Segregation of Customer Funds for Cleared Swaps
I support the final rules on segregation of customer funds for cleared swaps. These rules are an important step forward in protecting customers and reducing the risk of swaps trading. The rules carry out the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandate that futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) segregate customer collateral supporting cleared swaps. FCMs and DCOs must hold customer collateral in a separate account from that belonging to the FCM or DCO. It prohibits clearing organizations from using the collateral of non-defaulting, innocent customers to protect themselves and their clearing members. For the first time, customer money must be protected individually all the way to the clearinghouse.
We received a tremendous amount of public input on this rule, including through two roundtables, as well as through comments on an advanced notice of proposed rulemaking and a proposal. This rule builds on customer protections included in the clearinghouse core principles rule we finalized in October requiring DCOs to collect initial margin on a gross basis for their clearing members’ customer accounts.
External Business Conduct Standards
I support the final rules to establish business conduct standards for swap dealers and major swap participants in their dealings with counterparties, or external business conduct. Today’s final rules implement important new authorities in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) for the Commodity Futures Trading Commission to establish and enforce robust sales practices in the swaps markets. Dealers will have to tell their counterparties the mid-market mark of their outstanding bilateral swaps every day, bringing transparency to the markets and helping to level the playing field for market participants.
The rules prohibit fraud and certain other abusive practices. They also implement requirements for swap dealers and major swap participants to deal fairly with customers, provide balanced communications, and disclose material risks, conflicts of interest and material incentives before entering into a swap.
The rules include restrictions on certain political contributions from swap dealers to municipal officials, known as “pay to play” prohibitions.
The rules also implement the Dodd-Frank heightened duties on swap dealers and major swap participants when they deal with certain entities, such as pension plans, governmental entities and endowments.
The rules were carefully tailored to include safe harbors to ensure that special entities, such as pension plans subject to the Employee Retirement Income Security Act, will continue to be able to access these markets and hedge their risks.
The final rules benefitted substantially from the input of members of the public who met with staff and Commissioners and those who submitted thoughtful, detailed letters. The Securities and Exchange Commission, prudential regulators and the Department of Labor also provided helpful feedback.
Registration of Swap Dealers and Major Swap Participants
I support the final rule to establish a process for the registration of swap dealers and major swap participants. The rule implements the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) mandate that these entities be subject to registration and regulation for their swaps business. Registration will enable the Commodity Futures Trading Commission to monitor swap dealers and major swap participants for compliance with the Dodd-Frank Act and Commission rulemakings. Through regulation of dealers, the Commission will be able to protect market participants and the public, as well as promote sound risk management practices. The final rule includes a requirement that swap dealers and major swap participants become members of a registered futures association, such as the National Futures Association (NFA).
In addition, I support the order delegating to the NFA the authority to register swap dealers and major swap participants. This will help efficiently allocate resources and provide the Commission with flexibility.
I support the proposed rule implementing the “Volcker Rule” requirements in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
Dodd-Frank amended the Banking Holding Company Act to provide the Commodity Futures Trading Commission with authority to implement Volcker Rule requirements for the entities for which we are the primary financial regulator.
Today’s proposal mirrors the joint rule proposed in October by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, and the Securities and Exchange Commission.
Consistent with the joint proposed rule, this proposal prohibits certain banking entities from engaging in proprietary trading. The proposal permits, as Congress prescribed, market-making and risk-mitigating hedging.
I look forward to receiving comments from market participants and the public on the proposed rule.