SEC AND CFTC SEEK COMMENT FOR JOINT STABLE VALUE CONTRACT STUDY

The following is an excerpt from the SEC website: "Issue 2011-161 August 19, 2011 Commission Announcements The Securities and Exchange Commission and the Commodity Futures Trading Commission (CFTC) have approved for publication in the Federal Register a request for public comment that is expected to assist in conducting a joint study on stable value contracts. Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act provides for the comprehensive regulation of swaps and security-based swaps and includes definitions of key terms relating to such regulation. It requires the SEC and CFTC to jointly conduct a study to determine whether stable value contracts fall within the definition of a swap, and if so, whether exempting such contracts from the swap definition is appropriate and in the public interest. The Dodd-Frank Act calls for the SEC and CFTC to make the determination in consultation with the Department of Labor, the Department of the Treasury, and the state entities that regulate the issuers of stable value contracts. Public comments must be received on or before 30 days after publication in the Federal Register. (Press Rel. 2011-169) Enforcement Proceedings In the Matter of Peter Emrich, Alberto Ferreiras, James Frankfurth, Frank Rossi, and Dana Valensky The Commission announced that on August 18, 2011, it issued an Order Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of 1934 and Notice of Hearing (Order or OIP) against Peter Emrich (Emrich), Alberto Ferreiras (Ferreiras), James Frankfurth (Frankfurth), Frank Rossi (Rossi), and Dana Valensky (Valensky) (jointly Respondents). The Division of Enforcement alleges in the Order that: Emrich pleaded guilty to one count of conspiracy to commit securities fraud in violation of 18 U.S.C. Section 371 before the United States District Court for the Eastern District of New York in United States v. Kozak, et al., 02-CR-879 (the Kozak Case), a criminal case arising from an unregistered offering of securities of Out of the Black Partners LLC, a California limited liability company. On May 10, 2010, a criminal judgment was entered against Emrich. Frankfurth pleaded guilty to one count of conspiracy to commit securities fraud in violation of 18 U.S.C. Section 371 in the Kozak Case. On June 21, 2010, a criminal judgment was entered against Frankfurth. Ferreiras pleaded guilty to the charges against him in the Kozak Case and United States v. Leonard, et al. 02-CR-881 (the Leonard Case), a related criminal case in the United States District Court for the Eastern District of New York arising from unregistered offerings of securities of two California limited liability companies, Little Giant, LLC and Heritage Film Group, LLC. In the Kozak and Leonard Cases, Ferreiras was charged with conspiracy and securities fraud. Ferreiras also pleaded guilty to one count of conspiracy to commit mail fraud in violation of 18 U.S.C. Sections 1349 and 3147 and eight counts of mail fraud in violation of 18 U.S.C. Sections 1341, 3147 and 2 before the United States District Court for the Eastern District of New York in United States v. Ferreiras, et al., 07-CR-325 (the ATM Case), a criminal case arising from a fraudulent scheme involving the sale of cashless ATM machines. On July 23, 2009, a criminal judgment was entered against Ferreiras in the Leonard, Kozak and ATM Cases. Rossi pleaded guilty to two counts of conspiracy to commit securities fraud in violation of 18 U.S.C. Section 371 in the Leonard Case. On March 21, 2011, a criminal judgment was entered against Rossi. Valensky pleaded guilty before the United States District Court for the Eastern District of New York to two counts of conspiracy to commit securities fraud in U.S. v. Noorai, et al., 02-CR-880 (the Noorai Case), a criminal case arising from an unregistered offering of securities, and one count of conspiracy to commit securities fraud in the Leonard Case. On Nov. 10, 2010, a criminal judgment was entered against Valensky in the Noorai and Leonard Cases. The Order finds that the indictments in the Kozak and Leonard Cases alleged, among other things, that the Respondents and others concealed or conspired to conceal from investors the actual amount of sales commissions that would be paid from the proceeds of the offerings. The indictment in the ATM Case alleged that Ferreiras and his co-conspirator carried out a scheme to obtain money and property from others by means of materially false representations and omissions in connection with the sale of cashless ATM machines. A hearing will be scheduled before an Administrative Law Judge to determine whether the allegations contained in the OIP are true, to afford Respondents an opportunity to respond, and to determine what, if any, remedial sanctions are appropriate and in the public interest. The OIP requires the Administrative Law Judge to issue an initial decision no later than 210 days from the date of service of the Order, pursuant to Rule 360(a)(2) of the Commission’s Rules of Practice. (Rel. 34-65167; File No. 3-14509) In the Matter of International Poultry Co., Inc. (n/k/a Carley Enterprises, Inc.) An Administrative Law Judge has issued an Order Making Findings and Revoking Registration by Default as to Respondent IPEX, Inc. (n/k/a Salus Labs International, Inc.) (Default Order) in International Poultry Co., Inc. (n/k/a Carley Enterprises, Inc.), Admin. Proc. No. 3-14439. The Order Instituting Proceedings alleged that Respondent repeatedly failed to file required annual and quarterly reports while its securities were registered with the Securities and Exchange Commission. The Default Order finds these allegations to be true and revokes the registration of each class of registered securities of IPEX, Inc. (n/k/a Salus Labs International, Inc.) pursuant to Section 12(j) of the Securities