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

SEC ENCOURAGES ISSUERS, UNDERWRITERS OF MUNICIPAL SECURITIES TO SELF-REPORT VIOLATIONS OF SECURITIES LAWS

FROM:  SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission announced a new cooperation initiative out of its Enforcement Division to encourage issuers and underwriters of municipal securities to self-report certain violations of the federal securities laws rather than wait for their violations to be detected.

“The Enforcement Division is committed to using innovative methods to uncover securities law violations and improve transparency in the municipal markets,” said Andrew J. Ceresney, director of the SEC Enforcement Division.  “We encourage eligible parties to take advantage of the favorable terms we are offering under this initiative.  Those who do not self-report and instead decide to take their chances can expect to face increased sanctions for violations.”

Under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, the Enforcement Division will recommend standardized, favorable settlement terms to municipal issuers and underwriters who self-report that they have made inaccurate statements in bond offerings about their prior compliance with continuing disclosure obligations specified in Rule 15c2-12 under the Securities Exchange Act of 1934.

Rule 15c2-12 generally prohibits underwriters from purchasing or selling municipal securities unless the issuer has committed to providing continuing disclosure regarding the security and issuer, including information about its financial condition and operating data.  The rule also generally requires that municipal bond offering documents contain a description of any instances in the previous five years in which the issuer failed to comply, in all material respects, with any previous commitment to provide such continuing disclosure.

“Continuing disclosures are a critical source of information for investors in municipal securities, and offering documents should accurately disclose issuers’ prior compliance with their disclosure obligations,” said LeeAnn Ghazil Gaunt, chief of the SEC Enforcement Division’s Municipal Securities and Public Pensions Unit.  “This initiative is designed to promote improved compliance by encouraging responsible behavior by market participants who have failed to meet their obligations in the past.”

The SEC can file enforcement actions against municipal issuers for making misrepresentations in bond offerings about their prior compliance with continuing disclosure obligations. Underwriters for such bond offerings also can be liable for failing to exercise adequate due diligence regarding the truthfulness of representations in the issuer’s official statement.  For instance, the SEC recently charged a school district in Indiana and its underwriter with falsely stating to investors that it had been properly providing annual financial information and notices required as part of its prior bond offerings.

SEC COMMISSIONER PIWOWAR'S SPEECH TO U.S. CHAMBER OF COMMERCE

FROM:  SECURITIES AND EXCHANGE COMMISSION 
Advancing and Defending the SEC’s Core Mission
 Commissioner Michael S. Piwowar
U.S. Chamber of Commerce
Washington, D.C.
Jan. 27, 2014

Thank you, Chris (Donahue), for that very kind introduction. David Hirschmann, I commend you for the work that you do at the Chamber’s Center for Capital Markets Competitiveness to promote America’s global leadership in capital formation. I have had the pleasure of working with a number of talented people at the Center over the past few years and I want to take a moment to acknowledge just a few. Tom Quaadman, it has been great to join you in your efforts to ensure that the financial regulatory agencies are following the law and basing their decisions on the best available information about a regulatory action’s likely economic consequences. Jess Sharp, who was in the trenches with me at the White House during the height of the global financial crisis, please continue to advocate for bringing regulatory and public transparency to the over-the-counter derivatives markets while preserving Main Street’s ability to hedge their business risks. Alice Joe, I have enjoyed working with you on money market fund reforms that are consistent with the Securities and Exchange Commission’s (SEC’s or Commission’s) goal of preserving the benefits of the product for investors and the short-term funding markets.

I also want to thank everyone for being so understanding about rescheduling my speech due to the federal government shutdown last October. I am happy to finally be here to talk about some of the issues we are facing at the Commission. Before proceeding, I need to provide the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the Commission or my fellow Commissioners.

I would like to take the opportunity today to articulate how I believe an SEC Commissioner should approach each and every issue that comes before the Commission. As you know, the SEC is confronted with a wide range of matters including rulemakings, exemptive requests, interpretive guidance, and, of course, enforcement actions. Regardless of the area, when making decisions, a Commissioner should be guided by the SEC’s core mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

My overarching philosophy as an SEC Commissioner is pretty simple. It boils down to a question that I ask myself every morning on my way to work: What can I do today to help advance and defend the SEC’s core mission? I choose the words “advance” and “defend” carefully. They are words that can be used to describe both sports strategies and military strategies, which are appropriate analogies for an SEC Commissioner. Some days I feel like I am in a friendly competition that involves well-defined and well-enforced rules. Other days I seem to be in hand-to-hand combat with outside forces.

First, I will explain what I mean when I say “advance the SEC’s core mission,” by highlighting some items that I believe should be priorities for the Commission over the next several months. Then, I will focus on how we can and should “defend the SEC’s core mission.” By way of example, and as I will discuss further, money market fund reform presents an opportunity to both advance and defend the SEC’s mission. I have not yet reached any conclusions on the substance of money market reform, but I do want to preview how I am approaching the issue. Finally, time permitting, I am happy to answer any questions you may have.

Advancing the SEC’s Core Mission

Obviously, the Commission is quite busy with our Dodd-Frank Act and JOBS Act mandates. Nonetheless, there are areas in which we can and should undertake efforts to advance our core mission. Let me highlight five.

Comprehensive Review of Equity Market Structure: I recently gave a speech in which I called for a comprehensive equity market structure review program that draws on lessons from the 1963 “Report of the Special Study of Securities Markets of the Securities and Exchange Commission”[1] and the 2012 UK Foresight Programme report on “The Future of Computer Trading in Financial Markets – An International Perspective.”[2] Without going into great detail, there are two key features of my vision for a comprehensive review of equity market structure. First, in order to allow us to cover a wide range of topics, it should be a multi-year review. Second, so that each issue can be considered and addressed in sufficient depth, the Commission should leverage the resources of outside parties by leading a collaborative effort with market structure experts from the private sector and the academic world.[3]

Tick Size Pilot Program for Small Capitalization Companies: It is clear that the one-size-fits-all approach to market structure is not working for small capitalization companies. One idea to test how to allow the securities of small cap companies to trade more efficiently is to create a pilot program for alternative minimum tick sizes. I support such a pilot and would like to see it implemented as soon as possible. Even if increasing the tick size does not produce the benefits that proponents suggest it will, a pilot program will provide useful information about the dynamics of liquidity in our equity markets.

Incremental Fixed-Income Market Structure Changes: During my previous tour at the Commission, I was very involved with price transparency initiatives in the corporate bond and municipal bond markets. In one research study, my colleagues and I were able to show that providing post-trade prices on corporate bond transactions decreased transaction costs, which translated to investor savings of more than $1 billion per year.[4] Subsequent research shows that more can be done to enhance the fixed-income markets for the benefit of investors and issuers, including opportunities to “pick low-hanging fruit.” For example, while commissions on agency transactions must be disclosed, the same is not true for markups and markdowns on riskless principal transactions, even though the trades are economically equivalent. Therefore, I have asked the staff of the Commission’s Office of Municipal Securities to work with me to develop a few proposals to improve how the fixed-income markets operate.

Over-Reliance on Proxy Advisory Firm Recommendations: I see many similarities between the influence that proxy advisory firms wield today and how credit rating agencies were relied upon pre-crisis, including an over-reliance by investors on their recommendations.[5] Investment advisers are increasingly looking to the recommendations of proxy advisory firms for purposes of satisfying their fiduciary duty in connection with voting (or not voting) client securities. This reliance, in effect, shifts the fiduciary duty from the advisers to the proxy advisory firms, which, due to their relationships with issuers of the securities, may have their own distinct conflicts of interest. The Commission hosted a very productive Proxy Advisory Services Roundtable last month that highlighted these issues and made clear that we cannot continue to ignore the need for reform.[6] The Commission must not lose the momentum that was generated from the roundtable and should quickly move forward with initiatives to curb the unhealthy over-reliance on proxy advisory firm recommendations.

Compliance with Section 2 of Executive Order 13579 – Retrospective Analyses of Existing Rules:[7] Over two years ago, President Obama signed an Executive Order that, among other things, directs independent agencies such as the SEC to develop and implement a plan to conduct ongoing retrospective analyses of existing rules. The stated goal is “to determine whether any such regulations should be modified, streamlined, expanded, or repealed so as to make the agency’s regulatory program more effective or less burdensome in achieving the regulatory objectives.” The Commission has not yet undertaken a serious effort to conduct a retrospective analysis of our existing rules in accordance with the directive. This must change.

