd-Frank Act addresses is that, like so many other industries, the financial industry has gotten very concentrated around a small number of very large firms.

Adding to the challenge is the perverse outcome of the financial crisis, which may be that many people in the markets have come to believe that this handful of large financial firms will – if in trouble – have the backing of the taxpayers. As it is unlikely that we could ever ensure that no financial institution will fail – because surely, some will in the future – we must do our utmost to ensure that when those challenges arise, the taxpayers are not forced to stand behind those institutions and that these institutions are free to fail.

The Dodd-Frank Act addresses this in many ways beyond derivatives, but the derivatives piece is a critical component. The derivatives reforms lower risk throughout the economy by heightening market transparency and directly regulating dealers for their swaps activity.

In addition, it directly lowers interconnectedness in the swaps markets by requiring those standardized swaps that are entered into and amongst financial institutions to be brought to central clearing. Each of these reforms is critical to lowering the risk that the financial system and, in particular, the failure of a large financial institution, poses to all of your corporations and the economy as a whole.

Promoting Transparent, Open and Competitive Markets

A further benefit that reform will bring to the economy and you in your roles as corporate treasurers is making the swaps marketplace more transparent, open and competitive. This reform will bring real, tangible benefits to the corporations that you represent.

Each part of our nation’s economy relies on a well-functioning derivatives marketplace. The derivatives markets are used to hedge risk and discover prices. They initially emerged around the time of the Civil War as tools to allow producers and merchants to be certain of the prices of commodities that they planned to use or sell in the future.

Not many of you are active in the agriculture derivatives markets, but that is where the markets first emerged. Initially, there were derivatives on agricultural commodities, such as wheat, corn and cotton. These early derivatives, called futures, are currently regulated by the CFTC. After much debate, futures markets first came under regulation in the 1920s and 1930s and have been comprehensively regulated since.

The derivatives markets have grown from those agricultural futures through the 20th and 21st centuries to include swaps. I am sure that most of you in this room have used swaps to hedge risks in your business. Maybe you have hedged an interest rate risk or a currency risk. A commodity price risk or credit risk. The swaps markets provide corporations with a means of locking in rates or prices in one part of their business so that they can focus on what they are best at – whether it be producing goods or providing services.

Such price certainty allows companies to better make essential business decisions and investments. Thus, it is critical that market participants have confidence in the integrity of these price discovery markets.

While the derivatives market has changed significantly since swaps were first transacted in the 1980s, the constant is that the financial community maintains information advantages over their nonfinancial counterparties. When a Wall Street bank enters into a bilateral derivative transaction with one of the corporations represented in this room, for example, the bank knows how much its last customer paid for similar transactions. That information, however, is not generally made available to other customers or the public. The bank benefits from internalizing this information.

The Dodd-Frank Act includes essential reforms to bring sunshine to the opaque swaps markets. Economists and policymakers for decades have recognized that market transparency benefits the public.

The more transparent a marketplace is, the more liquid it is for standardized instruments, the more competitive it is and the lower the costs for hedgers, borrowers and, ultimately, their customers. This transparency would benefit the companies that comprise your investment portfolios.

The Dodd-Frank Act brings transparency in each of the three phases of a transaction.

First, it brings transparency to the time immediately before the transaction is completed, which is called pre-trade transparency. This is done by requiring standardized swaps – those that are cleared, made available for trading and not blocks – between or amongst financial entities to be traded on exchanges or swap execution facilities (SEFs), which are a new type of swaps trading platform created by the Dodd-Frank Act.

Exchanges and SEFs will allow investors, hedgers and speculators to meet in a transparent, open and competitive central market. Even if you, as corporate treasurers of nonfinancial entities, decide not to use exchanges or SEFs for your swaps transactions – because the Dodd-Frank Act says that you are not required to do so – you still will benefit from the transparent pricing and liquidity that such trading venues provide.

The Dodd-Frank Act mandates that all market participants have the ability to utilize SEFs and derivatives exchanges if they choose to do so. The statute requires these trading facilities “to provide market participants with impartial access to the market.” The CFTC’s proposed rules require SEFs to allow market participants to leave executable bids or offers that can be seen by the entire marketplace. That means that any market participant – a bank or a nonbank – a corporation or a financial institution – can choose if they want to hedge a risk and enter into a swap. This brings competition to the marketplace that improves pricing and lowers risk.

Corporate treasurers will benefit from markets that have competition. When you use the swaps markets, you are paying for a service to reduce your risk. You want a lot of people competing for that business. You want them to compete in a transparent marketplace where you will benefit from better pricing.

Second, the Dodd-Frank Act brings real-time transparency to the pricing immediately after a swaps transaction takes place. This post-trade transparency provides all end-users and market participants with important pricing information as they consider their investments and whether to lower their risk through similar transactions.

The CFTC’s proposed real-time reporting rules include provisions to protect the confidentiality of market participants. The rules also provide for a time delay for large swap transactions – or block trades.

Third, the Dodd-Frank Act brings transparency to swaps over the lifetime of the contracts. If the contract is cleared, the clearinghouse will be required to publicly disclose the pricing of the swap. If the contract is bilateral, swap dealers will be required to share mid-market pricing with their counterparties. Thus, you as corporate treasurers and the broader public will benefit from knowing the valuations of outstanding swaps on a daily basis.

Additionally, the Dodd-Frank Act brings transparency of the swaps markets to regulators through swap data repositories. The Act includes robust recordkeeping and reporting requirements for all swaps transactions so that regulators can have a window into the risks posed in the system and can police the markets for fraud, manipulation and other abuses.

Commercial End-User Exceptions

So far I have discussed what the Dodd-Frank Act will do to benefit corporate treasurers and the economy as a whole. Before I close, I will take a moment to address what the Act does not require.

First, the Act does not require non-financial end-users that are using swaps to hedge or mitigate commercial risk to bring their swaps into central clearing. The Act leaves that decision up to the individual end-users.

Second, there was a related question about whether corporate end-users would be required to post margin for their uncleared swaps. The CFTC has published proposed rules that do not require such margin.

Third, the Dodd-Frank Act maintains your ability to enter into bilateral swap contracts with swap dealers. You will still be able to hedge your company’s particularized risk, whatever it may be, through customized transactions.

Conclusion

In conclusion, the Dodd-Frank Act reforms are important to the economy and to each of the corporations you represent. Only with these reforms can we hope to lower the risk that taxpayers and your corporations would bear the costs if a large financial institution failed in the future.

Only with reform can the public get the benefit of transparent, open and competitive markets. That transparency, openness and competitiveness will directly benefit your corporations because they will lower your costs over time. These reforms will reduce risk in the swaps market similar to that which contributed to AIG’s failure and the 2008 financial crisis.

Thank you."