CFTC Chairman Gensler Cites Adam Smith and Discusses Swaps Regulation

CFTC Chairman Gary Gensler spoke before the Futures Industry Association (“FIA”) 2013 Futures and Options Expo, focusing on past, current and future revisions to the regulations governing the swaps market.

Chairman Gensler first pointed out how the swaps market, which is $400 trillion in size, has dwarfed the $30 trillion futures market. Asserting that Adam Smith had focused on the importance of market transparency in The Wealth of Nations, Gensler stated that the first major reform in the swaps market was making it more transparent. According to Gensler, the public can now see the price and volume of each swap transaction as it occurs. Additionally, Gensler mentioned reforms that require swap execution facilities to provide all market participants with impartial access. He stated that the CFTC will continue to address questions of transparency, such as the registration of a multilateral trading platform that is a U.S. person or located or operating in the U.S.

Gensler went on to discuss how the swaps market now has mandated central clearing for financial entities and dealers. According to Gensler, this is a significant reform because the “central clearing of swaps lowers risk and allows customers more ready access to the market.” He also spoke about reforms for swap dealers, such as new business conduct standards for risk management, the documentation of swap transactions, and recordkeeping and reporting.

Additionally, Gensler discussed the significance of international coordination on swaps market reform and developments regarding customer protection, particularly, the set of customer protection rules which were recently finalized by the CFTC.

He concluded by discussing the future of swaps market regulation. Gensler stated that there will be continued implementation of reforms, such as the trade execution mandate that will likely be in effect by the first quarter of 2014. Additionally, Gensler said the CFTC will continue to preserve pre-trade transparency, and will soon consider staff recommendations for a proposal on a futures block rule. Gensler also stated that the CFTC will continue work on the concept release on automated trading and will pursue potential transitions to alternatives to LIBOR and Euribor.

Lofchie Comment:  Adam Smith’s work is primarily famous for its discussion of the “invisible hand”; i.e., the notion that markets function well as the result of individuals acting in their own personal interests and not because of government regulation. In short, the moral philosophy advocated by Adam Smith was the exact opposite of Chairman Gensler’s view that regulation should be imposed as a cautionary measure. (As for the issue of market transparency, The Wealth of Nations does not contain any discussion whatsoever of it. For the import of Adam Smith’s work see pages 181-95 of Joseph Schumpeter’s History of Economic Analysis.)

More substantively, it is not really clear why the Chairman sees a link between the transparency of swap prices and the financial crisis. The problem with prices preceding the financial crisis is not that they were hidden – they were in fact well known – they were just too high.

See: Chairman Gensler’s Remarks.
Related speeches citing Adam Smith: CFTC Chairman Gensler Cites Adam Smith in Defense of Dodd-Frank; CFTC Chairman Gensler Delivers Speech.