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From Securities Regulation Daily, March 14, 2013

CFTC Chairman Highlights Dodd-Frank Act’s Benefits to Swaps Market as Congress Considers Improvements to Title VII

By John Filar Atwood

CFTC Chairman Gary Gensler believes that the Dodd-Frank Act has provided important benefits to derivatives market participants, but said that it is only natural that two and a half years later, end users would be seeking additional guidance and some fine-tuning would be needed. Gensler testified before the House Committee on Agriculture, which is considering several pending bills to improve Title VII of the Dodd-Frank Act. He noted that the CFTC has a number of initiatives underway that might address the areas of concern.

Legislative approach. Committee chairman Frank Lucas (R-Okla) said that the legislative proposals are all intended to address unintended consequences of the Dodd-Frank Act. He said that the bills contain “common sense tweaks to ensure that the Dodd-Frank Act does not unnecessarily burden end users.” Ranking Member Collin Peterson (D-Minn) urged patience by lawmakers, saying that the CFTC most likely would address all of the concerns through its own initiatives.

Gensler was reluctant to comment on any specific pending legislation, but he did say that legislation requiring cost-benefit analyses to be both quantitative and qualitative could make the CFTC’s job much harder. Committee member Mike Conaway (R-Tex) has introduced legislation to enhance cost-benefit analyses in several ways. Gensler said that the CFTC has been conducting cost-benefit analyses, but he worries that legislation in this area “would make it harder to get any rule out of the building.”

Dodd-Frank reforms. Gensler said that some of the benefits that the Dodd-Frank Act has produced include post-trade transparency, which allows end users for the first time to see the price and volume of each swaps transaction. It also has given the public greater access to the market and reduced risks through central clearing. Finally, the public is benefiting from the oversight of swaps dealers as required under the Dodd-Frank Act, he said.

Reforms that are still in the process of being implemented include pre-trade transparency rules, which the Commission hopes to have ready very soon, he said. Guidance on the cross-border application of the swaps market rules also is forthcoming. Gensler said that he hopes to have this ready by July. Still ahead is the tough decision about what to do with LIBOR and other benchmark interest rates, he added.

Consumer protection. Gensler fielded several questions on the customer protection rules, which the CFTC released for comment last fall. Several committee members said that they have heard from their small business constituents that these rules would be very burdensome on their businesses.

Gensler said that the Commission received 125 comment letters on the proposals, most of which were positive. However, he acknowledged that the provision regarding residual interest has been a cause for concern. The provision states that the assets of one customer may not be used by a futures commission merchant to cover the positions of another customer. Gensler said that comment letters have made it clear that businesses need to be able to do this on an intra-day basis. He said he was not sure if the rules would be reproposed, but assured the committee that the CFTC was aware of the residual interest issue.

Cross-border issues. In the area of international coordination of swaps market reform, Gensler said that the CFTC is working on cross-border guidance. The guidance includes a commitment to permit foreign firms to meet Dodd-Frank requirements through compliance with comparable foreign rules, a concept that the Commission refers to as “substituted compliance.”

Asked with which countries U.S. laws currently most closely align, Gensler said Europe and Japan, with Canada being a close third. He noted that Australia and Hong Kong also have registered swaps dealers, but he said their laws were a little further away from meeting the requirements for substituted compliance.

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