CFTC CHAIRMAN GENSLER'S STATEMENT BEFORE FINANCIAL STABILITY OVERSIGHT COUNCIL

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Statement of Chairman Gary Gensler before the Financial Stability Oversight Council

December 9, 2013

I want to thank Secretary Lew for his kind words.

Five years ago when President-elect Obama asked me to serve, the economy was in a free fall. Americans were paying for the crisis with their jobs, their pensions and their homes.

Our financial system and our financial regulatory system had failed the American public.

Since then, the dedicated staffs of the Financial Stability Oversight Council’s (FSOC) member agencies have been hard at work to ensure finance better serves the economy.

Finance is but one part of our interconnected economy. The vast majority of opportunity, growth and innovation are outside of finance. In fact, 94 percent of private sector jobs are not in finance.

Finance best serves the economy when markets operate under common-sense rules of the road.

President Roosevelt understood this when he, along with Congress, transformed markets. Their reforms – enhancing transparency, access, and competition in the futures and securities markets and overhauling the nation’s banking laws – established the foundation for the U.S. economic growth engine for decades.

Five years ago President Obama and Congress faced similar challenges in the aftermath of this era’s financial crisis – how to modernize finance’s rules of the road so they work best for the public.

Through Dodd-Frank reforms, many of which now have been implemented by FSOC member agencies, much progress has been made.

First, at the heart of reform is ensuring that the largest financial institutions in our free-market system have the freedom to fail. That was true for my dad’s small family business in Baltimore. Nobody would have bailed him out if he didn’t make payroll each Friday.

That’s why I was pleased last month when Moody’s removed the uplift in credit ratings of the largest bank holding companies that had come from perceived government support. This is a real testament to the work of the Federal Deposit Insurance Corporation and the Federal Reserve, under the leadership of Chairmen Martin Gruenberg and Ben Bernanke and Governor Daniel Tarullo.

Second, due to the U.S. banking regulators working hand-in-hand with international regulators, tougher capital and liquidity standards are becoming a reality. Further, annual stress tests of large banks determine if capital levels are sufficient.

Third, we now have an agency – with the energetic leadership of Richard Cordray – whose key mission is ensuring consumers are protected from predatory lending practices and get a fair deal on financial products from mortgages to credit cards.

Fourth, thanks to the leadership of Chairs Mary Schapiro and Mary Jo White at the Securities and Exchange Commission (SEC), we now have real transparency into the hedge fund world and are addressing the risks of potential runs on money market funds.

Fifth, the swaps market, which was at the heart of the crisis, has been completely transformed. Bright lights of transparency now are shining on the $380 trillion market. The public can see the price and volume of every transaction, like a modern-day tickertape. Regulated trading platforms are trading a quarter of a trillion dollars in swaps each day. And more than 70 percent of the interest rate swaps market is now in central clearing – lowering risk and bringing access to everyone wishing to compete.

Sixth, each of us has been vigorous cops on the beat going after bad actors in the markets. The CFTC, working with the Department of Justice and the SEC, exposed the pervasive rigging of interest rate benchmarks and changed the entire public debate regarding LIBOR and other benchmarks.

I particularly want to thank the members of this council for the strong public policy statements included in the FSOC annual report calling for international regulators and market participants to find and transition to a replacement for LIBOR.

Lastly, is the benefit of this council. Through the leadership of Secretaries Geithner and Lew, and the collaboration of everyone around this table, we have become a real deliberative body. We have enhanced the lines of communication between the agencies, whether it’s the day to day assessing of risks in our financial system or working through the reform agenda. This week, for example, the Volcker Rule will be finalized based on our collaborative work.

Taken as a whole, the Dodd-Frank common-sense rules of the road have been truly transformative. These reforms are helping finance better serve the rest of the economy.

Once again, I want to thank all of you. It has been a real honor to serve with each of you on this council. It’s also an honor to share my last FSOC meeting with my fellow outgoing council member and seatmate, Ben Bernanke.

CFTC CHAIRMAN GENSLER'S REMARKS BEFORE FUTURES INDUSTRY ASSOCIATION

FROM:  COMMODITY FUTURES TRADING COMMISSION 
A Transformed Marketplace – Remarks of Chairman Gary Gensler's before the FIA 2013 Futures & Options Expo

November 6, 2013

Thank you, Walt, for that kind introduction. I also would like to thank the Futures Industry Association (FIA) for the invitation – I’m honored that you’ve invited me to speak each of these last five years.

Ever since Adam Smith and the Wealth of Nations, economists have consistently written that access to and transparency in markets benefits the broad public.

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.

