Opening Statement for Title VII Intermediaries Release — April 18, 201
Commissioner Elisse B. Walter
U.S. Securities and Exchange Commission
April 18, 2012
Thank you Chairman Schapiro.
Who? What? When? Where? Why? The 5 W’s have guided millions of writers — from grade school students penning their first essays to career journalists reporting major events. While I doubt anyone believes that the Federal Register makes for the same scintillating read as a page one news feature, I think that the 5 W’s can be a guide for us regulators as well, focusing our task on the questions we need to answer in our regulations and guidance. This is particularly true for regulations under Title VII of the Dodd-Frank Act, as we have been tasked with creating a regulatory regime where none previously existed — a blank page that we need to fill.
The first of the 5 W’s, at least as I always learned them, is Who, and so I think it fitting that the first rules we are adopting under Title VII are the definitions of swap and security-based swap dealers and major swap and security-based swap participants. Determining who will be regulated is an important first step in establishing a regulatory system, for it is through those entities that almost all of the substantive regulations we adopt will flow.
One of the challenges of establishing the regulatory regime for security-based swaps is that the market is dynamic. The products themselves are dynamic and will undoubtedly evolve. But the security-based swaps market also is dynamic because it likely will evolve in response to regulations that we adopt, including the definitional rules that we are adopting today. Specifically, while the data we have indicates that security-based swap dealing is currently very concentrated, the Title VII regulations we adopt could very well result in lowering barriers to entry, increasing, perhaps significantly, the number of entities dealing with investors in security based swaps. In other words, the answer to the question “Who should be regulated?” is likely to change over time. I applaud the staff for recognizing this challenge and addressing it. Throughout the release, from the explanation of the extension of the dealer-trader distinction to defining security-based swap dealers, to the de minimis exception and related phase-in period, the staff has struck an effective balance in drafting the rules. The rules reflect the market today; based on the data we have, we believe that the rules we are adopting will capture an overwhelming majority of security-based swap dealing. This bears repeating. Based on robust analysis of empirical data, we are covering the marketplace. On the other hand, the rules provide the flexibility to withstand the changes to the market that will inevitably arise. In particular, I am pleased to support the staff’s study of the existing market and commitment to studying the nascent market so that we can use the best data available to inform the decisions we are making today and the ones the Commission will make in the future.
Finally, I want to say a word about the cost-benefit analysis in this release — if you’ll indulge me in extending the analogy that I used earlier - the way we answer the last of the 5 W’s, the why. Why is regulation necessary? Why did we make the choices we make? There has been much discussion of the way the Commission conducts its cost-benefit analysis. Indeed, our Chairman testified about it just yesterday. I think much of the criticism we have received about our cost-benefit analysis has been a bit unfair. In my view, the Commission’s decision-making has been characterized by efforts to find the regulatory solution that best protects investors while not imposing unnecessary costs. That is the essence of robust cost-benefit analysis. But, regardless of my own feelings about the recent critiques of our cost-benefit analysis, today’s release should end any doubt about whether we have taken those critiques seriously. The staff- — including the staff from Trading and Markets, the Division of Risk, Strategy and Financial Innovation, and the Office of the General Counsel — have provided a thorough and thoughtful analysis of the costs and benefits of the alternatives we considered and our decision points. They have identified, analyzed and considered quantifiable data when it is available, and also expressly recognized that there are many programmatic benefits and costs to regulation that are not quantifiable. But, as this release demonstrates, unquantifiable does not mean “unimportant.” Indeed, the mandate in Dodd-Frank for establishing a regulatory regime for security-based swaps indicates that Congress believes that many expected and not currently quantifiable programmatic benefits — the reduction of systemic risk and the increase in investor protection, among others — are critically important. Although the staff is already headed down this course, I encourage them to keep this in mind as we consider future rulemakings under Title VII and in other areas.
I would like to thank our staff, particularly those in the Division of Trading and Market and the Division of Risk, Strategy, and Financial Innovation, and the staff of the CFTC profusely for their hard, excellent, and collaborative work on this release, and I am happy to support the recommendation.