 As if the SEC does not already have enough to do to advance our core mission, we are also faced with the need to defend it. Currently, I see two outside forces that are threatening our ability to effectively protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The first threat is special interests, from all parts of the political spectrum, that are trying to co-opt the SEC’s corporate disclosure regime to achieve their own objectives. The Commission, therefore, should carefully consider whether any additional disclosures benefit investors or whether they enable the agenda of special interests to the detriment of investors.

With simply our current disclosure requirements, I worry that investors are already suffering from what former SEC Commissioner Troy Paredes calls “information overload.” Commissioner Paredes points out that “[i]ronically, if investors are overloaded, more disclosure actually can result in less transparency and worse decisions, in which case capital is allocated less efficiently and market discipline is compromised.”[8] Last year, he called for a top-to-bottom review of the Commission’s disclosure regime.[9] I wholeheartedly agree. Such a review could help us identify special-interest disclosures that may have crept into our present disclosure regime and are counterproductive to creating informed investors.

The second threat to our core mission is banking regulators trying to impose their bank regulatory construct on SEC-regulated investment firms and investment products. Yet the Commission – not the banking or prudential regulators – is responsible for regulating markets. My concern is that the banking regulators, through the Financial Stability Oversight Council (FSOC or Council), are reaching into the SEC’s realm as market regulator. Therefore, one of my first acts as a Commissioner was to request that I be afforded an observational role at FSOC meetings. I also asked that, in addition, or in the alternative, my counsels be allowed to attend the biweekly FSOC Deputies Committee meetings. To be clear, I understand that the Dodd-Frank Act designates the SEC’s Chair as the Commission’s only voting member of the FSOC.[10] However, the statute also designates the Commission as a “member agency” of the Council.[11]

Unfortunately, my requests to attend FSOC meetings as a non-participating guest were denied. I do not think that they were unreasonable requests, and I did not ask for any special favors. I simply asked the FSOC to treat the SEC the same way it treats the Federal Reserve. If you look at the minutes from past FSOC meetings, which are publicly available on the FSOC’s website, you will see that three people from the Federal Reserve regularly attend FSOC meetings – the Chairman of the Federal Reserve Board of Governors (the Federal Reserve’s voting member), and his two guests: a Federal Reserve Governor (Daniel Tarullo), and the President of the Federal Reserve Bank of New York (William Dudley). I would like the FSOC to extend the same courtesy to the SEC and other member agencies.

One of the responses I received to my request was that, if the SEC started bringing multiple people to the Council meetings, then every agency would want to do the same. My answer to that concern is that the FSOC should get a bigger table. Or, it should stop allowing the Federal Reserve to bring three people to the Council meetings when other member agencies are afforded only one seat. This issue is not just an abstract one for me. The FSOC, within which the banking and prudential regulators exert substantial influence, represents an existential threat to the SEC and the other member agencies.

Last September, the Department of Treasury’s Office of Financial Research (OFR) published a study – and I use the term “study” loosely – prepared for the FSOC on the asset management industry.[12] The study sets the groundwork for the regulation of asset managers by the FSOC. Among the Council members, only the SEC solicited public feedback regarding the study.[13] I applaud Chair White for doing so. In response, the Commission has received more than 30 comment letters, including one from the Chamber. I vehemently believe that before the FSOC decides whether further study or action is warranted, the collective voices of the public and the SEC should be heard by the members of the Council. This is all the more important because the vast majority of asset management firms are SEC-regulated entities.

Another issue on which the SEC has ceded ground to the FSOC and banking regulators is money market fund reform. One of the most shocking decisions in the 80-year history of the SEC was the wholesale abdication of the Commission’s responsibility to the FSOC on money market funds.[14] This choice has been widely criticized by former chairmen, commissioners, and SEC senior staff as threatening the independence of the SEC and the other independent financial services regulatory agencies.[15] I am in complete agreement. The only somewhat coherent systemic risk argument about money market funds that I have heard articulated is that a run on money market funds could lead to banks failing because they cannot rollover short-term debt. The moral of that story is not that money market funds have “structural vulnerabilities.” It is that banks are too reliant on short-term funding. The banking regulators have the ability to address such a bank regulatory shortcoming directly. Nothing in the Dodd-Frank Act weakened or repealed that authority.

Instead of the FSOC spending time enabling bank regulators to encroach on the SEC’s jurisdiction in securities regulation, where we have superior expertise, the Council should focus on fulfilling its own mission of identifying threats to the financial stability of the United States. I have identified three entities that the FSOC should consider reviewing as non-bank systemically important financial institutions (non-bank SIFIs): the Federal Government, the Federal Reserve, and the Basel Committee on Banking Supervision.

Serious academic research, previous actions by the FSOC, and common sense support designating all three of these entities as non-bank SIFIs. Deborah Lucas, a prominent MIT economist and former assistant director at the Congressional Budget Office, makes a compelling case that the government is a significant source of systemic risk, and therefore it falls under the mandate of the FSOC and OFR to monitor and study it.[16] Viral Acharya, a respected NYU financial economist, posits that governments effectively operate as “shadow banks” in the financial sector, that their role as shadow banks have been at the center of the financial crisis, and that they continue to pose a threat to financial stability.[17] Even the FSOC itself recognizes that the Federal Government has a significant impact on the economy – at a recent meeting the Council discussed the effects of a government shutdown and a debt ceiling impasse on the economy and financial markets, including short-term funding markets.[18] With respect to the Federal Reserve, its balance sheet stands at over $4 trillion in assets and continues to grow at a current tapered pace of $75 billion per month.[19] Andrew Haldane, the Bank of England’s Executive Director of Financial Stability, co-wrote a paper famously titled “The Dog and the Frisbee,” in which the academic case is made for simplicity in banking regulations.[20] Among other things, the paper explores why complex regulation, such as Basel risk-weighted capital standards, are not only costly and cumbersome, but suboptimal for preventing and controlling financial crises.

Money Market Fund Reform – Advancing and Defending the SEC’s Core Mission
I thought I would end with some words on how I am thinking about whether additional money market fund reforms are needed, and, if so, how I will be evaluating each alternative.

As an economist, one of the first questions I ask in the context of any rulemaking is “What is the baseline?” In other words, what is the starting point from which I will evaluate the costs and benefits of any proposed regulatory change? In the case of money market funds, it is tempting to start with a baseline of September 2008, when the Reserve Primary Fund “broke the buck.” However, the Commission adopted a number of new money market fund regulations in 2010.[21] The stated objectives of those rules were to “increase the resilience of money market funds to economic stresses and reduce the risks of runs on the funds.”[22]

Therefore, the proper baseline from which to evaluate any additional money market fund rule proposals is the current regulatory framework, which includes the 2010 reforms. From a cost-benefit perspective, the next relevant questions are “What are the marginal benefits of additional regulations”; and “what are the marginal costs of those additional regulations?” In order to answer those questions, we need to understand how effective the 2010 regulations were. The Commission’s Division of Economic and Risk Analysis (“DERA”) has done an excellent job providing the answers to those questions in their 2012 staff report “Response to Questions Posed by Commissioners Aguilar, Paredes, and Gallagher,”[23] and in the economic analysis in the Commission’s 2013 proposing release for additional money market fund reforms.[24]

After carefully reading both of those documents and engaging in numerous discussions with Commission staff and money market fund participants, I have concluded that the 2010 money market fund regulations were, in economist-speak, “necessary, but not sufficient.” They provided much-needed investor protection improvements in the areas of disclosure, liquidity, credit quality, and operations. However, the reforms were not sufficient to address remaining investor protection concerns in at least two areas. Namely, more should be done to mitigate the first mover-advantage enjoyed by investors who run during times of heavy redemptions. There also remains a need to provide investors with more timely information about funds’ holdings, including the value of those holdings.

I have not reached any conclusions on which alternatives in the Commission’s outstanding rule proposal best address these investor protection concerns while preserving the benefits of money market funds for investors and the short-term funding markets. I will be working with Commission staff over the coming weeks and months to evaluate the marginal benefits of the various alternatives – floating NAV, fees, gates, additional disclosures, etc. – and their associated costs.

Thank you all for your attention. I am happy to answer any questions you may have.


[1] Report of Special Study of Securities Markets of the Securities & Exchange Commission, all chapters available at  http://www.sechistorical.org/museum/papers/1960/page-2.php under the heading “SEC Special Study of the Securities Markets.”

[2] See http://www.bis.gov.uk/assets/foresight/docs/computer-trading/12-1086-future-of-computer-trading-in-financial-markets-report.pdf .