Those reforms have given farmers, ranchers, producers, merchants and commercial companies confidence to use the futures market to manage their risks. They are able to lock in the price of a commodity at harvest time, or lock in an interest rate or currency rate, and focus on that which they do best – producing goods and services for the economy.

The swaps market emerged in the 1980s. It remained outside these time-tested reforms until last year.

Both futures and swaps, though, are just two forms of the same thing – derivatives. Both had become essential to our economy and to the way people and businesses manage risks.

The swaps market also had grown to dwarf the futures market in total notional outstanding. We now know the swaps market is $400 trillion in size, compared to the $30 trillion futures market.

Lacking of common-sense rules of the road, the swaps market contributed to the 2008 crisis. Need I remind anyone about AIG.

It became time to bring this vast, dark market into transparency. It became time to ensure that the broad public gained the benefits of central clearing and oversight of dealers.

Thus, the President and Congress passed reform borrowing from what had worked best for decades in the futures market.

Now, the swaps marketplace has been transformed.

It’s been a remarkable journey these past five years – and all of you have been part of this journey. It not only took 65 finalized rules, orders and guidances by the CFTC. Your thousands of comments, meetings and questions were a critical part of the process as well. You worked hard – with real costs and against deadlines – to implement these reforms to bring us to a new marketplace.

Transparency

Foremost, the swaps marketplace now has transparency that simply did not exist in 2008.

The public now can see the price and volume of each swap transaction 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 get even greater transparency. Though there is more work to be done regarding the data flowing into data repositories, we now are able to see and filter the details on each of the 1.8 million transactions and positions in the data repositories.

Further, starting last month, the public – for the first time – has been benefitting from new transparency, access and competition on regulated swap trading platforms.

Economists have known the benefits of such transparency since the time of Adam Smith; it just wasn’t a reality in the swaps marketplace.

Now, as a result of reforms, swap execution facilities (SEFs) are required to provide all market participants with impartial access. They must provide dealers and non-dealers alike the ability to make and respond to bids, offers and requests for quotes. This is a basic tenant that Adam Smith and so many economists have laid out – that access and transparency promote competition and benefit the economy.

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

We’ll continue to address questions as they arise to help smooth the transition to the transparency and impartial access of exchange trading.

Addressing one such question, as our cross border guidance directs, if a multilateral trading platform is a U.S. person, or it is located or operating in the U.S., it should register.

A multilateral trading platform that provides persons located in the U.S. with the ability to trade or execute swaps on the platform’s market (either directly or indirectly through an intermediary), should register.

Registration applies whether those persons are U.S. persons or non-U.S. persons whose personnel or agents are located in the U.S. This is regardless of the location where the swap is ultimately booked, including in circumstances where a swap dealer arranges, negotiates, or executes the terms of a swap in a non-U.S. branch, but trades swaps on a multilateral swaps trading platform using personnel or agents of the swap dealer located in the U.S.

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.

Clearing

Second, the swaps market has been transformed to a market with mandated central clearing for financial entities as well as dealers.

Customers now gain the benefit that until recently only dealers had. Central clearing of swaps lowers risk and allows customers more ready access to the market.

Clearinghouses have operated successfully at the center of the futures market for over 100 years – through two world wars, the Great Depression and the 2008 financial crisis.

Reforms have taken us from only 21 percent of the interest rate swaps market being cleared in 2008 to 80 percent during the week ending October 25, 2013.

That same week, we saw 62 percent of new credit index swaps being cleared.

Further, we no longer have the significant time delays that were once associated with swaps clearing.

Five years ago, swaps clearing happened either at the end of the day or even just once a week. This left a significant period of bilateral credit risk in the market, undermining one of the key benefits of central clearing.

Now reforms require pre-trade credit checks and straight-through processing for swaps trades intended for clearing.

As a result, 99 percent of swaps clearing occurs within 10 seconds, with 93 percent actually doing so within three seconds. No longer do market participants have to worry about credit risk when entering into swaps trades intended to be cleared.

Thus, breakage agreements – agreements that had been requested by dealers in the event a swap wasn’t accepted for clearing – are not needed and should not be required for access to trading on a SEF or designated contract market.

Taken as a whole, these reforms have completely transformed the swaps market to a new marketplace.

Swap Dealers

Third, the market has been transformed for swap dealer.

In 2008, swap dealers had no specific requirements with regard to their swap dealing activity.

Today, with 90 swap dealers registered, all of the world’s largest financial institutions in the global swaps market are coming under reforms.

These reforms include new business conduct standards for risk management, documentation of swap transactions, confirmations, sales practices, recordkeeping and reporting.

