Opening Statement, Open Meeting on the Eighth Series of Proposed Rulemakings under the Dodd-Frank Act
Commissioner Jill E. Sommers
December 16, 2010
I would also like to thank the staff for all of their hard work and dedication over these many months as we attempt to implement the provisions of Dodd-Frank. While I may not be supporting all of the proposals, I do appreciate all that you have done.
In previous meetings I have explained that I would not support proposed regulations that I thought were too broad or amounted to over-reaching by the Commission, or that too narrowly construed the language of Dodd-Frank. While in the past I believe we certainly have overreached, today my objections to the proposed regulations for Swap Execution Facilities (SEFs) and to the proposed Position Limits stem from our overly-narrow reading of the statute.
Dodd-Frank defines a SEF as a “trading system or platform in which multiple participants have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce, including any trading facility.” As I have pointed out in my public speaking engagements over the past few months, the term “trading facility” is defined in the Commodity Exchange Act (Act), but the terms “trading system” and “platform” are not. By introducing these new, undefined terms into the Act, and by specifying that SEFs should facilitate the trading of swaps through any means of interstate commerce, I believe Congress intended a broad model for executing swaps on SEFs, both cleared, uncleared, liquid or bespoke. The goals identified by Dodd-Frank for registering SEFs are “to promote the trading of swaps on swap execution facilities and to promote pre-trade price transparency in the swaps market.” In my view, the best way to achieve these twin goals is to adopt a model that provides the maximum amount of flexibility as to the method of trading. Unfortunately, this proposal does not do that.
Section 37.9, which governs the types of execution methods that SEFs may offer, is a key provision of this proposed regulation. While it permits alternative methods of execution, such as the trading facility model and the request for quote model, it also requires that to be registered as a SEF an applicant must, at a minimum, provide market participants “with the ability to post both firm and indicative quotes on a centralized electronic screen accessible to all market participants who have access to the swap execution facility.” In my view this provision is not mandated by Dodd-Frank and may limit competition by shutting out applicants who wish to offer request for quote services without this functionality. I believe this interpretation of the statute, and other requirements within this section, are far too restrictive.
As a result of my concerns, we worked throughout the past week to include alternative language for Section 37.9 in the proposal. I believe this alternative language complies with Dodd-Frank and would promote both pre-trade price transparency and the trading of swaps on SEFs. Including the alternative would have given the public an opportunity to comment, in accordance with the Administrative Procedure Act, on both the alternative language and the language contained in the proposed rule. I am deeply disappointed that despite a commitment to a transparent process in promulgating the Dodd-Frank rules, the alternative language is not in the proposal today and we are not giving the public the opportunity to comment on it. I will therefore include a separate statement in the Federal Register notice with the alternative language and hope the public will comment on it. The alternative language is also set forth at the end of this statement.
I would like to take a moment to also comment on position limits. It is no secret that I have not supported imposing position limits in the past, and my views have not changed. Our authorizing Committee gave us the words “necessary” and “appropriate,” both of which should be critical components of our analysis, but as you all know have not been. But, even if we had engaged in that analysis, we do not have the data we need to effectively set position limits. Moreover, in the absence of data, any limits we set will be completely unenforceable. I think it is bad policy to promulgate regulations that are not enforceable. Those challenges aside, I am also concerned about an issue that was brought up in yesterday’s hearing, which is that we have never considered whether limits should apply differently to different groups or classes of traders, a distinction that Section 4a(a) of the Act allows us to make.
I do have some questions about the other two proposals we are considering today and look forward to discussing them with staff.
§ 37.9 Permitted Execution Methods.
Definitions.
(1) As used in this Part 37:
(i) Order Book System means:
(A) An electronic trading facility, as that term is defined in section 1a(16) of the Act;
(B) A trading facility, as that term is defined in section 1a(51) of the Act;
(C) A trading system or platform in which all market participants in the trading system or platform can enter multiple bids and offers, observe bids and offers entered by other market participants, and choose to transact on such bids and offers; or
(D) Any such other trading system or platform as may be determined by the Commission.
(ii) Request for Quote System means:
(A) A trading system or platform in which a market participant transmits a request for a quote to buy or sell a specific instrument to all other market participants in the trading system or platform to which all market participants may respond;
(B) A trading system or platform in which a market participant transmits a request for a quote to buy or sell a specific instrument to more than one potential counterparty. Upon receipt of responsive quotes from any of the potential counterparties, the original requester may accept a responsive quote and complete a transaction with any one of the responsive counterparties;
(C) A trading system or platform in which multiple market participants can both (i) view real-time electronic streaming quotes, both firm or indicative, from multiple potential counterparties on a centralized screen; and (ii) have the option to complete a transaction by (A) accepting a firm streaming quote, or (B) transmitting a request for a quote to more than one market participant, based upon an indicative streaming quote, taking into account any resting bids or offers that have been communicated to the requester along with any responsive quotes; or
(D) Any such other trading system or platform as may be determined by the Commission.
(iii) Voice-Based System means:
(A) A trading system or platform in which a market participant executes or trades a swap using a telephonic line or other voice-based service.
(2) Swaps subject the clearing requirements under the Act that are made available for trading pursuant to § 37.10 may be executed or traded on an Order Book System, a Request for Quote System, or any such other trading system or platform as may be determined by the Commission.
(3) Swaps not subject to the clearing requirements under the Act may be executed or traded on an Order Book System, a Request for Quote System, a Voice-Based System, or any such other trading system or platform as may be determined by the Commission.
(4) A swap execution facility can be an Order Book System, a Request for Quote System, or any such other trading system or platform as may be determined by the Commission, or any combination of the aforementioned systems.
Last Updated: January 18, 2011