Opening Statement Regarding the Twelfth Open Meeting to Consider Final Rules Pursuant to the Dodd-Frank Act
Commissioner Jill Sommers
May 10, 2012
Thank you Mr. Chairman and thank you to the rulemaking team for the hard work and diligence in crafting these rules. We have before us today final rules relating to the Core Principles for Designated Contract Markets (DCMs). Core Principles were designed to allow DCMs the flexibility to establish compliance regimes that fit with their markets and business models. This flexible approach has been very successful. The proposed DCM Core Principle rules published in late 2010 significantly, and needlessly, strayed from the flexible approach in favor of a prescriptive, one-size-fits-all, rules-based approach. I did not, and still do not, support abandoning the flexible, principles-based approach to regulation. I am pleased, however, that in a number of areas the final rules before us today recognize the value of retaining flexibility and pull back from the overly prescriptive regime set out in the proposed rules. I understand that in a number of areas where we have established specific rules, we have codified the best practices already in place at DCMs today. While on its face this may seem reasonable, I have lingering concerns about whether codifying today’s best practices will prevent exchanges from developing tomorrow’s best practices. Our industry evolves quickly, and we are on the cusp of regulating vast markets and diverse products that we have never regulated before. We must remain vigilant to ensure that our lack of experience in these markets and with these products does not cause us to stand in the way of continued evolution and progress.
Conspicuously absent from the rules we vote on today are final rules relating to Core Principle 9, Execution of Transactions. The proposal requiring at least 85% of all trading in each contract to occur in the centralized market or risk forced de-listing was an unnecessary solution in search of a problem. Moreover, in my view it was at odds with the Commodity Exchange Act, and if challenged, likely would not withstand judicial scrutiny. An unfortunate result of those proposed rules has been that exchanges, particularly smaller and newer exchanges, have been reluctant to list, and in some cases have decided not to list, new contracts because of the uncertainty surrounding the possibility of forced de-listing if liquidity did not grow within the specific timeframes set by the government. When we take up final rules relating to Core Principle 9 in the near future, we must seek to establish certainty so DCMs can get on with listing new products without fear of forced de-listing, and should reject any construct that fails to recognize that the Commodity Exchange Act does not require every listed contract to serve a price discovery function by trading in the centralized market.
Another Core Principle that is of particular interest to me is Core Principle 21, relating to financial resources. Nobody can argue against the notion that DCMs must be financially secure and must have sufficient resources available to continue their operations. The challenge becomes balancing the need for DCMs to set aside capital for regulatory purposes, with the need for DCMs to deploy their capital to build robust, competitive businesses that create jobs and additional opportunities for market participants and American businesses. The rules we are voting on today allow for sufficient flexibility to appropriately achieve that balance. Flexibility, however, when not carefully and appropriately exercised, can upset that balance. We need to make sure that does not happen.
Finally, last month we finalized the further definition of swap dealer, major swap participant, and eligible contract participant, and rumor has it that we are getting closer to finalizing the product definitions. Once that happens, there will be a date certain for entities to register as swap dealers or major swap participants. It appears that the date certain for required registration will be well before the Commission issues final rules or guidance relating to the extraterritorial application of Dodd-Frank, and before the Commission issues final rules on capital and margin. As we sit here today, I have yet to see a term sheet, a comment summary or a working draft of an extraterritoriality release, and have not seen any drafts of final rules for margin and capital. I have no reason to believe that either will be final before registration is required. Requiring registration before critical rules are finalized makes no sense and is contrary to the approach being taken by the SEC. It is my understanding that the SEC does not plan to require registration until after all of their substantive rules are finalized. This gives market participants the ability to fully evaluate what activity triggers the registration requirement, and all the costs and benefits associated with registration before the decision to register must be made. This is a reasonable approach and one I would like us to consider.
As I have said many times before, this process is complex and these rules have consequences for market participants. We are all aware of the importance of making this new regulatory framework for derivatives successful. With every step forward we must try to avoid taking an unnecessary step backwards. But we seem to have a penchant for putting the cart before the horse. I strongly support a concise, clear and comprehensive implementation plan that can harmonize the efficacy of these rules with both domestic and global regulators. I am concerned that as we get closer to the finish line we may look back only to realize that no one is capable of crossing it.
Last Updated: May 10, 2012