Just to note how significant this is – this past summer, swap dealers and their over 10,000 counterparties around the globe changed their swap documentation, lowering risk by cleaning up the back office.

These documentation reforms build on what the Federal Reserve Bank of New York had tried to achieve with dealers voluntarily.

I would note from my own experience in the financial community, those back office documents really matter in a bankruptcy or other crisis.

International Coordination on Swap Market Reform

Further, the transformed marketplace covers the far-flung operations of U.S. enterprises.

Congress was clear in the Dodd-Frank Act that we had to learn the lessons of the 2008 crisis.

AIG nearly brought down the U.S. economy through its guaranteed affiliate operating under a French bank license in London.

Lehman Brothers had 3,300 legal entities when it failed. Its main overseas affiliate was guaranteed here in the U.S., and it had 130,000 outstanding swap transactions.

A decade earlier, Long-Term Capital Management was operating out of Connecticut but actually booked their $1.2 trillion derivatives book in the Cayman Islands.

Based upon CFTC guidance, swaps market reform covers transactions between non-U.S. swap dealers and guaranteed affiliates of U.S. persons, as well as swaps between two guaranteed affiliates.

As of last month, offshore branches and guaranteed affiliates, as well as hedge funds, like Long-Term Capital Management, all had to come into central clearing and the other Dodd-Frank reforms.

Customer Protection

Market events of the last two years also highlighted the need to further ensure the protection of customer funds.

Segregation of customer funds is the core foundation of the commodity futures and swaps markets.

Segregation must be maintained at all times. That means every moment of every day.

The CFTC went through a two-year process with market participants, including significant input from the FIA, to ensure that customers have confidence that their funds are segregated and protected. Last week, the sixth set of customer protection rules were finalized by the Commission.

The Future

Before I take questions, I wanted to share a few thoughts looking forward.

First there will be the continued implementation of reforms. Among the highlights is the trade execution mandate likely going live in the first quarter of 2014. Also, there is the critical implementation of the recently completed customer protection rules. The CFTC will continue pivoting from rulewriting to ensuring compliance with these reforms.

Second, it is critical that we preserve the pre-trade transparency that has been a longstanding hallmark of the futures market. The Commission finalized a block rules for swaps and soon will consider staff recommendations for a proposal on a futures block rule.

Third, we have witnessed a fundamental shift in markets from human-based trading to highly automated trading. The Commission looks forward to hearing back on our concept release on automated and high frequency trading.

Fourth, we must deal with the fact that LIBOR is more akin to fiction than fact. Through five settlements the CFTC has brought against banks, we have seen how the public trust can be violated through bad actors readily manipulating benchmark interest rates. As LIBOR and Euribor are not anchored in observable transactions, they have been and can be again readily and pervasively rigged.

The work of the Financial Stability Board to find alternatives and consider potential transitions to these alternatives is critical. This will mean significant changes in the futures and swaps markets. There is a need for these reforms, though, if we’re going to protect the integrity of the markets.

CFTC Resources

Lastly, one of the greatest threats to well-functioning, open, and competitive futures and swaps markets is that the CFTC – the agency tasked with overseeing your markets – is not sized to the task at hand.

That the CFTC completed 65 rulemakings should not be confused with the agency having sufficient people and technology to oversee the markets.

At 673 people, we are only slightly larger than we were 20 years ago. Since then though, the futures market has grown and changed significantly. Further, we have this new job of overseeing the vast swaps market.

The overall branding of these markets is dependent on 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 5 percent, and was forced to notify employees of an administrative furlough for up to 14 days this fiscal year.

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

Conclusion

Let me close by thanking all of you. These last five years have been a remarkable journey. The futures market performed well straight through the crisis. That’s why we borrowed so much from the futures market in an effort to bring much-needed reform to the swaps market.

On a personal note, I want to thank you for all that we’ve achieved together. I want to thank you because this may be my last speech as the CFTC’s Chairman at an FIA conference. I assure you, though, if invited, I’ll be with you again.

Thank you, I look forward to answering your questions.

CFTC CHAIRMAN GENSLER'S LECTURE AT WHARTON LEADERSHIP LECTURE SERIES

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
Remarks of CFTC Chairman Gary Gensler Before the Wharton Leadership Lecture Series
October 15, 2013

Good afternoon and hello Quakers. I thank Justin for that very kind introduction. I also want to thank my dear friend and your classmate, Scott Schneider, for suggesting to Wharton to invite me here to speak.

It is a great honor to be asked back to speak at Wharton, my alma mater.

