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Final Rules Relating to Cross-Border Security-Based Swap Activities

Commissioner Daniel M. Gallagher

June 25, 2014

Thank you, Chair White.  I would like to join my colleagues in thanking the staff for all the hard work that went into preparing today’s final rule.  In particular, I would like to acknowledge the dedicated efforts of Brian Bussey, Richard Gabbert, Josh Kans, and Margaret Rubin of the Division of Trading and Markets.  I also want to acknowledge the excellent work of the staff of the Division of Economic and Risk Analysis and the Office of General Counsel.  And I would be remiss if I didn’t make special mention of Steve Luparello, director of the Division of Trading and Markets.  Steve, I am glad you chose to serve the country again in your new role, and you have been off to a terrific start.

Today’s final rule marks a key step forward in fulfilling the Commission’s mandate, set forth in Title VII of the Dodd-Frank Act, to put in place a rule set and oversight structure for the over the counter security-based swaps market.  Many have commented that the pace of the SEC rulemaking has been too slow, especially when compared to the reckless one set by the CFTC over the last few years.  Although it would be best for the markets and market participants to have clarity sooner rather than later, I believe the Commission’s deliberate pace is what allows us to produce high quality, thoughtful rules like the one we are considering today.  Of course, that would not be possible without the careful, intelligent staff that worked on this final rule. 

Title VII is of course just one significant feature of the Dodd-Frank Act.  Indeed, Title VII is illustrative of a fundamental flaw of Dodd-Frank.  Each Title of the Act purports to solve the financial crisis, without reference to either the actual causes of the crisis or the myriad solutions looking for problems in the other two thousand pages of the statute. 

To many of us who were in the trenches during the financial crisis, the Dodd-Frank Act was and remains a disappointment, focusing on outlier issues at the expense of addressing the primary causes of the financial crisis – for example, failed federal housing policy.

Indeed, just yesterday the Wall Street Journal noted that the price of synthetic bonds issued by Fannie Mae and Freddie Mac continue to reflect the “implicit guarantee” that they will ultimately be backed by the federal government.[1]  The systemic risk of Fannie and Freddie continues, yet their massive failures didn’t warrant mention in Dodd-Frank – I guess there wasn’t enough room given that Conflict Minerals in the Congo had to be addressed.  And while cronyism-corrupted federal housing policy persists, we are here today continuing our quest to implement the Rube Goldberg Machine mandates of Title VII. 

I do not mean to imply that the derivatives markets don’t warrant attention in any serious review of issues raised by the financial crisis.  Indeed, it was well known for years that the OTC derivatives markets were in need of greater transparency, in particular regulatory transparency.  The New York Fed, for example, pushed for voluntary disclosure of OTC derivative transactions a decade ago.  Ultimately, however, this push for voluntary disclosure proved insufficient, and the lack of understanding by regulators of the scale of derivatives positions held by major market participants fed into the interventionist ambitions of policymakers, as exemplified by the bailout of AIG. 

Title VII could have addressed the issue of transparency with a simple and clear mandate for regulatory reporting.  Such a mandate would have resulted in straightforward, smart regulation that we could have implemented four years ago.  But instead, we continue to expend our resources to establish an entirely new regulatory regime – for five percent of the derivatives markets mind you – with extensive registration and compliance requirements.  The rule we finalize today is rational and well-considered given the statutory mandate.  The Dodd-Frank Act, however, as exemplified by Title VII, is misguided and will continue to distract this agency and other important arms of the government for years to come if we let it.  

Again, I sincerely appreciate the hard work that the staff put into today’s final rules.  I support today’s recommendation and I have no questions. 

[1 John Carney, Freddie and Fannie Bonds Don't Share and Share Alike, Wall Street Journal, Jun. 24, 2014; available at

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