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

Commissioner Michael V. Dunn

October 18, 2011

Thank you all for joining us today for another meeting to consider final rules promulgated pursuant to the Dodd-Frank Act. Today we consider rules in two areas: position limits and derivatives clearing organizations. We also consider a proposed amendment to the effective date for regulation.

When the Dodd-Frank Act was originally conceived and then became the law, the financial crisis of 2008 was fresh in everyone’s minds. It was unnecessary to explain why Congress and the President chose to overhaul this country’s financial regulatory system – put simply – parts of it were broken. Parts of our financial regulatory structure did not work, and because they did not work, the people of this country suffered greatly. Today, years after the crisis ended, I think people have forgotten how this all started. For these people, I would like to remind them why Dodd-Frank is important by examining some facts about 2008.

• The financial crisis cost the U.S. an estimated $648 billion due to slower economic growth, as measured by the difference between the Congressional Budget Office (CBO) economic forecast made in September 2008 and the actual performance of the economy from September 2008 through the end of 2009. That equates to an average of approximately $5,800 in lost income for each U.S. household.
• The U.S. lost $3.4 trillion in real estate wealth from July 2008 to March 2009 according to the Federal Reserve. This is roughly $30,300 per U.S. household. Further, 500,000 additional foreclosures began during the acute phase of the financial crisis than were expected, based on the September 2008 CBO forecast.
• The U.S. lost $7.4 trillion in stock wealth from July 2008 to March 2009, according to the Federal Reserve. This is roughly $66,200 on average per U.S. household.
• 5.5 million more American jobs were lost due to slower economic growth during the financial crisis than what was predicted by the September 2008 CBO forecast.

None of this was a result of problems with the regulated futures markets.

I believe implementing the final rules promulgated pursuant to the Dodd-Frank Act will likely be the most important thing I have done during my tenure at the CFTC. The financial crisis showed us that many of our financial regulatory systems were ill-prepared to effectively prevent the catastrophic loss of wealth this country suffered. For this reason, I believe that Dodd-Frank has correctly taken center stage in our efforts to ensure that events like the financial crisis of 2008 can be averted in the future.

Unfortunately, there are times when a sideshow takes center stage. Position limits are the sideshow that has unnecessarily diverted human and fiscal resources away from actions to prevent another financial crisis.

To be clear, no one has proven that the looming specter of excessive speculation in the futures markets we regulate even exists, let alone played any role whatsoever in the financial crisis of 2008. Even so, Congress has tasked the CFTC with preventing excessive speculation by imposing position limits. The law is clear, and I will follow the law. However, as Commissioner at the CFTC, I think it is important to let the public know what may happen once we implement position limits.

After we implement position limits, in all likelihood, the prices of heating oil and gasoline will not drop precipitously as some have strongly suggested. Airline tickets will not be cheaper and the food you buy at the grocery store will be the same price. Investments in precious metals will continue to rise and fall unpredictably.

Things will remain relatively the same, except for those who use the markets we regulate to provide the very resources we all need. For these farmers, producers and manufactures, position limits, and the rules that go along with them, may actually make it more difficult to hedge the risks they take on in order to provide the public with milk, bread and gas. The role of the futures market is price discovery, not price setting. If we limit participation in these markets through position limits, producers may receive inaccurate market signals when making production decisions. If this occurs, the prices we all pay for our groceries and to heat our homes may become more volatile. Position limits may actually lead to higher prices for the commodities we consume on a daily basis.

Despite the fact that we have received over 15,000 comment letters on position limits and had hundreds of meetings concerning the pros and cons of position limits and whether or not excessive speculation even exists, my opinion has not changed. I am still left with the conclusion that no one has presented to this agency any reliable economic analysis to support either the contention that excessive speculation is affecting the markets we regulate or that position limits will prevent excessive speculation. As I said when we voted on the proposed rule, my fear is that position limits are, at best, a cure for a disease that does not exist or a placebo for one that does. At worst, position limits may harm the very markets they are intended to protect.

I commend staff for drafting a rule that will hopefully do as little harm to the market as possible. I know that the time and effort put into this rule may be greater than any other rule that comes before this Commission. This is unfortunate because it has taken the Commission’s limited resources away from the issues that should be center stage: the important work of improving our financial regulatory structure to prevent another financial crisis.

Among the rules that should take center stage for us are our rules regarding Derivatives Clearing Organizations. I take pride in noting that the regulatory system that we have in place for the futures industry works, and it worked during the 2008 financial crisis and its aftermath. The DCO rules we vote on today hopefully will bring a similar level of transparency and oversight to the swaps industry.

In considering these rules, I am mindful of the excellent job that our clearinghouses have done in regard to the futures industry. In fashioning these rules, we should not be taking action that places new restrictions on how they have always done their futures business. However, there are instances where our existing budget situation forces us to be prescriptive rather than principles-based in these rules. Unfortunately, the Commission simply does not have the resources to oversee everything that it would need to in a more principles-based regime. As a result, this rule is much more restrictive than it should be if we had the necessary resources for oversight.

I thank the staff for their hard work on this rule, and I appreciate their effort in drafting rules that should be center stage in our efforts to avoid and prepare for another financial crisis.

Last Updated: October 18, 2011