Exchange Act of 1934. The proceeding has ended as to all other Respondents. See International Poultry Co. Inc. (n/k/a Carley Enterprises Inc.), Securities Exchange Act Release No. 65027 (August 4, 2011). (Rel. 34-65168; File No. 3-14439) Commission Revokes Registration of Securities of Directcom, Inc. (n/k/a Directcom Marketing, Inc.) for Failure to Make Required Periodic Filings On August 19, 2011, the Commission revoked the registration of each class of registered securities of Directcom, Inc. (n/k/a Directcom Marketing, Inc.) (Directcom) for failure to make required periodic filings with the Commission. Without admitting or denying the findings in the Order, except as to jurisdiction, which it admitted, Directcom consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to Directcom, Inc. (n/k/a Directcom Marketing, Inc.) finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of Directcom’s securities pursuant to Section 12(j) of the Exchange Act. This Order settled the proceedings brought against Directcom in In the Matter of Derand Real Estate Investment Trust, et al., Administrative Proceeding File No. 3-14489. Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows: No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . . For further information see Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of Derand Real Estate Investment Trust, et al., Administrative Proceeding File No. 3-14489, Exchange Act Release No. 64971, July 26, 2011. (Rel. 34-65169; File No. 3-14489) Commission Revokes Registration of Securities of One IP Voice, Inc. (n/k/a Indian Hill Holdings Corporation) for Failure to Make Required Periodic Filings On August 19, 2011, the Commission revoked the registration of each class of registered securities of One IP Voice, Inc. (n/k/a Indian Hill Holdings Corporation) (OIVO) for failure to make required periodic filings with the Commission. Without admitting or denying the findings in the Order, except as to jurisdiction, which it admitted, OIVO consented to the entry of an Order Making Findings and Revoking Registration of Securities Pursuant to Section 12(j) of the Securities Exchange Act of 1934 as to One IP Voice, Inc. (n/k/a Indian Hill Holdings Corporation) finding that it had failed to comply with Section 13(a) of the Securities Exchange Act of 1934 (Exchange Act) and Rules 13a-1 and 13a-13 thereunder and revoking the registration of each class of OIVO’s securities pursuant to Section 12(j) of the Exchange Act. This Order settled the charges brought against OIVO in In the Matter of bioMETRX, Inc., et al., Administrative Proceeding File No. 3-14465. Brokers and dealers should be alert to the fact that Exchange Act Section 12(j) provides, in pertinent part, as follows: No member of a national securities exchange, broker, or dealer shall make use of the mails or any means or instrumentality of interstate commerce to effect any transaction in, or to induce the purchase or sale of, any security the registration of which has been and is suspended or revoked . . . . For further information see Order Instituting Administrative Proceedings and Notice of Hearing Pursuant to Section 12(j) of the Securities Exchange Act of 1934, In the Matter of bioMETRX, Inc., et al., Administrative Proceeding File No. 3-14465, Exchange Act Release No. 64880 (July 14, 2011). (Rel. 34-65170; File No. 3-14465) Commission Settles With Two Defendants in Sedona Corporation Market Manipulation Fraud The Securities and Exchange Commission announced today that on August 8, 2011, the U.S. District Court for the Southern District of New York entered final judgments against defendants Mottes Drillman and Jacob Spinner in a Commission injunctive action arising from fraudulent manipulative trading in the securities of Sedona Corporation. Without admitting or denying the allegations in the Commission's complaint, Drillman and Spinner consented to the entry of judgments enjoining them from future violations of the anti-fraud provisions of the federal securities laws and from aiding and abetting violations of the broker-dealer record-keeping provisions, ordering each of them to pay disgorgement of $4,000, representing ill-gotten gains received as a result of the conduct alleged in the complaint, together with prejudgment interest thereon in the amount of $3,107.25, and a civil penalty of $25,000. The Commission's complaint alleges that, from February to April 2001, Drillman, Spinner, and others participated in a scheme with Andreas Badian, an official of an unregistered investment adviser firm, to manipulate Sedona’s stock price. The complaint also alleges that Drillman and Spinner aided and abetted violations of the broker-dealer record-keeping requirements through the creation of trade tickets which falsely reported short sales of Sedona stock as “long” sales. Four individuals and one entity remain as defendants in the litigation. In related administrative proceedings, the Commission issued Orders suspending each of Drillman and Spinner from associating with any broker or dealer for a period of six months. Without admitting the Orders’ findings, except as to jurisdiction and as to the entry of the injunctions against them, Drillman and Spinner each consented to issuance of the Order suspending him. [SEC v. Andreas Badian, et al., Civ. Action. No.06 CV 2621 (LTS) (S.D.N.Y.)] (LR-22070); (Rel. 34-65171; File No. 3-14510; 34-65172; File No. 3-14511) In the Matter of Matthew J. Ryan On August 19, 2011, the Commission issued an Order Making Findings and Imposing Remedial Sanctions Pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Order) against Matthew J. Ryan. Ryan consented to a Commission Order barring him from association with any broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally recognized statistical rating organization, and from participating in any offering of penny stock. This sanction