[3] See The Benefit of Hindsight and the Promise of Foresight: A Proposal for A Comprehensive Review of Equity Market Structure, Commissioner Michael S. Piwowar, U.S. Securities and Exchange Commission, London, England (Dec. 9, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540470552.

[4] See Edwards, A. K., L. E. Harris, & M. S. Piwowar (2007): “Corporate Bond Market Transaction Costs and Transparency,” Journal of Finance, 62, 1421–1451.

[5] See Opening Statement at the Proxy Advisory Services Roundtable, Commissioner Michael S. Piwowar, U.S. Securities and Exchange Commission, Washington, D.C. (Dec. 5, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1370540449928.

[6] See http://www.sec.gov/spotlight/proxy-advisory-services.shtml.

[7] See Executive Order 13579 – Regulation and Independent Regulatory Agencies (July 11, 2011). See also M-11-28 – Memorandum for the Heads of Independent Regulatory Agencies (July 22, 2011).

[8] See Remarks at The SEC Speaks in 2013, Commissioner Troy A. Paredes, U.S. Securities and Exchange Commission, Washington, D.C. (Feb. 22, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1365171492408#.Ut2WJbROmM8.

[9]Id.

[10] See Section 111 of the Dodd-Frank Act.

[11] See Section 102 of the Dodd-Frank Act.

[12] See http://www.treasury.gov/initiatives/ofr/research/Documents/OFR_AMFS_FINAL.pdf.

[13] See http://www.sec.gov/divisions/investment/comments-ofr-asset-management-study.shtml. Comments are available at http://www.sec.gov/comments/am-1/am-1.shtml.

[14] See Statement at SEC Open Meeting – Proposed Rules Regarding Money Market Funds, Commissioner Daniel M. Gallagher, U.S. Securities and Exchange Commission, Washington, D.C. (June 5, 2013), available at http://www.sec.gov/News/Speech/Detail/Speech/1365171575594.

[15] See letter from Former Chairmen, Commissioners, and Senior Staff of the U.S. Securities and Exchange Commission to the Members of the Financial Stability Oversight Council, Re: Jurisdiction of Independent Financial Services Regulatory Agencies (Feb. 20, 2013), available at

http://www.preservemoneymarketfunds.org/wp-content/uploads/2011/04/Former-SEC-staff.pdf .

[16] See Deborah Lucas, Evaluating the Government as a Source of Systemic Risk, First Draft: Sept. 30, 2011, available at  http://dlucas.scripts.mit.edu/docs/SystemicRisk111012.pdf .

[17] See Viral V. Acharya, Governments as Shadow Banks: The Looming Threat to Financial Stability, Sept. 2011, available at http://www.federalreserve.gov/events/conferences/2011/rsr/papers/Acharya.pdf.

[18] See Financial Stability Oversight Council, Meeting Minutes, Oct. 31, 2013, http://www.treasury.gov/initiatives/fsoc/council-meetings/Documents/Oct%2031,%202013.pdf.

[19] See Total Assets of the Federal Reserve, available at http://www.federalreserve.gov/monetarypolicy/bst_recenttrends.htm.

[20] See Andrew G. Haldane & Vasileios Madouros, The Dog and the Frisbee (Aug. 31, 2012). The paper was presented at the Federal Reserve Bank of Kansas City's 36th economic policy symposium “The Changing Policy Landscape,” Jackson Hole, Wyoming, available at http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech596.pdf .

[21] See Money Market Fund Reform, Investment Company Act Rel. No. 29132 (Feb. 23, 2010), available at http://www.sec.gov/rules/final/2010/ic-29132fr.pdf.

[22] See http://www.sec.gov/news/press/2010/2010-14.htm.

[23] The staff report can be found at http://www.sec.gov/news/studies/2012/money-market-funds-memo-2012.pdf. At the time the report was conducted, DERA was known as the Division of Risk, Strategy, and Financial Innovation.

[24] See Money Market Fund Reforms; Amendments to Form PF, Investment Company Act Rel. No. 30551 (June 5, 2013), available at http://www.sec.gov/rules/proposed/2013/33-9408.pdf.

SEC ISSUES ANNUAL REPORT ON CREDIT RATING AGENCIES

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission issued its annual staff report on the findings of examinations of credit rating agencies registered as nationally recognized statistical rating organizations (NRSROs).  The agency also submitted an annual staff report on NRSROs to Congress.

“The two reports reflect an evolving industry,” said Thomas J. Butler, director of the SEC’s Office of Credit Ratings.  “The examination report shows that the SEC’s vigilant oversight is improving compliance at NRSROs, while the annual report to Congress depicts an industry that is growing more competitive and transparent.”

The 2010 Dodd-Frank Act requires the SEC to examine each NRSRO at least annually and issue a report summarizing key findings of the examinations.  The report discusses the staff’s findings and recommendations for each of the 10 NRSROs.  Among the areas examined are whether each NRSRO conducts business in accordance with its policies, procedures, and methodologies as well as how an NRSRO manages conflicts of interest and whether it maintains effective internal controls.

The report noted, for instance, that the staff found one or more NRSROs lacked comprehensive procedures governing ratings placed under review.  The staff also found that oversight of the process for developing new rating methodologies and criteria was not sufficient at one or more NRSROs to ensure independence from business and market share considerations.

The 2013 examination report highlights certain improvements among NRSROs, such as increased investment in compliance systems and infrastructure along with enhancements in compliance training for both analytical and non-analytical employees.  These improvements address recommendations that the staff made to NRSROs on prior examinations.

The annual report to Congress, which is required by the 2006 Credit Rating Agency Reform Act, identifies the applicants for NRSRO registration, actions taken on the applications, and the SEC’s views on the state of competition, transparency, and conflicts of interest among NRSROs.

Observations from the 2013 annual report include the following:

The number of NRSROs rose to 10 with HR Ratings de México, S.A. de C.V., registering in November 2012.
Some smaller NRSROs have gained significant market share in ratings for certain types of asset-backed securities.
Transparency is increasing due to the NRSROs issuing unsolicited commentary on ratings issued by other NRSROs.

The following SEC staff made significant contributions to the examinations and reports: Abe Losice, Michele Wilham, Kenneth Godwin, Natalia Kaden, Harriet Orol, Jacob Prudhomme, Diane Audino, Kristin Costello, Scott Davey, Shawn Davis, Michael Gerity, Julia Kiel, Joanne Legomsky, Russell Long, Carlos Maymi, David Nicolardi, Sam Nikoomanesh, Joseph Opron, Abraham Putney, Mary Ryan, Warren Tong, Evelyn Tuntono, and Kevin Vasel.

CFTC GENSLER'S REMARKS AT SWAP EXECUTION FACILITY CONFERENCE

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Remarks of Chairman Gary Gensler at Swap Execution Facility Conference: Bringing Transparency and Access to Markets
November 18, 2013

Thank you, Shawn, for that kind introduction. I’m pleased to be back for my third Swap Execution Facility (SEF) Conference. I’m particularly pleased to be here now that SEFs are up and running.

For the first time, all swaps market participants have access to compete. For the first time, all – and that means dealers and non-dealers alike – benefit from transparency.

Since the time of Adam Smith and The Wealth of Nations, economists have consistently written that transparency and open access to markets benefits the broad public and the overall economy.

When markets are open and transparent, markets are more efficient, competitive, and liquid, and costs are lowered for companies and their customers.

President Roosevelt understood this when he asked Congress during the Great Depression to bring transparency, access and competition to the commodities and securities markets.

The reforms of the 1930s transformed markets. They helped establish the foundation for the U.S. economic growth engine for decades.

The swaps market emerged nearly 50 years later, but remained dark and closed until just last year. Lacking transparency and common-sense rules of the road, the swaps market contributed to the 2008 crisis.

Thus, just as President Roosevelt did in the 1930s, President Obama and Congress passed comprehensive financial reform. They brought the $400 trillion swaps market out of the shadows and opened access to all participants.

With the completion of nearly all of the agency’s rulemaking and the initial major compliance dates behind us, the marketplace has been transformed.

Bright lights now are shining on the swaps market. Transparency is shining both prior to and after a trade.

Real-time clearing also is now a reality with 99 percent of swaps clearing within 10 seconds and 93 percent actually doing so within three seconds. Approximately 70 percent of newly entered interest rate swaps and over 60 percent of credit index swaps are being cleared.