After cartoonist, Gary Trudeau, delivered our commencement address – and my parents headed back to Baltimore – I didn’t have much on my mind other than a particular girl who was visiting and heading over to Smokey Joe’s.

So I can safely say that when I left West Philadelphia thirty-four years ago, I did not contemplate that one day I might be asked to return to share thoughts on leadership.

I have been fortunate to live a very full live – with some success and a lot of dumb luck – in both the private sector and in public service. For 18 years, I worked in the investment banking business in New York and Tokyo before joining President Clinton’s administration at the Treasury Department. Now, as Chairman of the Commodity Futures Trading Commission, I’m honored to head an agency that regulates America’s commodities and derivatives markets and to work to bring much needed reforms to the nation’s financial system.

I feel completely honored to serve this nation and to have served two presidents. I’ve been thinking about what I could say that might have some relevance to you. I could share stories about tough merger negotiations while on Wall Street or meetings in the Oval Office. The event planners, though, asked me to talk about leadership principles and experiences - some positive … some negative – that I have found most valuable since leaving Wharton. In essence, what worked and what did not?

And though the most important role I have and ever will play is as a husband and as a father of three wonderful daughters, I imagine that the organizers wish that I stick to thoughts on the world of business and politics.

Though, I hope that you will allow me to muse about some personal thoughts as well.

Here are some of the most critical lessons that I’ve learned in my career since leaving Wharton 34 years ago:

First, pursue your passions.

I have seen people in careers not passionate about their work. Don’t do that. Instead, find what you love the most and try and make a go at it.

I feel very fortunate. Neither of my parents went to college. After World War II, my dad used his mustering out pay to buy some used beat up vending machines. He later placed cigarette machines and pinball machines in local Baltimore bars. I used to travel with him when he would take the nickels out of the machines and help him count them. I guess you could say this was my first foray into business and the world of finance.

I knew from that early age that I wanted to pursue a career in business. At the same time, I felt a deep passion for politics and government, so I sought to merge those two dreams. I lost my campaign for senior class president in high school, but I kept alive my passion.

I chose to apply to the Wharton School to pursue those dreams. It was a lot easier, though, to get into college back in 1975. Nearly 25 of my high school classmates went on to the University of Pennsylvania. Not to mention, I had actually gotten a D in high school French.

At college, I once again got involved in student politics, being appointed the student representative on the University Budget Committee. I am glad to know the University still follows the tradition. Particularly, given that along with other students I actually participated in a four-day sit-in of College Hall in 1978 protesting the University’s cut of the hockey program. We were unsuccessful saving the varsity hockey program … but it did subsequently return as a club sport. Are there any Wharton Wildmen here?

I graduated from Penn with a bachelor’s degree and an MBA and followed my passion into business in New York. In 18 years on Wall Street, I became a partner at Goldman Sachs, worked in Tokyo for three years and met countless talented people. From there I moved to the Treasury Department where I could merge my experience in finance with my desire to be in public service. After President Obama was elected, I was honored to be asked to serve again in a new role.

Each of you may have different passions or dreams. Some of you may wish to be at large firms and others at small start-ups. Some will wish to pursue new technologies and some not. Some may have an interest in public service as I did, and many won’t. And some of you may have no idea what you want to do. It may take time to reveal itself, but whatever your passion is or whenever it develops, follow it.

I married an artist whose true passion was creating images. In her 20s, though, Francesca went off to Columbia for her MBA. She later was able to reconnect with her passion in her 40s. When she returned to it, she produced wonderful art that was featured in the Corcoran Gallery of Art and the Getty Museum in Los Angeles. So if your passion is art, do that!

Second, make your opportunities, and seize them.

Sometimes life presents us with great new opportunities. You should take them. Often, however, you have to make your own opportunities. That often requires a willingness to take risk.

I think that Sheryl Sandberg’s view that “careers are a jungle gym, not a ladder” is very apt. I had the great pleasure of serving with Sheryl in President Clinton’s Treasury Department. As that Administration ended, frankly, neither of us knew what we were likely to do next.

Initially I moved to Baltimore, co-authored a book, joined some boards and helped out on some campaigns. Francesca’s cancer returned and I spent increasing amounts of cherished time with my girls and her. After Francesca passed away, I became a stay-at-home dad doing the laundry, buying the groceries and making sure the dogs were fed.

When Hillary Clinton was preparing to run for president - that’s for 2008 - I told Hillary that I wanted to help her in any way I could. Hillary hesitated to let me join, though, unless I could assure her the girls would be OK. It finally took four conversations with Hillary and several months for me to persuade her that I could fulfill my responsibilities as a dad in Baltimore and commute to Arlington for her campaign every day.