was based on Ryan’s guilty plea to one count of an indictment in United States v. Matthew John Ryan, Crim. Indictment No. 1:10-cr-00319-NAM (N.D.N.Y.), on February 22, 2011. This count charged Ryan with securities fraud and alleged that he made false representations to investors and used investor funds for multiple purposes he concealed, including to pay other investors’ purported returns and his personal expenses, such as his loan payments on luxury cars. Ryan consented to the issuance of the Order without admitting or denying any of the findings therein, except as to jurisdiction and his guilty plea, which he admitted. (Rel. 34-65173; File No. 3-14297) Investment Company Act Releases Northern Lights Variable Trust, et al. An order has been issued on an application filed by Northern Lights Variable Trust (the Fund) and Gemini Fund Services, LLC (Gemini) pursuant to Section 6(c) of the Investment Company Act of 1940, as amended (1940 Act). The order exempts separate accounts of life insurance companies supporting variable annuity contracts and variable life insurance contracts that may invest in shares of the Fund and shares of an Insurance Fund (as defined below), from the provisions of Sections 9(a), 13(a), 15(a) and 15(b) of the 1940 Act and Rules 6e-2(b)(15) and 6e-3(T)(b)(15) thereunder, in situations where such shares are sold to and held by one or more of the following types of investors: (i) separate accounts registered as investment companies or separate accounts that are not registered as investment companies under the 1940 Act pursuant to exemptions from registration under Section 3(c) of the 1940 Act that fund variable annuity contracts (VA Accounts) and variable life insurance contracts (VLI Accounts) (VA and VLI Accounts together “Separate Accounts”) issued by both affiliated life insurance companies and unaffiliated life insurance companies; (ii) trustees of qualified group pension and group retirement plans outside of the Separate Account context; (iii) investment adviser(s) or affiliated person(s) of the investment adviser(s) to a series of an Insurance Fund, for the purpose of providing seed capital to a series of an Insurance Fund; and (iv) general accounts of insurance company depositors of VA Accounts and/or VLI Accounts. An Insurance Fund is any future investment company that is designed to fund VA Accounts and/or VLI Accounts and for which Gemini or any of its affiliates may serve in the future as investment adviser, sub-adviser, manager, administrator, principal underwriter or sponsor. (Rel. IC-29757 – August 16) Standards Setting Boards Approval of Proposed Rules The Commission approved proposed rules (PCAOB-2011-02) submitted by the Public Company Accounting Oversight Board pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 relating to the funding of the PCAOB’s operations. (Rel. 34-65162) The Commission approved proposed rules (PCAOB-2011-01) submitted by the Public Company Accounting Oversight Board pursuant to Rule 19b-4 under the Securities Exchange Act of 1934 for an interim inspection program related to audits of brokers and dealers. (Rel. 34-65163) Self-Regulatory Organizations Proposed Rule Changes The Commission issued a notice of filing of a proposed rule change by the Municipal Securities Rulemaking Board pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934, relating to amendments to Rule A-3, on Membership on the Board (SR-MSRB-2011-11). Publication is expected in the Federal Register during the week of August 22. (Rel. 34-65158) NYSE Arca filed a proposed rule change (SR-NYSEArca-2011-54) pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 and Rule 19b-4 thereunder relating to listing and trading of the WisdomTree Dreyfus Australia & New Zealand Debt Fund under NYSE Arca Equities Rule 8.600. Publication is expected in the Federal Register during the week of August 22. (Rel. 34-65160) NYSE Arca filed a proposed rule change (SR-NYSEArca-2011-53) under Section 19(b)(1) of the Securities Exchange Act of 1934 to reflect a change to the benchmark index applicable to the Russell Equity ETF. Publication is expected in the Federal Register during the week of August 22. (Rel. 34-65161) Immediate Effectiveness of Proposed Rule Changes A proposed rule change filed by The NASDAQ Stock Market to change the name and modify the contents of the NASDAQ Ouch BBO Feed (SR-NASDAQ-2011-118) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of August 22. (Rel. 34-65159) A proposed rule change filed by the New York Stock Exchange deleting the text of NYSE Rule 92 and adopting a new NYSE Rule 5320 that is substantially the same as Financial Industry Regulatory Authority Rule 5320 to prohibit trading ahead of customer orders with certain exceptions (commonly known as the Manning Rule) (SR-NYSE-2011-043) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of August 22. (Rel. 34-65164) A proposed rule change filed by NYSE Amex deleting the text of NYSE Amex Equities Rules 92, 513, 514 and adopting new NYSE Amex Equities Rule 5320 that is substantially the same as Financial Industry Regulatory Authority Rule 5320 to prohibit trading ahead of customer orders with certain exceptions (commonly known as the Manning Rule) (SR-NYSEAmex-2011-59) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of August 22. (Rel. 34-65165) A proposed rule change filed by NYSE Arca deleting the text of NYSE Arca Equities Rules 6.16 and 6.16A, and adopting new NYSE Arca Equities Rule 5320 that is substantially the same as Financial Industry Regulatory Authority Rule 5320 to prohibit trading ahead of customer orders with certain exceptions (commonly known as the Manning Rule) (SR-NYSEArca-2011-57) has become effective pursuant to Section 19(b)(3)(A) of the Securities Exchange Act of 1934. Publication is expected in the Federal Register during the week of August 22. (Rel. 34-65166)"