The playing field has been leveled through transparency, impartial access, central clearing and straight-through processing. Asset managers, pension funds, insurance companies, community banks and all market participants are gaining benefits that until recently only swap dealers had.

It’s been a remarkable journey these past five years – and all of you have been part of this. Your hundreds of comments, meetings and questions have been critical to CFTC’s efforts. You worked hard – with real costs and against deadlines – to implement these reforms to bring us to a new marketplace.

Open Access

With 18 temporarily registered SEFs, we now have more than a quarter-of-a-trillion dollars in swaps trading occurring on average per day. That is a big number by any measure.

Congress said that SEFs are to provide market participants with impartial access to the market.

Consistent with Congress’ direction, the Commission’s final SEF rules, completed six months ago, are clear. Impartial access is about allowing market participants to “compete on a level playing field.”

Last week, CFTC staff issued guidance reminding SEFs of this core responsibility: the Commission’s regulations require SEFs to provide all its market participants – dealers and non-dealers alike – with the ability to fully interact on order books or request-for-quote (RFQ) systems.

SEFs are required to provide dealers and non-dealers alike the ability to view, place or respond to all indicative or firm bids and offers, as well as to place, receive, and respond to RFQs.

All market participants should feel confident that their bids or offers are being communicated to the rest of the market.

Further, SEFs must provide to all eligible contract participants (ECPs) market services, including quote screens and similar pricing data displays.

Last week’s guidance, spoke directly to some questions that market participants had brought to our attention as contrary to impartial access.

First, any discriminatory treatment for swaps intended to be cleared, such as “enablement mechanisms,” that prevents market participants from viewing bids or offers on a SEF is inconsistent with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act) and the Commission’s regulations.

Second, requiring swaps traded on a SEF that are intended to be cleared to have pre-execution agreements, such as breakage agreements, is inconsistent with the Dodd-Frank Act and the Commission’s regulations.

Third, requiring a market participant to be a swap dealer or a clearing member to respond to an RFQ is inconsistent with the Dodd-Frank Act and the Commission’s regulations.

Dodd-Frank reforms truly are about bringing greater access to these markets. Reforms really are about allowing multiple market participants to meet and transact with multiple market participants.

This does mean a paradigm shift from the business models of the past.

Thus, SEF registration was not meant to be just business as usual.

Bringing access to the entire marketplace means platforms will no longer be just dealer to dealer or dealer to customer.

Through reform, all market participants who meet the standard of an ECP must be given impartial access.

Transparency

Congress was also clear that transparency must shine on the swaps market both before and after a trade.

When light shines on a market, the economy and public benefit.

Post-Trade Transparency

With reform, post-trade transparency has become a reality in the swaps market.

The price and volume of each swap transaction can be seen as it occurs. This post-trade transparency spans the entire market, regardless of product, counterparty, or whether it’s a standardized or customized transaction.

This information is available, free of charge, to everyone in the public. The data is listed in real time – like a modern-day tickertape – on the websites of each of the three swap data repositories.

Regulators also gained transparency into the details on each of the 1.8 million transactions and positions now in data repositories. The data repositories, swap dealers and SEFs, though, need to do more to ensure that the data flowing into the data repositories is accurate; consistent; and able to be readily sorted, filtered, and aggregated.

Pre-Trade Transparency

Reform also is about shining light before a trade happens.

Such pre-trade transparency gives anyone looking to compete in the swaps market the ability to see prices of available bids and offers prior to making a decision on a transaction.

This lowers costs for investors, businesses and consumers, as it shifts information from dealers to the broader public.

Our final rules provided significant flexibility in achieving this pre-trade transparency.

All SEFs are required to provide for an order book to all its market participants. In addition, SEFs have the flexibility to offer trading through RFQs.

Further, as long as certain minimum functionality is met, SEFs can conduct business through any means of interstate commerce, such as the Internet, telephone, and the mail – or, if one chooses, carrier pigeons.

The final rules were technology neutral.

Trade Execution Requirement

To benefit the public, broaden competition, and promote transparency, Congress required that certain standardized swaps must be executed on a SEF or designated contract market (DCM). The trade execution requirement covers all swaps that are subject to mandatory clearing and made available to trade.

Four SEFs already have made filings for a wide range of interest rate and credit index swaps to be determined made available for trading.

With 90 registered swap dealers, including the world’s largest financial institutions, I believe sufficient liquidity exists across the entire interest rate swap curve to support SEFs making these swaps available for trading.

The major dealers already quote markets across the entire curves, including for so-called benchmarks as well as non-benchmarks.

I anticipate that by next February there will be a trade execution requirement for a significant portion of the interest rate and credit index swap markets. The significant flexibility built into SEFs’ minimum trading protocols – including order books, RFQs and crossing rules – will enable the markets to adjust to this new mandatory trading environment.

Futures Block Rule

Earlier this year, the Commission finalized a block rule for swaps. To preserve the pre-trade transparency that has been a longstanding hallmark of the futures market, I believe that it is critical do so for futures as well.

This is important so that we do not allow for arbitrage between the swaps market that now has a block rule and the futures market that does not have a formal block rule. Thus, it is my hope that the CFTC staff’s recommendation to publish a futures block rule for public comment be on the agenda for our next open Commission meeting in December.

SEF Registration

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 Act. They expressly repealed exemptions, such as the so-called “Enron Loophole,” for unregistered, multilateral swap trading platforms.

They did so based on a long public debate.

In fact, then-Senator Obama in June 2008 called for fully closing the “Enron Loophole.”

Last week, CFTC staff issued guidance with regard to SEF registration. If a multilateral trading platform is a U.S. person, or it is located or operating in the U.S., it should register.

Consistent with the cross-border provisions of Dodd-Frank, a multilateral swaps trading platform located outside the United States that provides U.S. persons or persons located in the U.S. (including personnel and agents of non-U.S. persons located in the United States) with the ability to trade or execute swaps on or pursuant to the rules of the platform, either directly or indirectly through an intermediary, will register as a SEF or DCM.

This will trigger some SEF registrations for foreign-based platforms that are already registered with their home country. For instance, one Australian platform is going to register with the CFTC, 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.

In addition, we have been asked by a number of swap dealers and SEFs about how our rules apply to foreign swap dealers operating in the United States.

Last week, CFTC staff issued an advisory addressing this question.

If a foreign-based swap dealer has personnel in New York and they regularly arrange, negotiate, or execute swaps in the United States, then the transactions come under Dodd-Frank requirements. As the advisory stated, these activities are “core, front-office activities” of a swap dealer’s dealing business.

In other words, a U.S. swap dealer on the 32nd floor of a New York building and a foreign-based swap dealer on the 31st floor of the same building, have to follow the same rules when arranging, negotiating or executing a swap.

One elevator bank … one set of rules.

Moving Forward

The CFTC now largely has moved beyond rulewriting and initial compliance dates.

We have now moved on to reviewing registered entities and registrants to ensure they fully come into compliance.

As we have done for many years, we are doing this through examinations, surveillance, enforcement and issuing guidance and advisories. To smooth implementation, we will continue to work with market participants as needed.

We know the markets are undertaking a significant effort to ensure a smooth transition, including steps to incorporate guidance and advisories. We will continue working with market participants, but when there is a question, the best thing to do is to come into compliance with all of the CFTC’s rules and guidance.

CFTC Resources

To ensure for a well-functioning futures and swaps market, the public needs a well-funded CFTC.

To ensure that transparency and access are a reality and not something just in the rulebooks, the public needs a well-funded CFTC.

To ensure that the markets are free of fraud, manipulation and other abuses, the public needs a well-funded CFTC.

Though this small and effective agency was able to complete 67 rulemakings, orders and guidances to transform a marketplace, this should not be confused with the agency having sufficient people and technology to oversee the markets.

With 670 people, we are only 36 people more than 20 years ago, and we’ve got a whole lot more to do. We have a vast $400 trillion swaps market to oversee, in addition to the $30 trillion futures market that we historically have overseen.

The overall branding of these markets is dependent on investors and customers having confidence in using them.

It’s also critical that we have the resources for the timely reviews of applications, registrations, petitions and answers to market participants’ questions.

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 6 percent, and was forced to notify employees of an administrative furlough for up to 14 days this fiscal year.

I believe that the CFTC is a good investment for the American public. It’s a good investment for transparent, well-functioning markets.

Conclusion

Let me close by thanking all of you. These last five years have been a remarkable journey, and the result is a transformed marketplace.

I want to thank you for all that we’ve achieved together.

I look forward to answering your questions.

