Chairman Gensler's testimony before the House Financial Services Committee

Provided by Equity Research Desk

CFTC Chairman Gary Gensler testified today before the House Financial Services Committee on proposed dealer and market regulations changes. The new regulatory framework would require “close coordination” between the SEC and the CFTC and aims to cover all OTC derivatives and markets. The plan has four key objectives:

Lower Systemic Risk. This dual regime would lower systemic risk through the following four measures:

· Setting capital requirements for derivative dealers;

· Establishing margin requirements for derivative dealers (whether dealing in standardized or customized swaps);

· Establishing segregation or set aside requirements for derivatives dealers and counterparties to customized OTC transactions, and creating appropriate bankruptcy protections;

· Requiring centralized clearing of standardized swaps; and

· Requiring business conduct standards for dealers.

Promote Market Transparency and Efficiency. This complementary regime would promote market transparency and efficiency by:

· Requiring that all OTC transactions, both standardized and customized, be reported to a regulated trade repository or central clearinghouses;

· Requiring clearinghouses and trade repositories to make aggregate data on open positions and trading volumes available to the public;

· Requiring clearinghouses and trade repositories to make data on any individual counterparty’s trades and positions available on a confidential basis to regulators;

· Requiring centralized clearing of standardized swaps;

· Moving standardized products onto regulated exchanges and regulated, transparent trade execution systems; and

· Requiring the timely reporting of trades and prompt dissemination of prices and other trade information;

Promote Market Integrity. It would promote market integrity by:

· Providing regulators with clear, unimpeded authority to impose reporting requirements and to prevent fraud, manipulation and other types of market abuses;

· Providing regulators with authority to set position limits, including aggregate position limits;

· Moving standardized products onto regulated exchanges and regulated, transparent trade execution systems; and

· Requiring business conduct standards for dealers.

Protect the Public from Improper Marketing Practices. It would ensure protection of the public from improper marketing practices by:

· Business conduct standards applied to derivatives dealers regardless of the type of instrument involved; and

· Amending the limitations on participating in the OTC derivatives market in current law to tighten them or to impose additional disclosure requirements, or standards of care (e.g. suitability or know your customer requirements) with respect to marketing of derivatives to institutions that infrequently trade in derivatives, such as small municipalities.

Chairman Gensler also commented that “the CFTC (needs) to establish aggregate position limits across markets (including OTC) in order to ensure that traders are not able to avoid position limits in a market by moving to a related exchange or market, including international markets”. The plan aims to have all standardized contracts cleared by a regulated CCP and traded on exchange and provides additional criteria to determine what constitutes a standardized swap, mainly, if an instrument is accepted for clearing by a regulated clearinghouse, it should be required to be cleared. Additional criteria to be considered are:

· The volume of transactions in the contract;

· The similarity of the terms in the contract to terms in standardized contracts;

· Whether any differences in terms from a standardized contract are of economic significance; and

· The extent to which any of the terms in the contract, including price, are disseminated to third parties.

Mr Gensler concluded by stating the “It is clear that we need the same type of comprehensive regulatory reform” covering all types of OTC derivatives dealers and markets and that they “are working closely with our international partners to make sure that the legislative, regulatory and policy developments outlined today occur in tandem with our international partners” in order to avoid regulatory arbitrage.