October 1, 2010
Good morning. I would like to thank the staff of each of the three rulemaking teams for the long hours and hard work that has resulted in the proposed rules that we will discuss today. I would also like to compliment the 27 other rulemaking teams that have put so much time and effort into identifying issues and preparing proposed rules. I can say from first-hand experience that the amount of paper and number of meetings that has resulted is overwhelming.
With regard to the rulemakings today; I intend to support all three, however, I have a number of concerns associated with the prescriptiveness of the proposed conflict of interest rules. I believe we have other remedies within the Dodd-Frank Act that can be more effective in achieving the goal of expanding access to clearing.
Conflicts of Interest
The main goal of the Act is to mitigate systemic risk by imposing a mandatory clearing requirement on swaps. The business of clearing is serious and financially complex and it should be treated as such. I am concerned the proposed rule seeks to impose limited and inflexible ownership caps and not afford the Commission the flexibility to consider all statutory objectives, including promoting competition and reducing systemic risk.
In addition, I am quite confident that the Open Access and Participant and Product Eligibility provisions in sections 2(h)(1)(B) and 5b(c)(2)(c) under the Act will be more effective in guaranteeing access to clearing than the ownership rules, which I believe to be an imprecise and ineffective tool to enhance competition, mitigate systemic risk, and resolve conflicts-of-interest.
With that said, I appreciate the inclusion of a waiver from the proposed rules that will provide the Commission with greater flexibility. Considering the Commission has yet to receive a single DCO application, I believe this flexibility is warranted.
Financial Resources Core Principle B
This rulemaking is the first among many designed to mitigate systemic risk through clearing in the swaps markets. However, as the Commission proposes rules to implement the Act, DCOs will be required to meet more stringent capital requirements, which will be passed on to their clearing members and customers. Market participants should have no illusions that the cost of clearing will increase dramatically. At the end of the day, it remains to be seen whether lower returns on capital and higher transaction costs will have its own unintended negative effect on liquidity, competition, and innovation in the U.S. financial markets.
Interim Final Rule & Margin of Pre-enactment Swaps
Finally, I agree with Commission’s decision on the reporting of swaps entered into before July 21, 2010. Additionally, I know many commercial entities are interested to know whether or not the Commission will impose margin requirements on pre-enactment swaps. I understand that this issue will be addressed in a future rulemaking, but I would like to take this opportunity to make it crystal clear that I oppose interfering with privately negotiated commercial contracts entered into prior to the enactment of the Act. I believe that any rule or regulation designed to do so would be of questionable legality and an extremely unwise policy decision.
Mr. Chairman, I appreciate you calling this public meeting and your willingness to consider alternative solutions on the governance rules. I hope that the comment period will provide sufficient time for market participants to provide constructive comments on these rules.
Last Updated: October 1, 2010