CFTC Chairman Gary Gensler spoke before the Americans for Financial Reform and Georgetown University Law Center’s Financial Transparency Symposium, reviewing the steps that the government and the CFTC have taken to reform the swaps market.
Chairman Gensler began with an overview of the debates that Congress and the Administration had when beginning to reform the market: which products to cover, which participants to cover, and what the cross-border scope of reform should be. According to Gensler, the scope of the current regulatory framework goes beyond swaps products that were most affected during the financial crisis, and now includes interest rate swaps, currency swaps, commodity swaps, equity swaps, credit default swaps and derivative products. Gensler also mentioned that there is now a three-tiered system of participant reforms, with swap dealers at the center, then financial institutions and, finally, non-financial institutions or end users. Additionally, Gensler stated that, during reform, Congress recognized that “risk knows no geographic border,” leading to the current framework’s focus on cross-border regulation.
Regarding the substance of the swaps market reform, Gensler noted twelve key decisions:
- transparency to regulators, through means such as putting in place swap data repositories;
- public market transparency;
- post-trade transparency, through means such as providing the public and end users with the price and volume of transactions;
- pre-transaction transparency, through means such as requiring swap execution facilities to provide it as swap trading platforms;
- central clearing reform, through means such as the mandatory clearing of interest rate and credit index swaps implementation;
- access reforms, through means such as implementing impartial access to trading venues and straight-through processing;
- intermediaries reform and requiring registration or licensing for both swaps and futures;
- customer protection;
- repealing the “Enron loophole”;
- employing the enforcement power that Dodd-Frank allowed the CFTC;
- adhering to the compliance dates that Congress gave the CFTC to complete reform; and
- reforming benchmark interest rates, such as LIBOR, Euribor and others.
Moving forward, Gensler pointed out future challenges, such as increasing the number of CFTC staff members, as well as making sure that reforms continue to evolve and “stay abreast of market participants’ practice.”
Lofchie Comment: It is hard to see the connection between any of the above items and the financial crisis. In what way would “transparency” as to swaps pricing have had relevance to the financial crisis? It’s not as if the pricing of swaps diverged in some meaningful way from prices in the cash markets. The reality is just the reverse: that swaps prices were consistent with prices in the cash markets.
Here is what the then-Chairman of the Federal Reserve Board, Alan Greenspan, had to say about the events leading up to the financial crisis in the current issue of Foreign Affairs (at page 89 of the November 2013 issue): “In the run-up to the crisis, the Federal Reserve Board’s sophisticated forecasting system did not foresee the major risk to the global economy. Nor did the model developed by the International Monetary Fund, which concluded as late as the spring of 2007 that ‘global economic risks [had] declined’ . . . .”
The Fed and the IMF had transparency as to interest rate swaps and FX swaps. Now we will have the same information as to swaps. Query: how does that make the economy safer in a way that is worth the enormous cost of this exercise?