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Statement at Open Meeting on Rule Defining Swaps-Related Terms for Regulating Derivatives

Commissioner Daniel M. Gallagher

April 18, 2012

Thank you, Chairman Schapiro. And I want to particularly thank you for your willingness to reconsider, at my request, certain fundamental aspects of this rule even though you could have easily proceeded without my support. I also want to thank the staffs of the Division of Trading and Markets and the Division of Risk, Strategy and Financial Innovation for their collaborative effort on this important rule. I want to particularly commend Robert Cook and Craig Lewis, the Directors of the two Divisions, for their leadership in producing the rule that the staffs of the Divisions are recommending to the Commission today, and I believe that it is particularly fitting that the Divisions are presenting this recommendation jointly given the success of that collaboration. I also want to thank Robert’s counsel, Nathaniel Stankard, for his extreme efforts and superlative work product which, in the critical last phase of this process, had a major impact on this rulemaking. And I also want to thank Brian Bussey for convincing me that this rule could actually become worth supporting.

It is fair to say that the collaboration between Trading and Markets and RiskFin in the development of the final rule has been the key ingredient to the creation of a quality final rule. Indeed, we are considering the rule only one day after the Chairman testified before Congress on new rule-writing guidance for the Commission and the staff that is designed to ensure, among other things, the involvement of RiskFin in the conception, development, and adoption of our regulations. While RiskFin’s involvement in this rule has come later in the process than contemplated by the guidance now governing Commission rulemaking, it nonetheless has made this a fundamentally better rule which I am happy today to support. Consistent with the guidance, the collaboration we have seen over the last two months in getting this rule done should serve as an example for how the Commission approaches rulemaking—from pre-proposal to adoption—in the future.

Although I was not at the Commission when Dodd-Frank became law, and was not here when this rule and the other Title VII rules were proposed, I certainly understand the challenges that the agency has faced in attempting to fulfill the mandates of Dodd-Frank. In the derivatives area alone, Congress has tasked this agency and the CFTC with standing up a regulatory regime in a very short time frame in markets we have traditionally not regulated. These regimes must be substantially similar, even though the SEC’s authority covers only approximately 5.5% of the OTC derivatives market.

We are implementing these regimes while information about these markets is highly imperfect—indeed, the lack of data about the OTC derivatives markets is one of the principal justifications for the statute—where the regulatory requirements will themselves affect market structure in ways that are unknown, and where the Commission has little expertise and no experience in regulating these markets. These factors—imperfect information, little agency expertise, and a mandate to create a gerrymandered regulatory regime from scratch—all argue for a regulatory approach that is careful, thoughtful and data driven. If we don’t take such an approach—that is, if we build our regulatory structure on a faulty foundation--we run the very real risk of undermining the health of markets that allow businesses to manage their risks, lower their cost of capital, and create jobs.

And in most respects this rule is consistent with the desire to be careful, thoughtful and data driven. Most importantly, we build into the rulemaking, after the regulatory structure for security-based swaps is in place for two years, a comprehensive staff study of some of the choices we are making today, to determine whether those choices are correct or need to be modified. At that time, we will have the benefit of massive amounts of additional data, a more developed regulatory infrastructure, and several years of agency expertise in regulating and overseeing these markets. The Commission will be in a far stronger position to determine whether the lines we draw today--including the de minimis level for determining whether one is a dealer, and the factors used to determine whether one is a dealer or major security-based swap participant—should be modified in light of a more comprehensive understanding of the market. Importantly, it should be noted, the study doesn’t predetermine the ultimate outcome of these choices, but merely allows that more comprehensive data and analysis will guide any decisions the Commission may make to modify or refine the definitions we are adopting today.

I view today’s rulemaking as a very promising development. The rules reflect a proper level of regulatory humility: we understand that we are operating with imperfect information and will carefully review the choices we make after we gather more information, and after our understanding of that information improves. There can be a temptation to approve a new rule, declare victory, and move on. But I take today’s rule as evidence that we are focused not just with getting a rule--any rule--done, but that we are singularly focused on getting it done right.

Before I conclude, I want to thank my colleagues both here and at the CFTC for engaging in what has turned out to be a very fruitful process over the last several weeks. To me, this process has illustrated the benefits of the Commission structure and the deliberative Commission process. This is a difficult rulemaking, both substantively and, because it is a joint rulemaking, procedurally, and I applaud the engagement of my fellow Commissioners at both Commissions. That engagement has markedly improved the final product, and it has been a true pleasure to work directly with my colleagues on both Commissions. And again, I would like to thank our staff, who have worked tirelessly to get this done. Thanks for all your hard work. I have no questions.

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