Questions and concerns about the COVID-19 virus have rightfully dominated headlines and pervaded our daily conversations dating back to the first weeks of this year when there were still so many unknowns. How severe was it going to be? Why are some people impacted more than others when they are infected? How exactly does it spread? And, of course, when will we be able to resume normal life? What will the new “normal” be? We may not know the precise answers to many of these questions until well after the pandemic has passed.  But, in the meantime, the rapid, exponential spread of the virus seemingly evades a complete understanding of how we can address and mitigate the risk it poses to the population in the near and long term. 

Over the next 24 hours, the CFTC will consider two major rules that target the heart of post-2008 financial crisis reform.  Unlike our limited understanding of the transmission of the COVID-19 virus, we do have the benefit of hindsight in understanding how risk spreads in global swap markets.  The 2008 financial crisis made clear that, in many cases, risk deriving from activities in non-US jurisdictions can seamlessly enter, embed in, and infect U.S. markets.[1] We also understand that undercapitalization greatly increases the impact of economic shocks.  Yesterday marked ten years since Congress passed Wall Street reform,[2] a swift legislative response to the financial crisis and ensuing Great Recession, which wreaked havoc on Main Street America and the global economy in large part because of undercapitalized financial institutions.  We must keep these hard-learned lessons top of mind as we refine the tools we use to prevent another crisis of that magnitude.  Some may suggest that our efforts over the next 24 hours will finally close a decade long chapter on financial reform.  However, we must not forget that although timing matters, substance equally matters: how we do things is as important as when we do things.

This afternoon, the Commission is voting on a final rule that establishes minimum capital requirements for swap dealers (“SDs”) and major swap participants (“MSPs”) who are not subject to a prudential regulator.  Although the rule under consideration this afternoon is the first time the Commission will be voting on a final rule for capital requirements, as clearly prescribed by Dodd-Frank, there have been multiple iterations of a capital rule dating back to 2011.[3] 

Congress’s 2010 response largely incorporated the international financial reform initiatives for over-the-counter derivatives laid out at the 2009 G20 Pittsburgh Summit aimed at improving transparency, mitigating systemic risk, and protecting against market abuse.[4]  One of the major initiatives in the G20 statement was the imposition of higher capital requirements, “To make sure our regulatory system for banks and other financial firms reins in the excesses that led to the crisis.”[5]  To rein in those excesses, the G20 leaders agreed to raise capital standards.[6]  The G20 leaders said unequivocally that, for over-the-counter derivatives markets, “[n]on-centrally cleared contracts should be subject to higher capital requirements.”[7]  There is no question that Congress had this same goal in mind when enacting the Dodd-Frank Act a decade ago.[8] 

Tomorrow morning, the Commission will vote on a separate rule that reduces our ability to exercise jurisdiction over cross-border activities that have a “direct and significant” connection to activities in U.S. markets.  In 2013, the Commission issued interpretive guidance and a policy statement to address the extraterritorial application of the Title VII Rules,[9] which has achieved the goals set out by both Congress and the CFTC.  In the wake of the financial crisis, Congress entrusted the CFTC with overseeing all swap activities that have a direct and significant connection to or effect on U.S. markets, and we must not abdicate this Congressionally-mandated responsibility.

Last December, the Commission voted to propose to discard the existing Guidance -- and the use of agency guidance and non-binding policy statements altogether -- in favor of rules implementing a purely risk-based approach.[10]  Focusing our expertise and resources on those entities which individually may pose systemic risk to U.S. markets means that many other entities that are smaller in relative size, yet able to generate and transmit significant risk, can evade oversight, and may ultimately carry risk into U.S. markets.  Regardless of their size, such entities can individually or in the aggregate affect and negatively impact U.S. financial markets. Just as the least restrictive parts of the country directly impact how rapidly COVID-19 spreads in the rest of the U.S., so too will the jurisdictions with the least regulatory oversight of swap markets directly impact the riskiness of U.S. markets.

As we collectively work to navigate and resolve a global pandemic that has harmed both the U.S. and global economies, it is more important than ever that we, as financial regulators, remember what we learned from the 2008 crisis, and remain steadfast in our support and advocacy for robust reforms; these reforms shielded our markets during the worst of market volatility of the Covid-19 pandemic, and will certainly do the same in the future.  

I am grateful for the work that staff did to prepare these rules, and I look forward to hearing more from the teams.

[1] See Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swaps Regulations, 78 FR 45292, 45293-5 (Jul. 26, 2013) (the “Guidance”); SIFMA v. CFTC, 67 F.Supp.3d 373, 387-88 (D.D.C. 2014)(describing the “several poster children for the 2008 financial crisis” that demonstrate the impact that overseas over-the-counter derivatives swaps trading can have on a U.S. parent corporation).

[2] The Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203, 124 Stat. 1376 (2010).

[3] See Capital Requirements of Swap Dealers and Major Swap Participants, 76 FR 27802 (proposed May 12, 2011).

[4] G20, Leaders’ Statement, The Pittsburgh Summit (Sept. 24-25, 2009), available at https://www.oecd.org/g20/summits/pittsburgh/.

[5] Id. at 2.

[6] Id.

[7] Id. at 9.

[8] See Statement of Sen. Christopher Dodd, Cong. Rec., Vol. 156, Issue 104, S5828, S5832 (July 14, 2010) (“Derivatives are vitally important if utilized properly in terms of wealth creation and growing an economy.  But what was once a way for companies to hedge against sudden price shocks has become a profit center in and of itself, and it can be a dangerous one as well, when dealers and other large market participants don’t hold enough capital to back up their risky bets and regulators don’t have information about where the risks lie.”).

[9] Guidance, 78 FR at 45297.

[10] Cross-Border Application of the Registration Thresholds and Certain Requirements Applicable to Swap Dealers and Major Swap Participants, 85 FR 952 (proposed Jan. 8, 2020).