CFTC CHAIR MAKES REMARKS

The following is an excerpt from the CFTC website:

Remarks Before the Financial Stability Oversight Council
Chairman Gary Gensler
July 18, 2011

Good morning. I thank Secretary Geithner for calling today’s meeting of the Financial Stability Oversight Council (FSOC). I also thank my fellow regulators and FSOC members for their coordination and consultation on the rule-writing process to implement the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Lastly, I want to thank the staffs of all the agencies – and particularly the Treasury staff – for their efforts in coordinating amongst eight agencies.

This week is the one-year anniversary of the Dodd-Frank Act. And on this anniversary, it is important to remember why the President and Congress came together to pass this historic law.

The 2008 financial crisis occurred because the financial system failed the American public. The financial regulatory system failed as well. When large financial firms, such as AIG and Lehman Brothers faltered, we all paid the price.

The Dodd-Frank Act includes critical swaps market reforms to protect the American people. The law brings much-needed transparency to this marketplace and lowers the risk of the swaps market to the overall economy. It lowers the possibility of taxpayers standing behind large financial institutions.

The Dodd-Frank Act also included the establishment of this Council, which is an opportunity for regulators – now and in the future – to ensure that the financial system works better for all Americans.

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 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.

At the CFTC, working with our partners at the SEC, we have been working diligently to write rules to implement swaps provisions in the Dodd-Frank Act that will ensure swaps no longer operate in the shadows and financial institutions pose less risk to taxpayers. We have substantially completed the proposal phase of the rule-writing process and have now turned toward final rules. Tomorrow, we are holding the second public commission meeting to consider approving final rules, and in the coming months, we will continue considering final rules. But until the CFTC completes its rule-writing process and implements and enforces these new rules, the public remains unprotected.