SEC CHAIR MARY JO WHITE'S REMARKS AT MANAGED FUNDS ASSOCIATION OUTLOOK 2013 CONFERENCE

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 
Hedge Funds – A New Era of Transparency and Openness
 Chair Mary Jo White
Managed Funds Association Outlook 2013 Conference, New York, New York

Oct. 18, 2013

Thank you very much Richard for that kind introduction. I am very happy to be here today and particularly pleased that I could join you at this conference at such an important time in your industry.

The Managed Funds Association has long been an important and constructive voice representing the private fund industry. And that voice is especially relevant today.

I. The Era of Transparency and Openness
Private funds, including hedge funds, play a critical role in capital formation, and are influential participants in the capital markets. And, perhaps more than ever before, the hedge fund industry as a whole is experiencing dynamic change — moving from what some would say was a secretive industry, to a widely-recognized and influential group of investment managers.

Today, I want to focus on this change within your industry, as well as on what the SEC must do as the primary regulator in this space.

There is little doubt that hedge funds have entered a new era of transparency and public openness – a transformation that I believe will benefit investors, the public and regulators. And, one that I believe will ultimately and significantly redound to your benefit as well.

It is a substantial and fairly sudden change brought on as a result of two recent and significant pieces of legislation: the Dodd-Frank Act[1] and the JOBS Act.[2] Although both are designed to promote additional transparency, they do so from different, but complementary perspectives.

The Dodd-Frank Act
The Dodd-Frank Act, as you know, required most advisers to hedge funds and other private funds to register with the SEC, resulting in public reporting of basic information regarding business operations and conflicts of interest.[3] Demonstrating leadership and a commitment to appropriate and effective regulation, the MFA supported this change.[4]

In addition, the Dodd-Frank Act directed the SEC to collect information, on a confidential basis, from private fund advisers regarding the risk-profiles of their funds.[5] And, again, the MFA weighed in constructively, taking the view that confidential reporting to a functional regulator could be beneficial to reducing potential systemic risk[6] – a view that I share.

The JOBS Act
The JOBS Act, meanwhile, facilitates greater transparency and openness in a different way. It directed the SEC to lift the decades-old ban on general solicitation that applied when companies or funds make private securities offerings under Rule 506 of Regulation D – a rule that private funds used to raise over $700 billion[7] in 2012.

As a result, as of September 23, 2013, hedge fund managers feel they have a new freedom to communicate with the public, to advertise, to talk to reporters, to speak at conferences and, most importantly, communicate with investors openly and frankly. And, you can do these things without the fear of securities regulators knocking on your door, or your outside counsel screaming at you.

For some of you, this rule change may not alter your practices significantly. But for others, the new rule will allow communication and engagement with investors in a way not permitted by the old rule.

Taken together, these are significant changes – creating an opportunity for a new era of openness, public engagement and the availability of information about your industry.

As leaders of the private fund community, you are in a unique position to guide your industry through this critical time. And, we – at the SEC – are committed to working alongside you to ensure that this transition is smooth – keeping in mind that your, and our, ultimate focus must be the interests of investors.

I will focus for a few minutes this morning on these changes within your industry and the responsibilities that flow from them. There are new and significant responsibilities that you have, but there are also important responsibilities that we as regulators shoulder in this new era.

I believe it is critical that we work together and each do our part to ensure that this new transparency and openness have a positive impact on capital formation and investor confidence.

Mandated Registration
As recently as 2010, regulators could only see a portion of the financial landscape comprised of hedge fund and other private fund advisers. That is because our view of the market was limited to those advisers who voluntarily registered with the Commission – or were required to do so because, for example, they also managed a mutual fund.

We knew that there was a gap in our knowledge. But, we did not know how many hedge fund managers existed and we did not know who they were -- we could not tell how big this slice of the market really was.

Commentators thought that many advisers would volunteer to register in the belief that an SEC registration would bestow greater credibility in the eyes of investors. And about 2,500 hedge fund and other private fund advisers did step forward. But, we did not know who else was out there.

In the wake of the Dodd-Frank Act, all of that changed. Hedge fund and other private fund advisers, for the first time, were required to become more visible. And, soon we saw over 1,500 new hedge fund and other private fund advisers, bringing the total number of registered advisers to private funds to just over 4,000. Until then, we did not know that we had not accounted for one-third of the industry. Today, as we now know, approximately 40% of the investment advisers, who are registered with the SEC, manage one or more hedge funds or other private funds.[8]

We do not take this new registration development, and what it has revealed, lightly. And we know that it was certainly an important milestone for your industry. It was significant both because of the historically private nature of your industry and because a requirement to register means much more to you than just checking a box on a form and letting us know that you exist.

Registration, as you know very well, requires, as an initial matter, making information about your operations and your funds public.

One immediate benefit of this requirement to your industry should be that transparency will enable you to shed the secretive, “shadowy” reputation that some would say has unfairly surrounded you – a myth that did not serve anyone well, least of all you.

Clearly, the increased transparency and openness creates benefits for you, your investors and the securities markets generally. But it carries with it new responsibilities and obligations as well, for both you as an industry and for us as your regulator. For you, it principally means sharing complete and accurate information with investors and regulators, whether through your registration forms, confidential regulatory reports, solicitation materials, or examination visits. For us, it principally means making sure our rules, examination and enforcement program are accurately tuned to a changing world and foster, not impede, the positive aspects of this growing transparency.

We want to work with you to make sure you are able to live up to your new regulatory responsibilities, but we also hope that you recognize their value. And we need your help when we craft rule proposals that affect your industry or when you find that existing rules are not appropriately calibrated for what you do.

II. The Responsibility of Transparency and Openness
Registration and Disclosure
The most basic regulatory responsibility is providing specific information to your investors and the public – information about the funds you manage, your operations and conflicts of interest. For some of you, providing this information when you registered with the SEC may have been the “first step” into this new era of transparency and openness. But it is familiar and common territory for many other entities across the securities industry.

The registration information you file with us is posted on the SEC’s website, making access for existing and prospective investors easy. In providing this information, you are helping investors understand your business and investment approach – and also helping to inform us by providing data through which we can assess a firm’s business operations, conflicts of interest and leadership.

Our knowledge of the markets and understanding of your businesses is also enhanced when you provide us with non-public data on your funds’ risk profiles, which is required by new Form PF mandated by the Dodd-Frank Act.[9] Form PF provides information on the types of assets you are holding to help to inform government regulators tasked with monitoring systemic risk. Using this information, regulators can then assess trends over time and identify risks as they are emerging, rather than reacting to them after they unfold. As part of this process, it is our responsibility to be sensitive to and safeguard the confidential nature of the data you provide.[10] We take that obligation very seriously.

This era of hedge fund transparency is also new for us. We need to continuously ensure that we – as regulators – are asking for the right information, in the most appropriate way; that we are training our staff to properly understand your business; and that, where necessary, we are hiring the experts who have been in your shoes at one time. We welcome your input on how we might further improve our disclosure and data gathering efforts.

* * *

In addition, the Commission recently proposed a rule[11] that would require you to provide information about offerings you and others conduct under Rule 506 of Regulation D, including those that use general solicitation and advertising.

This proposal is designed, in part, to provide more transparency to enable us to better monitor the private placement market. It would enable us to learn more about the size of the market, those who conduct offerings, and the characteristics of those who are unsuccessful in completing an offering. It also would provide us access to the solicitation materials that are being used and better assure that investors are getting some baseline level of information about risks.

It is part of our effort to ensure that this new market, which private funds dominate,[12] is conducted in a manner that furthers both new capital formation and investors’ interests. We are sincerely interested in your thoughts and constructive input on these topics.

To date, we have received more than 450 comment letters on the proposed amendments,[13] including one we recently received from the MFA. And, recently, we extended the time for the public to comment on the proposal.

This is an important proposal, and there are a lot of different views about it, so it is important to have an opportunity to consider these views. Issues raised in the comment process contribute meaningfully to all of our rulemakings.

But, for investors’ sake and the sake of the new marketplace, we need to move expeditiously toward adoption, following appropriate consideration of the comments. And we must get it right if we are going to make this new era of transparency and openness workable.

Contemporaneously with lifting the ban on general solicitation, the SEC staff has undertaken an interdivisional effort designed to monitor how the ability to advertise and “generally solicit” is actually occurring – how companies and hedge funds are taking advantage of the new rule. It includes assessing the impact of general solicitation on the market for private securities and –importantly –on identifying fraud if it is occurring. If it is, we can seek to stop those in their tracks, who would inappropriately take advantage of this new more open environment.