As for Sheryl, after a bit of time off and some soul searching she moved to California for a job at Google, which had but 400 employees at the time and still ranked 15th among web sites. Shall we just say the rest is for the history books?

Getting to a senior role in government, as well, requires taking risk and pursuing it. Every candidate for office does so when they put their name in front of voters. So too, do those interested in appointed office. Whether one works hard for a candidate on a campaign or is an expert in a particular field, you have to actively pursue the job. A Presidential Transition or White House has hundreds of thousands of resumes to review, so the person who ends up in a senior role must actually hit the phones, schedule meetings, take risks and make their case as to why they want to serve and in what role.

Taking advantage of an opportunity can mean big changes. It might require you to move to a new place or leave a job you like. But those changes can bring you success and happiness. Follow them.

Third, find mentors.

I would not have been invited to speak here today if not for the help of mentors along the way. My first mentors were my mom and dad who encouraged me through every step of school, taught me great values and showed me what a loving lifelong relationship can be.

When I was at Penn, I sought the counsel of my professors, but particularly three with whom I became very close. One of them, Professor Jamshed Ghandi, is still a member of your faculty. He was a remarkable teacher, who was the first to clearly explain to me the role and function of financial intermediation in our economy. To this day, I remember some of the most important advice Jamshed and the others gave me. I also recall when as a result of a little wager, Professor Ghandi and I had to play a game of Jacks on the ground along Locust Walk.

Another mentor at Wharton was Dean Don Carroll and, maybe even more so, his assistant Elli Page. Each semester I wanted to take one more class than allowed. So at the start of every semester, I went to the dean’s office and begged Elli to let me talk to him. I ended up graduating with my bachelor’s and master’s is four years because Elli kept getting me signoff to take those extra classes. To this day, I don’t know if it was the dean’s signature or Elli’s forgery.

Another mentor at Wharton was a woman a year ahead of me in school and about six years my senior. We first met in Professor Ghandi’s class on financial intermediation. She had spent a summer working on Wall Street and helped get me interviews. She was furious when she found out that I went to my first job interview in jeans, for the Boston Consulting Group, no less. I didn’t own a suit and hoped it was all right if I didn’t wear one!

Straight away, she called my dad and asked permission to take me shopping. We went to Brooks Brothers and she helped me buy my first suit. Somehow I ended up getting a job at Goldman Sachs.

Goldman took a risk on a young 21-year-old kid. I made many mistakes – mistakes of youth, mistakes of inexperience and sometimes mistakes of arrogance. But I also had mentors at the firm who looked after me and gave me much-needed guidance.

One of the mentors who knew me pretty well at Goldman Sachs later became Treasury Secretary for President Clinton. I ended up working with him at Treasury, but, let me tell you, he didn’t just call me one day to offer me the job. Secretary Rubin had joined the Administration four years before I did. I stayed in touch over those years, and made sure he knew about my willingness to serve if an opportunity presented itself. He asked me to join the team as an assistant secretary and gave me the opportunity to fulfill my passion for public service.

You too will undoubtedly meet many talented people in the future who share your passions. Learn from them. Seek advice from those who have done what you want to do. Build off of those relationships.

Fourth, every time you take on a new role, right at the beginning, articulate one clear goal and write it down on a Post-it note.

All too often I have seen individuals being consumed by others’ agendas rather than their own. This is true in the private sector as well as the public sector. Beware of letting your competitors or events overwhelm how your days are spent.

Within a month of taking on a new role make sure that you clearly define your number one goal. Write it down on a Post-it note and put it in your desk drawer. Every day, open up the drawer and ask yourself “what have I done today to move forward on this goal?”

Every job includes mundane duties that, if not appropriately managed, can consume you. Every role has competitors trying to throw your organization and you off your game. Leadership, though, is about completing tasks in the face of all of these challenges and distractions, most importantly to do so towards your high priority goal – the one on your Post-it note.

Further, in pursuing your goal, know the difference between strategies and tactics. Far too often, talented people fill meetings discussing tactics without tying them to an agreed upon strategy. Tactics are critical, but only as they fit in with a well-articulated strategy.

During my first year at the CFTC, we set out a strategy of advocating that Congress enact comprehensive regulatory reform of over-the-counter derivatives, or swaps. Our tactics included giving speeches, providing Congress with legislative and technical assistance, placing opinion pieces in leading newspapers and actively working with coalitions of supporters outside of Congress.

We did not lose track of our strategy in favor of focusing on a particular tactic. We did not write op/eds for the sake of getting them published; rather, we only wrote op/eds if they fit into our larger strategy. Success depended on remaining steadfastly focused on our goals and our strategy.