Final Rulemaking on Designating Financial Market Utilities as Systemically Important

I support the final rulemaking on the Authority to Designate Financial Market Utilities as Systemically Important. This is a significant rulemaking that will enable the Financial Stability Oversight Council (FSOC) to identify and designate systemically important financial market utilities, including clearinghouses.

Comprehensive and robust regulatory oversight of clearinghouses, in particular their risk management activities, is essential to our country’s financial stability. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, standardized swaps between financial entities must be brought to clearinghouses.

The Commodity Futures Trading Commission (CFTC) has overseen clearinghouses for decades. The Dodd-Frank Act provides for enhanced oversight of these clearinghouses. In close consultation with our fellow domestic and international regulators, including the Federal Reserve Board and the Securities and Exchange Commission, the CFTC proposed rulemakings on risk management for clearinghouses. These rulemakings take into account relevant international standards, particularly those developed by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions (CPSS-IOSCO).

The Dodd-Frank Act gives both the Council and the Federal Reserve Board important roles in clearinghouse oversight by authorizing the Council to designate certain clearinghouses as systemically important and by permitting the Federal Reserve Board to recommend heightened prudential standards in certain circumstances.

The Council’s final rulemaking complements the CFTC’s rulemaking efforts and enhances the regulation of systemically important financial market utilities, which will mitigate systemic risk and promote financial stability.

Report to Congress on Secured Creditor Haircuts

I will vote to approve the Report to Congress on Secured Creditor Haircuts. The report appropriately addresses the arguments in favor of and against legislation to mandate secured creditor haircuts, and also provides a helpful analysis of the academic literature on this subject.

The report also covers the issues Congress specified, including a comparison of the relevant aspects of resolution under the Bankruptcy Code, Federal Deposit Insurance Act, and Dodd-Frank Title II Orderly Liquidation Authority. And it discusses other means to promote market discipline."

CFTC COMMISSIONER O'MALIA SPEAKS ON ACCOUNTABILITY

The statement below by Commissioner Scott O’Malia and is excerpted from the CFTC website:

“The Importance of Being Accountable”
Opening Statement by Commissioner Scott D. O’Malia
July 19, 2011
Public Hearing:
Consideration of Proposed Rules: Customer Clearing Documentation, Timing of Acceptance for Clearing and Clearing Member Risk Management
Consideration of Final Rules: Process for Review of Swaps for Mandatory Clearing; Part 40, Provisions Common to Registered Entities; and Removing Any Referance to or Reliance on Credit Ratings in Commission Regulations, Proposing Alternatives to the Use of Credit Ratings
Today, the Commission will consider three final rules and two proposed rules. I support the final rules as they are noncontroversial process rules. However, I have serious concerns with both proposed rules as they rely on weak statutory authority, poorly articulate a necessity for either rule and are neither justified nor required under the Dodd-Frank Act. Today’s draft rules regarding client documentation and clearing member risk standards were never mentioned previously during these months of intense rulemaking and seem to be fabricated from whole cloth. This is unacceptable.
I have grown increasingly frustrated with the rulemaking process because there appears to be no specific plan or strategy for implementing these rules, nor do we appear to be following President Obama’s direction to ensure that the federal rulemaking process be done in the most transparent, responsible and accountable fashion.
I have requested specific reforms to improve the rulemaking process, but each request has been met with silence. I fear that we are running astray of the President’s executive orders by eschewing transparency and accountability in favor of opacity and expediency. As we push forward, we are running out of time to make a correction. To be clear, the failure to produce a final rule schedule and implementation plan the next time the Commission meets on August 4th will render public input irrelevant as the Commission barrels through with final rules this fall.
Creating a More Open Government
In his inaugural address, President Obama gave us the directive; he told us to enter a new era of responsibility. To those of us who manage the public’s dollars, President Obama warned that we will be held accountable. Through spending wisely, reforming bad habits, and doing our business in the light of day, the President said that we can restore the trust between the American people and their government. Two days later, the President issued a memorandum to the heads of the Executive Departments and Agencies titled “Transparency in Open Government” in which he further laid out his implementation plan for an administration committed to creating an unprecedented level of openness in government.1 This plan offers the public increased opportunities to participate in policymaking and to provide the benefits of their expertise. It is about utilizing technology to communicate, collaborate, and improve opportunities to make the entire process more efficient and effective.
Executive Order #13,563 – Improving Regulation and Regulatory Review
This past January, President Obama grabbed our attention with a Wall Street Journal opinion piece2 to accompany his signing of Executive Order 13,563 “Improving Regulation and Regulatory Review.”3 He put the administration on this mission: “[T]o root out regulations that conflict, that are not worth the cost, or that are just plain dumb.” Yes, he did say that.
Executive Order #13,579 – Application to Independent Agencies
Six months later, the President signed another Executive Order (Executive Order 13,579) titled “Regulation and Independent Regulatory Agencies.”4 If the January directive wasn’t clear, this new order should eliminate any doubt that Independent Agencies like the CFTC must go out of their way to ensure responsible rulemaking by, among other things, undertaking a thorough cost benefit analysis, both qualitatively and quantitatively, to ensure that new rules do not impose unreasonable costs. We also must make our process more accountable through increased transparency and openness, which our current process lacks.
Reforms to Our Rulemaking Process
In an effort to respond to the concerns of the many citizens who have walked through my door and submitted comment after comment in the more than fifty rulemakings to date, I have put forward two proposals to squarely address the need for greater openness, transparency and accountability.
First, I have called for a detailed plan that reveals the order, timing, and substance of the Commission’s rules implementing and effectuating the Dodd-Frank Act. This proposal should have the benefit of public comment as well.
Second, I have requested that all proposed and final rules that the Commission will be voting on be published for seven-days prior to each public meeting. Today, the public must wait days, if not weeks for the Federal Register to publish proposed and final rules that the Commission has already voted on. My proposal will give the public a clear picture of the end result of the rulemaking process prior to our final vote.
The Commission has responded with silence, cementing in my mind that the current process is inadequate.
The Commission is tentatively scheduled to next meet on August 4th. I ask again that we make the final rule proposals publicly available seven days prior to that meeting. At that meeting, I propose that we first and foremost vote to put forward a clear rulemaking order and implementation schedule for public comment. This will allow the public to comment on the draft schedule during August before too many more final rules are passed this fall. If we continue to delay development of an implementation schedule and continue to adopt rules without the benefit of meaningful final comment, then we are being downright insubordinate. To ignore our President not once, but twice, and to respond to Congressional recommendations such as the letter we received Thursday, July 14th from Chairman Lucas and Subcommittee Chairman Conaway, which again implored us to adhere to what amounts to notions of honest dealing and fair play and to not make speed more important than substance, is arrogant and shameful. We can do better, and we should.
The Rules Before Us
The Removal of References to Credit Rating Agencies
I’d like to recognize Ward Griffin and his team for their work on the final rule before us regarding the removal of references to credit rating agencies from the Commission’s regulations.
Part 40 Rule Certification
I commend Bella Rosenberg, and her team for their work on this rule that provides an improved process for the evaluation of designated contract markets (DCMs), swap execution facilities (SEFs) and swap data repositories (SDRs) against the core principles outlined in the Commodity Exchange Act (CEA). The team has given thoughtful consideration to comments from both the public and from my office, and I believe their willingness to hear concerns and seek practical solutions that work has resulted in a final rule that is an improvement from the rule proposal.
Part 39 Process for Review of Swaps for Mandatory Clearing