In a similar vein, because of the SEC’s new “bad actor” rule, which was adopted at the same time the ban on general solicitation was lifted, those who commit securities law violations after the effective date of the new rule (which was September 23, 2013) will be prohibited from participating in this private offering process going forward. There also will be disclosure of past “bad actors” involved in private offerings, to the extent they exist.

We need to keep a very close eye on core investor protection issues as the new “public-oriented” market for private securities initially develops. Our goal is not just to react to investor harm, but also to prevent it.

I think we are all aligned in this effort. We all want this new marketplace to thrive – efficiently, but honestly – for the benefit of entrepreneurs and investors alike.

Examinations
Of course, the new era of transparency and openness includes more than just registering with the SEC, filing information publicly and communicating more freely with the public.

Registering with the SEC also requires compliance with business conduct rules. These rules are there to help protect investors and safeguard our markets, but they are also rules that should strengthen your operations.

Transparency also means being subject to an occasional visit by a team of our professional compliance examiners – who will review your records and sit with you to evaluate whether your firm is being run in compliance with these business conduct rules and other requirements.

This may not be the most welcome aspect of the new age of transparency for hedge fund advisers. But it is a very important component of our regulatory work because well-conceived rules are of little value if they are not being followed. So, our examinations are designed to evaluate compliance, but also to assist you as you work to achieve your compliance objectives.

Since registering with the SEC, some of you may already have received your first visit from an SEC examination team. And, hopefully, you found them to be informed, professional and constructive. Certainly, that is something you deserve and should expect. And something we continuously seek to foster in our teams.

Now, I know questions have been raised about whether inclusion of private fund advisers in our examination program makes sense, given the often sophisticated nature of hedge fund investors. The question is legitimate and, as the head of a regulatory agency, I need to continuously assess whether our resources are being deployed in the most productive, cost-effective manner.

That being said, the SEC has a mission of investor protection that runs across the investor landscape. It applies to all investors, and all investors in the U.S. markets deserve to know that there is a regulator on the block, looking around corners and concerned about their interests.

We should also recognize that, while many hedge fund investors are considered to be “sophisticated” or “institutional,” those terms apply to a wide swath of investor types. And the investment performance of institutional investors can affect the lives of people on the street. Institutional investors, for example, include pensions funding workers’ benefits, college endowments and charities. These “sophisticated investors” can and do have a real impact on main street investors.

So, yes, our examiners are in your space. We are, however, trying to be “smart” about how we examine.

That is why we launched an initiative to conduct focused exams of newly registered advisers. These examinations, known as “presence exams,” establish our regulatory presence with registered private fund advisers in a very tangible way. Our examiners are on-the-ground, in-person, discussing issues of importance to hedge fund advisers and their investors.

These presence exams, which are shorter in duration and more streamlined than typical examinations, are designed both to engage with newly-registered hedge fund and other private fund advisers and to permit our examination team to examine a higher percentage of new registrants.

The goal of the examinations is not to play “gotcha.” It is instead to make sure newly-registered private fund advisers are aware of their obligations under the SEC’s rules. And it is to promote investor-oriented business practices through, among other things, the sharing of best practices.

To foster a two-way street of transparency, we are making known the areas that are of interest to us. For instance, in a letter we sent to senior leadership of newly-registered private fund advisers, we explained that the staff is pursuing five focus areas for the presence exams:

marketing;
portfolio management;
conflicts of interest;
safety of client assets; and
valuation.[14]
We will work cooperatively with you to address any irregularities. But, should we find fraud, we will pursue it, just as you, your investors, and your fellow market participants would expect us to do.

III. The Regulator’s Responsibilities
Making Sure our Rules Work
Just as you have many new responsibilities, we too have additional obligations.

For instance, at the SEC, we need to fully understand your business and take into account the private fund business model and the needs of private fund investors. And, we have been striving to do that.

In August, for example, the SEC staff put out guidance[15] on how our custody rule[16] should apply to private stock certificates. That rule seeks to protect investors by imposing certain requirements on those private funds that hold stock certificates that represent the underlying ownership interests of the fund.

Through our engagement with the industry, however, the staff recognized that applying the custody rule in the private fund, and particularly, the private equity fund context may not work as intended.

In particular, the staff noted that existing mechanisms, such as the financial statement audit, provided appropriate investor protections and maintenance of stock certificates with a separate custodian often resulted in additional costs to investors and firms, with little added benefit. So, our staff advised that maintenance of private company, non-transferable stock certificates with a custodian is not necessary if the private fund is audited as required by the custody rule.[17]

Although I understand that we may need to take further steps, the staff guidance on the custody rule exemplifies our efforts to tailor the application of SEC rules to hedge funds and other private funds, while at the same time promoting meaningful investor protection.

As with the custody rule, we are also regularly considering our rules related to advertising – an area that is front and center in light of the JOBS Act and the new freedom that hedge fund advisers have to advertise. Even before the JOBS Act, hedge fund advisers had questioned SEC rules prohibiting testimonials and the meaning of the ban on “past specific recommendations.”[18]

And, I can imagine we will receive additional questions regarding the effectiveness of our advertising rules as hedge funds begin to “generally solicit” under the new rules implementing the JOBS Act.

From my perspective, I want to know if we are targeting the right areas, and if our rules, written decades ago, are still relevant and effective today.

Should, for example, the SEC or some other organization attempt to mandate standardized performance disclosure for hedge funds consistent with a recommendation from our Investor Advisory Committee?[19]

These are just some of the questions we are asking at the SEC and, for our rules to work right, we need your input.

A Focused Enforcement Program
Finally, because of the greater transparency, the SEC will have a clearer picture of the players and practices in your industry – including those who engage in fraud or sharp practices. This clearer picture gives us a window into the whole industry and enables us to craft an enforcement program that is more focused and directed.

Recently, the SEC has been quite active in bringing enforcement cases involving private funds. These cases have involved charges related to: insider trading; false advertising and performance claims; overvaluing assets in order to charge excessive fees; benefitting favored investors at the expense of other investors; and using private fund assets for the personal benefit of the fund’s adviser.

The existence of bad actors and outright fraudsters in the private fund industry hurts investors and obviously damages the industry’s reputation. None of us should stand for it.

It is essential, on our part, that the SEC have strong and vigilant examination and enforcement programs to root out these bad actors in order to build investor confidence in the fairness and integrity of our markets. It is important to you as an industry that we succeed in these efforts. And we welcome your support.

IV. Conclusion
Going forward in this new era of transparency and regulatory oversight, we want to work with you because we both shoulder new and important responsibilities. We know you will take these new requirements seriously and we do too.

We want to hear about the tools we use to gather information. And we want to hear about our efforts to stay current on your industry. We welcome your input on our regulatory effectiveness.

We also want to hear how our rules, examination and enforcement focus can be better targeted to the needs of private fund investors.

As hedge fund leaders, you have close relationships with your investors. You communicate with them regularly. You understand their needs. We need for you to share their perspectives with us.

My bottom line: we look forward to continuing to work with you constructively in this new era of transparency. If we do, our markets will be strengthened, investors will be protected, and your businesses can operate from a more transparent and stronger platform.

Thank you.

# # #


[1] Pub. L. No. 111-203, 124 Stat. 1376 (2010).

[2] Pub. L. No. 112-106, 126 Stat. 306 (2012).

[3] Section 403 of the Dodd-Frank Act (codified at Section 203(b) of the Investment Advisers Act of 1940, as amended).

[4] Testimony of Richard H. Baker, President and Chief Executive Officer, Managed Funds Association, for the Hearing on Capital Markets Regulatory Reform: Strengthening Investor Protection, Enhancing Oversight of Private Pools of Capital, and Creating a National Insurance Office, before the Committee on Financial Services, U.S. House of Representatives (October 6, 2009)., available at http://www.managedfunds.org/downloads/MFA%20testimony%20October%206%20final.pdf .

[5] Section 404 of the Dodd-Frank Act (codified at Section 204(b) of the Investment Advisers Act of 1940, as amended).

[6] Testimony of Richard H. Baker, President and Chief Executive Officer, Managed Funds Association, for the Hearing on Systemic Regulation, Prudential Matters, Resolution Authority and Securitization, before the Committee on Financial Services, U.S. House of Representatives (October 29, 2009), available at http://www.managedfunds.org/downloads/MFA%20Written%20Testimony.pdf .