Fifth, spend time learning about the practical bits of management.

Spending nearly $60,000 per year on tuition, you might be hoping to learn something about management. I might hope so, too, as your tuition has grown nearly twenty fold since I was a freshman at Wharton. Yes, tuition was only $3,430 per year in 1975! I’m not sure that would even cover your books!

I believe that one only truly learns about management, though, when finally doing it. When you get to that first management role, be sure to spend lots of time with your people. Communicate with and mentor them. Set clear goals.

Learn from those in your organization who do it well. Here are three key management lessons I learned from others along the way:

The first is simply the importance of keeping lists. I recall when I first saw Bob Rubin pull out his yellow pad and jot down a list. He was always doing it. Lists of tasks that needed to be done. Lists or relevant information that he needed for a decision. Lists of people to call. And he constantly followed-up with his staff on those lists, holding folks accountable and paying attention to the details of his lists. Try it on an iPad if you wish, but make those lists.
The other list man I learned from was Neil Armstrong. I kid you not. I met and befriended Neil Armstrong when advising an Ohio media company in the mid-1980s. As you all know, he was a remarkable man, but, when I worked with him, he also was the ultimate low ego, cool, quiet man, but under pressure, he just kept calm and got the job done.

When I once asked him if he enjoyed the views passing time on the way to the moon, he looked at me and said, “Gary, what I was always doing was reviewing in my head the next ten things I had to do on my checklist.” He was the ultimate list man, though he did admit to having enjoyed a few peeks back at the Earth along the way.

The second was from one of the best managers at Goldman Sachs. He spent a considerable amount of time on how to arrange the organization into boxes around clear lines of authority and accountability. He then spent even more time on getting the right people with the right skills for each of the “boxes.”
I kept this lesson at the forefront when I joined the CFTC with a clear goal on the Post-it note of enacting robust comprehensive swaps market reforms. That is why one of our first critical hires was an extraordinarily talented young speechwriter and former debater to help guide a public advocacy effort for reform. He’s one of your classmates, Scott Schneider.

The third lesson is the importance of identifying value drivers gating factors. Find those things in your organization that create value or are the constraint for higher performance. And then change the factor to open up the gate and create value.
Once Congress finalized financial reform in the Dodd Frank Act, at the CFTC we had to find a way to write and implement more than 60 new rules, though the agency was gravely underfunded and had never completed more than five rules in a year. We went after every gating factor we could find to move such a significant amount of reform “inventory.” We set up an entirely new team structure, new means of public openness and methods of outside regulatory consultations. Now we’ve nearly completed writing all the new Dodd-Frank rules, and financial institutions are coming into compliance with this new regulatory infrastructure. This would not have been possible had we not removed the gating factors at the CFTC.

Lastly, find a good partner.

I married Francesca, a beautiful woman I met at a party in New York four years after Wharton. We lost her to cancer seven years ago, but every minute of our 20 years of marriage was a blessing. We moved from New York to Tokyo to New York to Washington to Baltimore and had three beautiful daughters. So find a good partner in life. It does take work and a lot of communication, but life really is better with a good partner.

Before I close, I want to acknowledge that Wharton equipped me with many of the tools I needed both in the private sector and in public service. It was a remarkable experience that helped prepare me for each of my roles in business and government.

Thank you again for inviting me here today. I’d be glad to take any questions that you may have.

CFTC CHAIRMAN GENSLER ADDRESSES U.S. CHAMBER OF COMMERCE

FROM: U.S. COMMODITY FUTURES TRADING COMMISSION,
Remarks of Chairman Gary Gensler Before the U.S. Chamber of Commerce Seventh Annual Capital Markets Summit
April 10, 2013

Good afternoon, thank you David for that kind introduction. I’d also like to thank the Chamber of Commerce for inviting me to speak at your annual Capital Markets Summit. I’m honored to be joining this summit for the fourth year in a row.

Your conference is about managing risk in a global economy so I want to start by addressing what may be one of the most significant risks you’re facing in the capital markets.

That is the risk to market integrity of the continued use of LIBOR, Euribor and similar benchmark interest rates.

Interest rate benchmarks – central to borrowing, lending and hedging in our economy – are of critical importance to members of the Chamber.

LIBOR, as you may know, purports to represent the rate at which unsecured borrowing occurs between large banks. The insufficient number of transactions in this market, though, undermines market integrity.

Given their fundamental role in the capital markets and our economy, benchmark rates must be based on facts, not fiction.

