Opening Statement, Public Meeting on Proposed Rules Under Dodd-Frank Act

Commissioner Michael V. Dunn

April 12, 2011

Thank you all for joining us today for this important meeting regarding the implementation of the Dodd-Frank Act.

During the financial crisis, derivatives clearing organizations that have mandatory clearing and margin requirements met all their financial obligations without the infusion of any capital from the federal government. This was not the case in the world of uncleared swaps. Today staff presents us with a proposed rule laying out the margin requirements for uncleared swaps.

When reviewing this proposed rule on margin, it is important to remember that AIG wrote approximately $1.8 trillion worth of credit default swaps. AIG did not post initial margin or pay variation on many of these transactions because of their triple-A credit rating. Once the subprime crisis hit, AIG was subject to large margin calls that it could not pay. On the brink of a bankruptcy that had the very real possibility of causing a global financial meltdown, the U.S. government poured billions of dollars into AIG, the majority of which went to pay the counterparties on AIG derivatives deals. If AIG had been required to post initial margin or pay variation, in all likelihood, they never would have been able to enter into $1.8 trillion worth of swaps.

The story of DCO’s, who met all of their financial obligations, and AIG, who needed a massive government bailout to survive, illustrates the importance of margin in the cleared and uncleared world. In my opinion, companies like AIG simply cannot be allowed to amass swap positions so large without posting the necessary levels of initial and variation margin. Without margin requirements, positions of such magnitude will again threaten to destabilize the entire financial system.

I would like to once again thank the staff at the CFTC for all their hard work in regard to these very important proposed rules. Their dedication to their important work during this difficult time is what government service is all about.

Last Updated: April 12, 2011