[7] Vladimir Ivanov and Scott Bauguess, Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009-2012 (July 2013), available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf, Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Advisers Act Release No. 3624 (Jul. 10, 2013) [78 FR 44771 (Jul. 24, 2013)], available at http://www.sec.gov/rules/final/2013/33-9415.pdf.

[8] “ Dodd-Frank Act Changes to Investment Adviser Registration Requirements,” available at http://www.sec.gov/divisions/investment/imissues/df-iaregistration.pdf.

[9] Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Act Release No. 3308 (October 31, 2011), 76 FR 71128 (November 16, 2011), available at http://www.sec.gov/rules/final/2011/ia-3308.pdf.

[10] Reporting by Investment Advisers to Private Funds and Certain Commodity Pool Operators and Commodity Trading Advisors on Form PF, Investment Advisers Act Release No. 3308, at Section II.D, “Confidentiality of Form PF Data” (October 31, 2011), 76 FR 71128 (November 16, 2011), available at http://www.sec.gov/rules/final/2011/ia-3308.pdf.

[11] Amendments to Regulation D, Form D and Rule 156, Securities Act Release No. 9416 (Jul. 10, 2013) [78 FR 44806 (Jul. 24, 2013)], available at http://www.sec.gov/rules/proposed/2013/33-9416.pdf.

[12] See Vladimir Ivanov and Scott Bauguess, Capital Raising in the U.S.: An Analysis of Unregistered Offerings Using the Regulation D Exemption, 2009-2012 (July 2013), available at: http://www.sec.gov/divisions/riskfin/whitepapers/dera-unregistered-offerings-reg-d.pdf, Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, Advisers Act Release No. 3624 (Jul. 10, 2013) [78 FR 44771 (Jul. 24, 2013)], available at http://www.sec.gov/rules/final/2013/33-9415.pdf.

[13] Comments are available at “Comments on Proposed Rule: Amendments to Regulation D, Form D and Rule 156 under the Securities Act,” http://www.sec.gov/comments/s7-06-13/s70613.shtml.

[14] See “Letter Regarding Presence Examinations,” available at http://www.sec.gov/about/offices/ocie/letter-presence-exams.pdf.

[15] “IM Guidance Update: Custody of Privately Offered Securities,” (August 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-04.pdf.

[16] 17 CFR 275.206(4)-2.

[17] “IM Guidance Update: Custody of Privately Offered Securities,” (August 2013), available at http://www.sec.gov/divisions/investment/guidance/im-guidance-2013-04.pdf.

[18] 17 CFR 275.206(4)-1(a)(1) and (2).

[19] Recommendations of the Investor Advisory Committee Regarding SEC Rulemaking to Lift the Ban on General Solicitation and Advertising in Rule 506 Offerings: Efficiently Balancing Investor Protection, Capital Formation and Market Integrity (January 2013), available at http://www.sec.gov/spotlight/investor-advisory-committee-2012/iac-general-solicitation-advertising-recommendations.pdf.

REMARKS BY CFTC COMMISSIONER O'MALIA AT CFTC COMPLIANCE FORUM

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Keynote Address by Commissioner Scott D. O'Malia, Edison Electric Institute CFTC Compliance Forum, Washington, DC
October 17, 2013

The topic of today's conference is "Compliance and Implementation Issues." I must say such a topic gives us plenty of room to have a wide-ranging discussion, as there are so many questions and concerns regarding industry compliance and on-going implementation.

As we all know, the Dodd-Frank Act was enacted following the G-20 agreement in Pittsburgh in September 2009 to undertake comprehensive financial reform. The G-20 agreement proposed four main objectives of derivatives reform. First, report all data to a data repository. Second, require that all standardized derivatives contracts be exchange traded "as appropriate." Third, require clearing to be done through central counter parties. Fourth, impose higher collateral charges for all uncleared over-the-counter (OTC) products.

Since the passage of Dodd-Frank, the CFTC has been busy with an aggressive schedule of rule promulgation. Today we have finalized just over 60 rules including Dodd-Frank and non-Dodd Frank rule.

This new regulatory regime has had a profound impact on market structure as it has imposed new obligations, higher levels of transparency, and higher standards for risk management. Many of these new rules will have a positive impact on financial markets.

However, I have serious concerns about the Commission’s rule making process and schedule, as well as the statutory foundation of many rules and their overall impact on end-users.

Today, I would like to discuss three topics. First, I would like to address the implementation of the rules, both in terms of compliance already under way and what we need to think about going forward. Second, I would like to discuss the regulatory impact on end-users. Finally, I would like to discuss my concerns about the Commission’s preparedness to oversee the implementation of the Dodd-Frank regulatory regime.

The Process: Sacrificing Transparency and Certainty for Speed

From the beginning of my time at the Commission, I have been very concerned with the Commission's rulemaking process. As you may know, I have been disappointed with the Commission’s failure to develop a transparent rulemaking schedule that would enable market participants to plan for compliance with the massive new obligations imposed by these rules. In addition, I believe the Commission has rushed the rulemaking process, prioritizing getting rules done fast over getting them done right. This approach has compromised the legal soundness and consistency of our rules.

Stark evidence of the Commission’s flawed rules, and their unachievable compliance deadlines, can be seen in the massive number of exemptions and staff no-action letters issued to provide relief from them. To date, we have issued over 130 exemptions and staff no-action letters. That amounts to more than two exemptions for every rule passed. In nearly two dozen cases, the relief provided is for an indefinite period of time – thus making them de facto rulemakings, which didn't go through the Administrative Procedure Act or proper cost-benefit analysis. It is clear that the Commission has abused the no-action relief process.

Market participants are confused regarding the application of our rules, and how or when they must be applied. Further, since the Commission doesn't vote on staff no-action letters, they don't appear in the Federal Register. And you won't find the exemptive letters in our rulebook either. This lack of transparency and consistency will drive a compliance officer crazy.

One area where the Commission has made one of its biggest process fouls is the lack of robust cost-benefit analysis. Without a doubt, the comprehensive nature of the Dodd-Frank regulatory regime will have a significant cost impact on all market participants, and yet the Commission has failed to conduct appropriate and rigorous quantitative and qualitative analysis of our proposed rules. Understanding whether the benefits of the rules outweigh the costs is a common sense tool to determine the least burdensome solution to the problem.

The Commission has so far been able to get away with such inadequate cost-benefit analysis because the current governing statute sets a low bar. I support Congressional efforts to revise our statutory cost-benefit obligations in order to require the Commission to undertake a more rigorous quantitative and qualitative analysis, putting us on par with other federal agencies. I support Chairman Conaway's efforts (H.R. 1003) and hope the House and Senate will pass this legislation.

Implementation: What's Coming

While I have a longer list of process fouls committed by the Commission, I would like to turn to upcoming rules that will have a significant impact on end-users in particular.

The Commission is currently considering the position limit rule do-over. When I say the Commission, I mean that literally. During the shutdown there is no staff available to discuss this rule proposal. We can't make revisions. We can't ask questions about the rationale or justification. We can't even discuss with staff whether or not the proposed limits would have an appropriate impact to curb "excessive speculation."

The Commission is pursuing a dual track on position limits. Later this year, an appeals court will hear our argument urging it to overturn a federal district court’s ruling to vacate the original position limit rule. The district court found that the Commission failed to provide a finding of necessity as directed by the statute. Simultaneously, we are drafting a nearly identical rule arguing more strenuously that Congress made us do it, and that Congress really didn't want to know whether these rules are "necessary" or "appropriate."

Frankly, I find it interesting that the proposed rule will argue on one hand that Congress wanted position limits and that we aren't bound to apply an appropriateness standard – and then, on the other hand, argue in the cost-benefit analysis that these rules are well considered and will have the intended impact based on our analysis.

Another important rulemaking that will be before the Commission shortly is the application of capital and margin for all OTC trades. While I am pleased that the international community has worked together to make the standards consistent, make no mistake: these rules will increase the cost of hedging. End-users will be spared from mandatory margin exchange. However, nobody will receive a break from the new capital charges. These are new costs imposed on banks to offset the risk posed by OTC trades. Needless to say, these costs will be passed on to end-users.

I agree with Sean Owens, an economist with Woodbine Associates, who stated that under Dodd-Frank, "end users face a tradeoff between efficient, cost-effective risk transfer and the need for hedge customization. The cost implicit in this trade off include: regulatory capital, funding initial margin, market liquidity and structural factors."1

There is no doubt that these new requirements will have serious economic consequences for financial markets. And regulators should not take this lightly. In an effort to coordinate with international regulators, the Commission will re-propose its capital and margin rules. But even under the more accommodating margin requirements, the Commission must evaluate additional costs to end-users by conducting an in-depth cost-benefit analysis.