Prices and rates formed by the competitive forces of supply and demand in a robust, transparent marketplace are the best guarantee of a reliable price or rate. Yet hundreds of trillions of dollars of financial instruments and contracts rely upon a benchmark referencing a market where essentially no borrowing occurs.

Banks simply are not lending to each other as they once did. In 2008, Mervyn King, the governor of the Bank of England, said of LIBOR: "It is, in many ways, the rate at which banks do not lend to each other."

This is a result of many factors: the 2008 crisis, the continuing European debt crisis, the downgrading of large banks’ credit ratings, as well as central banks providing significant funding directly to banks. Recent changes to Basel capital rules, including the new liquidity coverage ratio, suggest that banks may not return to interbank lending on an unsecured basis.

The shift away from banks funding each other in the unsecured market (without posting collateral) has led to a scarcity or outright absence of actual transactions underpinning LIBOR and other benchmark rates.

This situation – having benchmark rates that are not anchored in actual transactions – undermines market integrity and leaves the financial system with benchmarks that are prone to misconduct.

Indeed, as law enforcement actions brought by the Commodity Futures Trading Commission (CFTC), the U.K. Financial Conduct Authority and the U.S. Justice Department have shown, LIBOR and other benchmark rates have been readily and pervasively rigged.

These cases resulted in Barclays, UBS and RBS paying fines of approximately $2.5 billion for manipulative conduct relating to these rates. At each bank, the misconduct spanned many years.

At each bank it took place in offices in several cities around the globe.

At each bank it included numerous people – sometimes dozens, among them senior management.

Each case involved multiple benchmark rates and currencies. In one case, there were over 2,000 instances of misconduct over a six-year period.

And in each case, there was evidence of collusion.

In the UBS and RBS cases, one or more inter-dealer brokers painted false pictures to influence submissions of other banks, i.e., to spread the falsehoods more widely.

Barclays and UBS also were reporting falsely low borrowing rates in an effort to protect their reputations.

Beyond these cases, there is a significant amount of publicly available market data that further calls the integrity of LIBOR into question.

A comparison of LIBOR submissions to the volatilities of other short-term rates reflects that LIBOR is curiously more stable than any comparable rate. For instance, how is it that in 2012 – if we look at the 252 submission days for three-month U.S. dollar LIBOR – the banks didn’t change their rate 85 percent of the time?

When comparing LIBOR submissions to the same banks’ credit default swaps spreads or to the broader markets’ currency forward rates, why is there a continuing disconnect between LIBOR and what those other market rates tell us?

Whether we consider the broad structural shift away from unsecured, interbank lending; the recent enforcement actions; or questions about market data, confidence in the continued use of LIBOR and other similar interest rate benchmarks is undermined.

For capital and risk to be efficiently allocated within the economy – which is of vital importance to Chamber members – interest rate benchmarks should reflect actual price discovery anchored in observable transactions.

While ongoing international efforts targeting benchmarks, which I am pleased to be a part of, will focus on governance principles for benchmarks, these efforts cannot address a central vulnerability of LIBOR: the lack of transactions in the underlying market.

The time has come for U.S. regulators to work with our counterparts abroad, along with market participants, such as the people in this room, to promptly identify alternative benchmarks that are anchored in observable transactions and determine how to transition to such alternatives. The transition must be as smooth and orderly as possible, but given the vulnerabilities in the system, I believe that a transition is warranted.

The market has some experience with benchmark transitions, albeit for smaller contracts. When the euro was created, a number of interest rate benchmarks were discontinued. How many of you remember PIBOR, RIBOR, MIBOR and FIBOR? Transitions have also occurred for energy and shipping rate benchmarks.

I recognize that moving on from LIBOR and Euribor may be challenging. But continuing to support LIBOR and Euribor in the name of stability may have the opposite effect. Using benchmarks that threaten market integrity may create more instability in the long run.

The status quo leaves your members at risk that benchmarks that were rigged in the past may be exposed to rigging again in the future.

That risk is neither good for the capital markets nor for our economy.

Swaps Market Reform

Now, let me turn to swaps market reform.

Your members benefit from transparent and efficient derivatives markets. Both futures and swaps markets provide the opportunity to hedge a risk by locking in a future price or rate. Managing the price risk of energy or agriculture or the rate risk of interest rates or foreign currency allows your members to focus on what they do best – innovating and producing goods and services for the economy.

The derivatives markets work best for farmers, ranchers, producers and commercial companies when they are transparent; competitive; and free of fraud, manipulation and other abuses. The implementation of the common-sense reforms in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) brings these benefits to the once opaque and unregulated swaps market.

Transparency lowers costs for businesses and consumers, as it shifts information from dealers to the broader public. Post-trade transparency has come to the marketplace. The price and volume of transactions is available to the public on a website, like a modern-day ticker tape.

