LITMIR.BIZ

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we should reconvene in an hour.

      I strode through the hall of the CFTC’s ninth-floor executive suite past the black-and-white photos of a dozen former agency chairs and then, further down the hall, past the living color photos of the current commissioners. I rode the elevator down to the red marbled lobby of the CFTC headquarters and walked past the uniformed security guards before the large etched-glass CFTC seal. I exited the building onto 21st Street in Northwest Washington—an area north of Foggy Bottom and south of Dupont Circle.

Returning to a lifelong habit of peripatetic processing of important information, I began to walk fast. I headed north on 21st Street across New Hampshire Avenue. The neighborhood quickly changed from modern rectilinear glass office blocks to hexagonally flared, flower-boxed Victorian residences. I paced onward toward Massachusetts Avenue and turned left on Embassy Row. I walked past the Cosmos Club,¹¹ where I had lived for six weeks the summer before while looking for an apartment.

      I saw no upside to wasting time trying to reverse the denial of the waiver. The issue was how to deliver my message. The speech was ready. It was good, and it was important. It would be my first major speech on US soil as a CFTC Commissioner. It was an important opportunity to define myself and my agenda to a critical audience of peers in the New York financial community. I intended to reiterate my pro-reform credentials as a supporter of the swaps trading provisions of Title VII of the Dodd–Frank Act. At the same time, I planned to criticize the CFTC's peculiar implementation of certain of those provisions.

As I turned right, past the bright magenta-flowered myrtle trees of the Cosmos Club garden, and walked up Florida Avenue, I reflected on the fact that I may have been one of the most long-standing advocates of swaps market reform from either political party to serve as a CFTC commissioner.¹² In 2000, when I first left New York law practice and entered the swaps industry, I was struck by the fact that, unlike in most overseas trading markets, swaps brokerage was not a regulated activity. This omission hurt the professionalism of US swaps markets compared to overseas markets, in my view.

      Not long after, I became a supporter of what's known as “central counterparty clearing” of swaps—that is, the practice in which a central party acts as an intermediary between buyers and sellers. In many derivatives markets, for instance, a clearinghouse serves this role, acting as the buyer to every seller and the seller to every buyer. The clearinghouse also ensures that the parties honor their contractual obligations over time.

      I had seen firsthand how the emergence of central clearing in the energy swaps market increased trading liquidity and market participation. Before the financial crisis, I had led an effort at a brokerage called GFI Group to develop a central counterparty clearing facility for credit default swaps. That initiative led to the formation of IceClear Credit, which today is the world's leading clearer of those products.

I also was a supporter of greater swaps transparency. My experience from the 2008 financial crisis was that financial regulators lacked visibility into the risk that large financial institutions could fail due to inability to pay their financial obligations. Undoubtedly, swaps and other derivatives contributed to the financial crisis through the writing of credit default swaps protection by the giant insurance company American International Group, known as AIG. An equal or greater contribution came from the opacity of another complex product—not a derivative—that made its way onto bank balance sheets: collateralized mortgage obligations. While some derivatives transactions had come to be centrally recorded, what was missing was reliable information for both regulators and the marketplace about the true value and risk of these instruments. Government authorities simply did not have sufficient data to accurately assess the implications of the potential failure of a Bear Stearns, Lehman Brothers or AIG on derivatives counterparties throughout the financial system. They had little ability to assess the true danger—short of telephone calls in the middle of the crisis to specialized firms like GFI, where I was working at the time. That was just not good enough.

So, by the time Congress began drafting the bills that would become Title VII of the Dodd–Frank Act, I was already a vocal advocate for its three key pillars of swaps market reform: regulated swaps execution, central counterparty clearing, and enhanced swaps transparency through data reporting. As a Republican, my support for Dodd–Frank's swaps provisions made me a maverick in my party, which had mostly opposed the legislation. Yet, as a businessperson, I believe that intelligently regulated markets are good for the economy and job creation. My support for parts of Dodd–Frank was driven by my professional and commercial experience, not academic theory or political ideology. These particular swaps reforms were organic and not terribly radical.¹³ Market participants were already at work on two of them—without government urging—when the crisis hit. Completing all three reforms correctly was the right thing to do. That is why I supported swaps market reform.

      Generally, in the American system, after Congress passes a law requiring new regulation by a federal agency, the agency designs and implements the rules. That gives regulators a lot of clout. No matter how good a law sounds on paper, whether it actually improves anything hinges on how the regulations implementing it are drafted. The devil is in the details.

In a remarkably short time after the passage of Dodd–Frank in 2010, the CFTC implemented most of its mandates. By the time I joined the Commission in 2014, the CFTC under its then chairman, the trenchant Gary Gensler (today chairman of the Securities and Exchange Commission), had already effectuated most of the swaps reforms, far faster than any other regulator in the United States or abroad. In particular, its implementation of the swaps clearing mandate was highly effective, significantly increasing the volume of transactions cleared through clearinghouses.¹⁴ Chairman Gensler and his fellow CFTC commissioners and staff deserve enormous credit for this remarkable achievement.

The CFTC also moved quickly to cause swaps transactions to be reported to swaps data repositories, referred to as SDRs.¹⁵ Yet despite these sound steps, the establishment of global standards for categorizing swaps trades was assigned to intergovernmental bureaucracies, rather than to bodies made up of swaps counterparties themselves. That was a misstep. The process of developing standards took on a life of its own. While important work was done, a decade after the financial crisis SDRs still could not provide regulators with a complete and accurate picture of the true risk of failure of a large swaps dealer in global markets.

The CFTC's least successful implementation of swaps reform, in my view, related to the trading and execution of swaps. In Dodd–Frank, Congress laid out a fairly simple and flexible framework for trading swaps. It required certain swaps to trade on regulated platforms called “swaps execution facilities” (SEFs). Congress defined these SEFs as trading systems or platforms “in which multiple participants (can) execute or trade swaps by accepting bids and offers made by other participants that are open to multiple participants in the facility or system, through any means of interstate commerce.” The key phrase is “any means of interstate commerce,” a phrase with a rich constitutional history, which US federal courts have interpreted to cover almost an unlimited range of commercial and technological enterprise, including those conducted over the telephone.¹⁶

As I would explain at length in my upcoming white paper, Congress had expressly permitted SEFs to offer various flexible execution methods for swaps execution. Unfortunately, in carrying out this mandate, the CFTC—improperly in my view—attempted to re-engineer swaps market structure by limiting methods of transacting. It grafted onto its SEF rules a number of market practices borrowed from exchange-traded futures markets. That was the wrong model and resulted in an overly complex and highly prescriptive contraption that was not only bad policy but inconsistent with the language of the law.

In my speech, I intended to say

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