Happy Anniversary: 1st Anniversary of Futurization

It was one year ago, almost to the day, that the energy markets switched from trading swaps to futures. This huge shift was triggered by the then-impending effective date of the swap and swap dealer definitions. To avoid trading swaps and being caught in the unnecessary, costly and highly complex de minimis calculation imposed on swap dealers, energy firms shifted their trading from swaps to futures, literally overnight.

Based on the complexity of our swaps rules and the cost-efficiency of trading futures, it makes sense that participants would make this change. I'm interested to hear more from end-users like you how this shift has impacted your hedging strategies.

I must warn you that there are several more changes coming up that will continue to impact energy markets. First, the Commission is considering a draft futures block rule that will be proposed to limit the availability of block trades.

Second, as I noted before, OTC margin and capital rules will increase the cost of OTC bilateral deals. This draft rule should be published by the end of the year.

Third, the European Union (EU) is considering whether it will find acceptable the U.S. rules allowing a minimum one-day margin liquidation requirement for futures and swaps on energy products. Europe might not recognize U.S. centralized counterparties as qualified and, as a result, ban EU persons from accessing these markets. The EU is insisting on a two-day margin liquidation minimum. I am told that this would have the practical effect of increasing margin requirements for energy trades by 40 percent. I’m not sure how this will be resolved, but I suspect it will be closely tied to U.S. recognition of the European regulatory regime.

End-Users

Now let me turn to my second topic: how our rules treat end-users.

Congress was very clear about protecting end-users from Dodd-Frank's expansive regulatory reach. As a result, many end-users assumed that they wouldn't be impacted by these rules. Clearly, they are no longer under such misconceptions.

The swap dealer definition is a good example of how the Commission failed to accurately interpret Dodd-Frank and broadly applied the swap dealer definition to all market participants. The Commission ignored the express statutory mandate to exclude end-users from its reach. The swap dealer final rule requires entities to navigate through a complex set of factors on a trade-by-trade basis, rather than provide a bright line test. While I appreciate that the Commission set an $8 billion de minimis level to exclude trades from a dealer designation, it remains challenging to determine what is in and what is out from this safe harbor.

As part of the complexity of the swap dealer definition, the Commission has applied inconsistent and incoherent requirements around bona fide hedging as part of the dealer calculation. The hedge exclusion from the dealer definition applies only to physical, but not financial, transactions. The Commission should apply a consistent definition for hedging.

Another complexity that the Commission has imposed on end-users is the definition of a volumetric option. Specifically, to determine whether a volumetric option is a forward or a swap, the rule applies a seven-part test. But the real kicker is that under the seventh factor, contracts with embedded volumetric optionality may qualify for the forward contract exclusion only if exercise of the optionality is based on physical factors that are outside the control of the parties. This is in contradiction to how volumetric options have been traditionally used by market participants, makes no sense and provides absolutely no certainty for market participants.

The Commission has seemingly gone out of its way to create complex rules that generally result in an outcome of heads we win, tails you lose. We need to clean up the definition and create reliable and well-defined safe harbors. If we don't, I would encourage Congress to revisit the statute.

Commission Readiness: The Consequences of a “Ready, Fire, Aim” Approach

Let me move now to my third main topic: Commission readiness to properly oversee the implementation of its Dodd-Frank regulatory regime. There are two questions I have regarding this issue. The first question is pretty straightforward: is the Commission prepared to effectively oversee the new swaps markets? I believe the answer to this question is "no."

Take the area of registration. The Commission’s new swaps regime has created multiple new categories of Commission registrants, and in each category there has been an inconsistent and uncertain process with the bar constantly moving for applicants. For example, it has been ten months since the first swap dealer application arrived. Today, we have 89 temporarily registered applications totaling over 180,000 pages and we haven’t signed off on single application as complete or final.

With regard to swap data repository (SDR) registration, it has taken the Commission eight to ten months to register just three SDRs under temporary status. We have exceeded our own self-imposed limit of 180 days in some cases and we still haven’t issued a final SDR determination.

As for the registration of swap execution facilities (SEFs), while we have registered 18 entities under a temporary basis, I can only imagine how long it will take for a SEF to secure final approval, especially when we admit that we didn’t read the rulebooks in order to meet the arbitrary October 2 effective date. My guess is that it will be a long and painful process as we insist on evolving revisions to SEF rulebooks while trading is going on.

Another area where the Commission has not been adequately prepared to do its job is in connection with swap data being submitted under new reporting regulations. Despite imposing aggressive compliance requirements on the market, the Commission doesn't have the tools in place to effectively utilize the new data being reported to SDRs, and it doesn't have a surveillance system in either the futures or swaps market that I would regard as adequate or modern.

Today, the data we receive from SDRs requires extensive cleaning and changes to make it useful. As chairman of the Commission’s Technology Advisory Committee (TAC), I have devoted significant TAC attention and resources to aid this effort. Stemming from our TAC meeting in April, a working group including Commission staff and the SDRs has been established and is working to harmonize data fields to aid in our ability to easily aggregate and analyze data across SDR platforms. It will take time before we are able to access, aggregate and analyze data efficiently.

I am also disappointed with our current stance on the oversight of SEFs. Despite the October 2 start-up date for SEFs, the Commission relies on self-regulatory organizations to send data via Excel spreadsheet. There is no aggregation capacity and I am not aware of any plan to automate this process for the less than two thousand swap trades that occur on a daily basis.

My second question: is the Commission sufficiently familiar with the readiness of the market to adapt to our rules? The answer to this question is also "no." As I discussed earlier, evidence of this failure can be found in the Commission’s extensive use of no-action relief tied to arbitrary deadlines. The Commission needs to do a better job of understanding the significant compliance challenges facing market participants as a result of new regulations.

Pre-Trade Credit Checks: Time for the TAC to Revisit the Issue

Let me give you a brief example of one challenge we are dealing with today. The Commission has been working toward a goal of straight-through processing of trades and clearing to prevent any trade failures due to credit issues. Just recently, the Commission has started insisting that SEFs provide functionality to pre-check all trades for adequate credit at the futures commission merchant (FCM) to guarantee a trade. In general, I support this objective. However, market participants were not prepared to comply with this new requirement by October 2, the date SEFs began operation.

Consistent with the Commission’s practice of issuing last-minute ad-hoc relief, the day before the SEF start-up date, staff issued a delay of the pre-trade credit checks for one month until November 1. We are just two weeks away from this new deadline and it is clear that not all SEFs, FCMs, credit hubs and customers are fully interconnected. Without end-to-end fully tested connectivity, I suspect trades will continue to be done over the phone – stalling limit order book trading.

This is a topic that we discussed at the recent TAC meeting on September 12. It was clear at that meeting that the pieces were not in place and additional time is needed.

With the arbitrary November 1 deadline looming and the Commission yet to provide confused swap market participants with necessary guidance on a host of unresolved issues, often stemming from a lack of clarity in the SEF rules, I believe additional time is required. The Commission has not provided adequate time to complete the on-boarding process and conduct the technology testing and validation that is necessary. We should also consider phasing in participants, similar to our approach with clearing, in order to avoid a big bang integration issue.

Again, I offer to use the TAC to identify a path forward if that will be useful, but the issues identified in September still remain.

Conclusion

In many respects it is quite remarkable the work that has been accomplished – by both the Commission and the market – to put in place trade reporting, mandatory clearing, and now the first stages of swap exchange trading. However, the Commission process by which all of this was accomplished is certainly not to be replicated.

We need to continue to make sure we follow Congressional direction to protect end-users and focus more on outcomes rather than setting arbitrary timetables tied to an individual agenda. Rather than relying on the ad-hoc no-action process, the Commission should take responsibility of fixing the unworkable rules – swap data reporting and the swap dealer definition come to mind.

If we are going to impose rules, let’s make sure they are informed by data and will not interfere with the fundamental function of hedging and price discovery in the markets – I’m thinking about position limits and our proposed futures blocks.

Finally, let's keep an eye on the costs – putting these markets out of reach for commercial hedgers doesn't help anyone. Let's sharpen the pencil and consider all the options. There is no reason why we should not be able to quantify the solution as the most cost-effective rule for the market.

Thank you again for the opportunity to speak with you today.

1 See Sean Owens, Optimizing the Cost of Customization, Review of Futures Market (July 2012).

Last Updated: October 17, 2013