Seventy-five swap dealers and two major swaps participants are now provisionally registered. With this new oversight, they are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation.

As of last month, the public is benefiting from the greater access to the swaps market and risk reduction that comes with central clearing. Swap dealers and the largest hedge funds began clearing the vast majority of interest rate and credit default index swaps. Compliance will continue to be phased in throughout this year.

Swaps Reforms Benefit End-users

Each component of swaps market reform has been done with an eye toward ensuring they work for end-users, America’s job providers. It’s the end-users in the non-financial side of our economy that provide 94 percent of private sector jobs.

Congress provided in the Dodd-Frank Act that end-users should be able to choose whether or not to clear swaps that hedge or mitigate commercial risks. Last summer, the Commission finalized rules to implement this exception, including for small financial institutions.

As the Chamber calls for in your Financial Regulatory Reform 2013 Report Card, the Commission’s proposed rule on margin provides that end-users will not have to post margin for uncleared swaps. We also continue to advocate with global regulators for an approach consistent with that of the CFTC.

Non-financial companies, other than those genuinely making markets in swaps, will not have to register as swap dealers.

Further, the CFTC has ensured that when end-users are required to report their transactions, they are given more time to do so than other market participants.

Exceptions for Inter-affiliate swaps

Also of importance to your members, last week the CFTC finalized a rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement.

In addition, CFTC staff issued a letter last week exempting swaps between affiliated counterparties that are not swap dealers or major swap participants from certain swap reporting requirements. This "no-action" letter extends to swaps between almost all non-financial affiliates.

Treasury Affiliates

We’ve received many comments and had many meetings with non-financial end-users that about required clearing if they use a treasury affiliate when entering into their market facing swaps. Though I don’t have any announcements today, let me assure you that the staff and Commission are taking a close look at how to appropriately address these issues in the context of the Dodd-Frank Act.

Further Implementation of Swaps Market Reform

Pre-trade Transparency

Looking forward, it’s a priority that the Commission finishes rules to promote pre-trade transparency, including those for swap execution facilities (SEFs) and the block rule for swaps.

Pre-trade transparency will allow buyers and sellers to meet and compete in the marketplace, just as they do in the securities and futures marketplaces. Market participants will be able to view the prices of available bids and offers prior to making their decision on a transaction.

End-users will get to see the pricing and volume of swap transactions on these platforms, but get to choose whether or not to use them. Furthermore, companies will continue to be able to rely on customized transactions to meet their particular needs, as well as to enter into large block trades.

Cross-border

Looking forward, it’s also a priority that the Commission ensures the cross-border application of swaps market reform appropriately covers the risk of U.S. affiliates operating offshore. During a default, risk knows no geographic border.

If a run starts in one part of a modern financial institution, whether it's here or offshore, the risk comes back to our shores. That was true with AIG, which ran most of its swaps business out of the London neighborhood Mayfair. It was also true at Lehman Brothers, Citigroup, Bear Stearns and Long-Term Capital Management.

Thus, as the CFTC completes the cross-border guidance, I believe it’s critical that Dodd-Frank swaps reform applies to transactions entered into by branches of U.S. institutions offshore, between guaranteed affiliates offshore, and for hedge funds that are incorporated offshore but operate in the U.S. Where there are comparable and comprehensive home country rules abroad, we can look to substituted compliance, but the transactions would still be covered.

If we fail to provide common-sense oversight to offshore affiliates of U.S. entities, American jobs and markets may move offshore, but, particularly in times of crisis, risk would come crashing back to our economy and could affect your businesses all over again. As I’m standing here speaking with the American Chamber of Commerce, which has the words "JOBS" in giant letters on the front of your building, I would imagine we would agree that this would not be a good result for the American public.

Ensuring we get the cross-border application of swaps reforms right is critical to protecting you members from the risk of another foreign-affiliate failure.

Conclusion

I was flattered to see that this year, the CFTC got a slightly better grade in your annual report card than last year – you moved us up to a C+ from a C.

I also noticed that derivatives reform was graded higher than all the other issues you covered, except "Preserving the Integrity of Accounting and Auditing."

More seriously, I was pleased to see that we agree on your overall statement on derivatives reform: moving the vast majority of swaps into central clearing and onto transparent exchanges increases transparency and lowers risk.

As I’ve said in past speeches to you, why aren’t we more aligned? We both want more transparency, openness and competition in these markets, which lowers costs for companies and their customers.

And we cannot forget the real scorecard for so many Americans that resulted in eight million jobs lost.