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 MAKES REMARKS BEFORE THE ISDA EUROPEAN CONFERENCE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Remarks of Chairman Gary Gensler before the ISDA European Conference

September 19, 2013

Thank you, Bob, for that introduction. I would also like to thank the International Swaps and Derivatives Association (ISDA) for the invitation to speak at this annual European conference.

Five years ago this week, the U.S. economy was in a free fall. Federal Reserve Chairman Bernanke and then Treasury Secretary Paulson faced the unthinkable – asking the American people to bail out financial institutions to save the economy.

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

Five years ago, there was no reporting of swaps to the public or to regulators

Five years ago, the swaps market was largely uncleared.

Five years ago, unregulated dealers dominated the market.

Five years ago, swaps were not exchange traded – all classic attributes of a dark market.

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

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

Today, the CFTC has substantially completed these reforms.

The CFTC’s 61 final rules, orders and guidance have brought traffic lights, stop signs, and speed limits to the once dark and unregulated swaps roads.

This new era of swaps market reform began to be implemented last October 12. With numerous implementation dates behind us and a number of critical dates coming up, the transition to a reformed swaps market is fully in motion.

This represents a paradigm shift to a transparent, regulated marketplace.

Transparency

Today, the public can see the price and volume of each swap transaction as it occurs on a website, like a modern-day tickertape. Further, half of the swaps market (by volume) is being reported to the public without delay – or as Congress mandated “as soon as technologically practicable.” Soon swaps will be traded on transparent platforms.

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

Regulators have benefited as well. Nearly $400 trillion in market facing swaps now are being reported into data repositories. There is still work to be done to ensure the data in the warehouses is reliable and accessible. There is still work to be done to aggregate across data warehouses as well. But this market transparency is a reality.

This transparency also spans the entire marketplace – cleared as well as bilateral or customized swaps. All categories of market participant from swap dealers to end-users now are to report transactions. Every product, without exception, now must be reported – interest rate; cross currency; foreign exchange; credit index; equity index; and commodities, such as energy and agricultural.

On September 30, the far-flung operations of U.S. financial entities, the guaranteed affiliates and the branches of U.S. persons, also will begin required public reporting.

Further, starting October 2 the public will benefit from the competition and transparency that swap execution facilities (SEFs) will bring to the marketplace. All market participants will have impartial access to SEFs where they can leave live, executable bids or offers in an order book.

We have 18 SEF applications, with seven of them now temporarily registered.

These reforms will finally close what had been known in the U.S. as the “Enron Loophole,” which had allowed for unregistered, multilateral swaps trading platforms.

Five years ago, this market transparency was nonexistent.

Clearing

This month, with the completion of phased implementation, mandatory clearing of interest rate and credit index swaps is a reality. Clearinghouses lower risk and promote access for market participants.

In the month of August, even before our last domestic clearing compliance date, 63 percent of new interest rate swaps were cleared. In total, nearly $180 trillion of the approximately $330 trillion market facing interest rate swaps market, or 53 percent, was cleared at the end of August. This compares to only 21 percent of the market in 2008, according to information on ISDA’s website.

On October 9, the guaranteed affiliates and branches of U.S. persons also will come into central clearing. This includes hedge funds that are operating in the United States but are incorporated in the Cayman Islands.

As we move into 2014, I would anticipate that closer to two-thirds of the interest rate swaps market will be in central clearing.

Yet five years ago, there was no required clearing in the swaps market.

We’ve also made significant progress since the crisis on reforms to protect both futures and swaps customers through the CFTC’s gross margining and the so-called “LSOC” (legal segregation with operational comingling) rules.

Commissioners now are considering final rules that would further strengthen controls around customer funds.

Swap Dealer Oversight

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

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

Today, we have 82 swap dealers and two major swap participants registered. This group includes the world’s 16 largest financial institutions in the global swaps market, commonly referred to as the G16 dealers. It also includes a number of energy swap dealers.

These reforms help protect the public, lower risk and increase market integrity as swap dealers now must report their transactions and comply with sales practice and other business conduct standards.

Working closely with our counterparts in Europe, we have essentially identical risk mitigation rules that include promoting the timely confirmation of trades and documentation of the trading relationship. Through ISDA protocols, 9,100 market participants have amended their documents to conform to the new U.S. risk mitigation requirements, and 5,200 market participants have conformed to European standards. More than 10,900 market participants are adhering to ISDA’s protocols for sales practices.

These reforms will significantly lower the risk of the swaps market to the public and the economy.

Five years ago, such oversight of swap dealers did not exist.

International Coordination on Swap Market Reform

AIG nearly brought down the U.S. economy through the operations of its offshore guaranteed affiliate.

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

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

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

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

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

Further, the guidance captures offshore hedge funds and collective investment vehicles that have their principal place of business in the U.S. or that are majority owned by U.S. persons.

The guidance embraces the concept of substituted compliances where there are comparable and comprehensive rules abroad. We are currently reviewing submissions for entity-level substituted compliance in six jurisdictions (the European Union, Australia, Canada, Hong Kong, Japan and Switzerland). We’re consulting closely with regulators in those jurisdictions and look forward to making determinations prior to December 21 of this year.

Benchmark Interest Rates

Five years ago, interest rate benchmarks such as LIBOR and Euribor were being readily and pervasively rigged.

Working with the Financial Conduct Authority and the U.S. Justice Department, we brought actions against three global banks for such abuses.

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

We must ensure that these benchmark interest rates have market integrity and that they are based on fact, not fiction.

The interbank, unsecured market that the benchmarks are intended to measure, however, essentially no longer exists, particularly for longer tenors.

The U.S. Financial Stability Oversight Council recommended that U.S. regulators work with foreign regulators, international bodies, and market participants to promptly identify alternative interest rate benchmarks anchored in observable transactions and supported by appropriate governance structures, and to develop a plan to accomplish a transition.

An International Organization of Securities Commissions (IOSCO) task force took an important step in announcing new principles in July that require benchmarks to be anchored by observable transactions and subject to robust governance processes that address potential conflicts of interest.

Building on IOSCO’s work, the Financial Stability Board is initiating a review of alternatives to existing benchmark interest rates, as well as considering any potential transition issues.

I want to thank Martin Wheatley, with whom I’ve worked so closely on these issues, for all of his efforts and leadership.

Conclusion

In the five years since the financial crisis, the swaps market has experienced a paradigm shift.

No longer is the market closed and dark.

With the substantially completed reforms, the public and regulators have transparency. We have a majority of the market moving to central clearing. We have oversight of swap dealers, including the far-flung operations of U.S financial institutions.

The public and the markets are benefitting from these common-sense rules of the road.

I’d like to close by saying that the CFTC is currently an underfunded agency. We are only slightly larger than we were 20 years ago. At that time, we oversaw just the futures market, which is less than a tenth of the size of the swaps market we now oversee as well.

It is critical to the public’s confidence in these markets that the regulator is well funded.

Investments in both people and technology are needed for effective market oversight – like having more cops on the beat.

It’s only with a well-funded CFTC that market participants, including this association’s members, will get timely reviews of applications and petitions and answers to your questions.

Last Updated: September 19, 2013