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Gensler and Schapiro Testify on Dodd-Frank Implementation and Address MF Global Bankruptcy

Thursday, December 8, 2011

Fanni Koszeg | Bloomberg Law CFTC & SEC Congressional Testimony, Gary Gensler & Mary Shapiro (Dec. 1, 2011) Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC) and Mary Schapiro, head of the Securities and Exchange Commission (SEC), testified before the U.S. Senate Committee on Agriculture, Nutrition and Forestry (Committee) at a hearing scheduled to address implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). In their prepared testimonies, both regulators detailed the progress of their respective rulemaking efforts to implement Title VII of Dodd-Frank, but the overwhelming majority of questions required them to address the MF Global, Inc. (MF Global) bankruptcy. The Committee is in charge of overseeing the CFTC and, accordingly, Gary Gensler was the target of many questions regarding his role in the events leading up to the MF Global bankruptcy and his subsequent recusal from the investigation initiated by the CFTC.

Need for Inter-agency and International Cooperation in Regulating the OTC Derivatives Marketplace

In her opening statement, the Chairwoman of the Committee, Debbie Stabenow, pointed out that the MF Global bankruptcy has shown how dangerously exposed the U.S. economy is to the European debt crisis and encouraged the regulators to harmonize their rules with each other and other prudential regulators, working closely with their global counterparts. Since the multi-trillion dollar global swaps market is by its nature highly interconnected, as painfully demonstrated by the financial crisis, effective regulation and oversight must be harmonized to avoid gaps and overlaps. In his testimony, Gensler emphasized that, especially in the context of the current European debt crisis, regulators must ensure through appropriate oversight, monitoring, and cooperation with foreign regulators, that a situation similar to the 2008 near collapse of the banking system does not happen again. To that end, the CFTC is engaged in ongoing dialogues with regulators around the world and, together with the SEC, will participate in a meeting of international regulators, including the European Securities Market Authority (ESMA), on December 8, 2011, to discuss how to regulate the global swaps market in a consistent, comprehensive, and coordinated manner. Schapiro also pointed to extensive international cooperation in her testimony and, in response to subsequent questioning, emphasized that the SEC is monitoring clearing houses and money market funds in particular to assess how they would withstand shocks coming out of Europe. With respect to coordination of rulemaking efforts, both Gensler and Schapiro said that they are working closely together and the differences in approach to certain technical elements of the rules stem largely from differences between futures markets and securities markets. The regulators expect to finalize the definition of "swap dealer" and certain other key terms as soon as possible next year.

Progress Report on Dodd-Frank Reforms

Gensler and Schapiro each gave a status update on rulemaking progress, including their rulemaking goals, processes, and covered areas. — Promoting Transparency Gensler said that the CFTC finalized the large trader reporting rule that establishes what information swap dealers and clearinghouses must report to the CFTC about large trader activity in the physical commodity swaps markets. In addition, the CFTC finalized an important rule establishing registration requirements for swap data repositories, which will gather data on all swaps transactions. Schapiro said that the SEC proposed rules regarding trade reporting, data elements, and real-time public dissemination of trade information for security-based swaps. In addition, the SEC has also proposed rules regarding security-based swap data repositories. — Clearing According to Gensler, central clearing of standardized swaps will be a crucial tool to lowering risk in swaps markets. One Senator questioned why the proposed minimum capital for clearing houses was set at $50 million, arguing that this level had been criticized as too low by some in the market. Gensler argued that the CFTC was attempting to make swaps markets more accessible and competitive because, unlike securities and traditional futures markets, swaps markets have been dominated by very few large institutions. — Economic Impact of Rulemaking Schapiro was asked to comment on a recent court decision vacating the SEC’s proxy rule, which the court deemed "arbitrary and capricious" due to the SEC’s failure to carry out an adequate cost-benefit analysis. For background on the decision see Bloomberg Law Reports®

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