I also commend Eileen Donovan and her team on their work to establish a new process for reviewing swaps for mandatory clearing. I support the final regulation today, because the regulation sets forth a reasonable process for a clearing organization: (1) to request, if necessary, that the Commission determine whether the clearing organization is eligible to clear swaps; and (2) to submit a swap to the Commission for review.
In addition, the regulation sets forth a reasonable process for a swap counterparty to request that the Commission stay a clearing requirement pending review. However, it is not enough for the Commission to simply establish a process for clearing organizations and swap counterparties to request or contest clearing determinations. In their comments to the Commission, market participants, as well as international regulators, have requested more transparency and clarity on substance. For example, they have requested greater certainty on the criteria that the Commission will use to determine whether mandatory clearing is appropriate for a swap.
I recognize that such specificity will not be provided in this rule. Instead, I have drafted a letter that I will be sending to clearing organizations and market participants seeking their input on further defining the various thresholds and standards that the Commission should consider in determining whether a swap should be subject to mandatory clearing. (See Attachment). I hope to receive comments during the 60 days prior to the effective date of this rule, and I hope that such comments will inform staff discussions going forward. Given our emphasis on clearing to manage systemic risk, to move forward on mandatory clearing without written guidance is irresponsible. It is also arguably an abrogation of our responsibilities under Section 2(h)(3)(D) of the CEA, as amended by the Dodd-Frank Act.5 I also hope that such comments will inform a roundtable discussion, as well as written guidance, on these important questions.
Another concern that I have with this rule is that it overreaches in interpreting Section 723(a)(3) of the Dodd-Frank Act, and in Regulation 39.5(c)(3)(iii). Basically, the final regulation leaves open the possibility that the Commission could impose capital and margin requirements directly on end-users exempt from the clearing requirement. This interpretation contradicts the letter from Senator Christopher Dodd and Senator Blanche Lincoln, which states, among other things, that “Congress clearly stated in this bill that the margin and capital requirements are not to be imposed on end users.” Further, the final regulation permits the Commission to impose capital and margin requirements on bank swap dealers and bank major swap participants. Understandably, the Office of the Comptroller of the Currency, our fellow regulator, disagrees.
Customer Clearing Documentation, Timing of Acceptance for Clearing, and Clearing Member Risk Management
I oppose the two proposed rulemakings on (i) Client Clearing Documentation and Timing of Acceptance for Clearing and (ii) Clearing Member Risk Management. Both proposals fail to conform to the type of responsible rulemaking that I have tried to persuade the Commission to endorse. The two proposed rules before us today put the cart ahead of the horse. Neither rule is mandated under Dodd-Frank, nor are they well grounded in statutory authority. Further it is unclear as to what resources the Commission will utilize to administer these two new optional rules.
Without statutory direction and given the massive number of rules already under consideration, I imagined the Commission would have developed a justification for the policy recommendations before us today. Unfortunately, neither the Commission nor the staff held a single hearing to understand whether or not we have a serious problem, or we are drafting rules in search of a problem.
Setting aside the flawed process in the development of these rules, this first proposal regarding client clearing documentation may be attempting to solve a problem that no longer exists. The proposal alleges that a voluntary annex to a voluntary model agreement from two industry associations6 may restrict open access to clearing and harm competitive trading. I understand that more than 60 market participants, on both the buy- and sell-sides, discussed the voluntary model agreement over a period of several months. The final agreement reflected an accommodation – even if imperfect – of their respective interests.7
I am very supportive of maximizing the effectiveness of clearing. I do not want any artificial barriers to clearing, such as needless credit or position sub-limits. Based on the practices in the futures market, I am also quite certain that technology is available to ensure timely acceptance of trades. However, as the second part of this rulemaking (i.e., the Timing of Acceptance for Clearing) makes evident, the industry must still resolve a number of operational issues. Therefore, there may be a role for certain types of documentation. Ideally, the buy-side, sell-side, and clearing organizations will continue their dialogue on such documentation. Before substituting Commission judgment for private consensus, I hope the Commission will host a public roundtable and a Commission meeting to see if the restrictions and anticompetitive effects alleged in this rulemaking exist, and, if so, how to resolve these issues to everyone’s satisfaction.
The second proposal regarding clearing member risk management fails to justify its costs in light of its benefits. First, as I mentioned previously, the proposal is neither mandated by the Dodd-Frank Act nor any provision in the CEA. Second, the proposal would require the Commission to ascertain whether clearing members are following certain risk management procedures. However, under another rulemaking, the Commission assigns the same responsibility to clearing organizations.8 Given our resource constraints, the Commission should focus on supervising clearing organizations – the main bulwarks against systemic risk. The Commission should ensure that clearing organizations are fulfilling their self-regulatory responsibilities, and adequately evaluating the risk management of its members. The Commission should not divert its resources to directly auditing clearing members, the failure of any one of which may be non-systemic.
Frankly, I would rather see the Commission dedicate resources towards developing real-time trade surveillance capabilities, rather than developing a redundant oversight function that will require additional resources we don’t possess. As our President has advised, we will be held accountable.
Mr. Chairman, I greatly appreciate the hard work of the staff and I sincerely hope you will provide an answer as to whether or not the Commission will publish a rule making schedule and an implementation timetable that includes dates to give the market and its participants an unambiguous strategy for implementing the Dodd-Frank rules. I also hope you will commit to publishing our draft rules when you publish the notice regarding all commission meetings.”