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Dissenting Statement at Open Meeting Concerning Rules Regarding Security-Based Swap Data Repositories and Regulation SBSR

Commissioner Michael S. Piwowar

Jan. 14, 2015

Thank you, Chair White.

The global financial crisis revealed the alarming fact that regulators tasked with oversight of our largest financial institutions did not possess even the most basic data related to the derivatives exposures and vulnerabilities of many entities. This lack of regulatory transparency — quite unfortunately — contributed to flawed analyses, false narratives, and costly taxpayer bailouts. There is obviously an important cautionary lesson to be learned.

Many of the provisions in today’s rulemakings are intended to address this data deficiency by providing much-needed and long-awaited regulatory transparency, as well as public transparency, to the security-based swap market. I would like to join my fellow Commissioners in thanking Staff for their hard work developing these important rules.

It is my strong support for regulatory and public transparency in the security-based swap market that gives me such great disappointment with the rules we are voting on today. Data is by its nature non-ideological, which is what makes it such an effective tool in analyzing regulatory decisions that are too often subject to political forces. I had hoped that these rules would likewise reject ideology and instead reflect a straightforward application of our statutory mandate. Apparently, that was too much to ask.

My frustration stems primarily from the fact that I largely supported the rules originally circulated by SEC Staff for consideration by the Commission. Those initial recommendations were the result of thoughtful, independent staff analysis and reflected a firm grasp of the likely impacts on the market participants we regulate and the markets generally. However, a number of deeply troubling changes were made to the rules after they were sent to the Commission. As the rules were being refined based on Commissioner input, compromise was rejected. The majority of the Commission chose to skew the rules to achieve a specific ideological outcome. These alterations to the Staff position led directly to my dissenting votes today.

* * *

The security-based swap data repository (SDR) rulemaking in particular was subjected to many misguided, Commissioner-driven changes. For example, in the last few days a new provision was added to the SDR rule under the pretense of “cracking down” on individuals that mislead or lie to an SDR’s chief compliance officer (CCO). While we can all agree that lying to a CCO is reprehensible behavior that should not be tolerated, the broad and imprecise language in this provision does nothing to bolster effective compliance. In reality, it merely creates heightened liability and uncertainty for individuals associated with SDRs based on their interactions with a CCO, which is neither necessary nor appropriate in the public interest.

The true impact of a “lying to the CCO” provision is that it will chill communication between the CCO and others at the SDR if they fear that their communication with the CCO may subject them to liability. The SDR rules before us today already include a mechanism to prevent lying, without creating the problems of a “lying to the CCO” provision. Specifically, the conflicts of interest requirements set forth in the rule are sufficient to address concerns about the quality of information provided to the CCO. For example, to mitigate potential conflicts of interest between the CCO and its officers, directors, or other employees of the SDR, the SDR could consider prohibiting, in its policies and procedures, such officers, directors, or employees from directly or indirectly influencing the CCO in the performance of the CCO’s responsibilities or from requiring the CCO to make any changes to the SDR’s annual compliance report.

The rationale I have just provided should sound incredibly familiar to my fellow Commissioners, because they have already seen it. It is the exact same explanation that was provided by Staff in the draft release they circulated to the Commission. After careful consideration, Staff had deliberately rejected incorporating a “lying to the CCO” provision, which had been suggested by a single politically-connected commenter whose views are often described as extreme and irrational. Staff had articulated why this provision was not only unnecessary given the protections in other SDR rules, but actually harmful to an SDR’s compliance programs. What now appears in the SDR rule being adopted is a provision unsupported by a reasoned analysis.

I recognize that “being tough on liars” is good headline material, but such a simplistic view does not make good policy. As Commissioners we are called to look beyond headlines and to understand the real effects our decisions will have on market participants and the economy as a whole. Unfortunately, the majority of the Commission is simply choosing to look tough at the expense of regulating well.

This type of unwarranted shift is not limited to the SDR rulemaking. The rules on security-based swap data reporting and dissemination (Regulation SBSR) also changed over the past few days in ways that I cannot support.

For example, the draft that Staff formally circulated to the Commission would not have mandated the use of “legal entity identifiers” (LEIs) for market participants that had not previously purchased them from an internationally recognized standards-setting system approved by the Commission.

I concur with this approach, which was developed by Staff in the Division of Trading and Markets, and agreed upon with the Division of Economic and Risk Analysis and Office of the General Counsel, as well as the Chair’s office. However, this provision changed dramatically after Commissioner input to the point that it now requires all U.S. persons engaged in security-based swap transactions to obtain, and thus pay for, an LEI, regardless of their size or the limited nature of their security-based swap activities. I will not support this overly broad approach and its failure to calibrate our rules for different types of market participants.

There are legitimate arguments in favor of having a single, uniform set of LEIs for all security-based swap market participants. However, I have not heard any convincing reason that providing relief from this mandate for commercial end-users would in any way compromise regulatory transparency or limit our ability to provide effective oversight of this market. In fact, even with an exception for commercial end-users, the overwhelming majority of security-based swap data would be reported with uniform LEIs, including those of all major market participants. In addition, we would still have all security-based swap data for commercial end-users reported to us with a unique identification code for each entity, even if such entities chose not to pay for an LEI from the global standards-setting system approved by the Commission.

Moreover, the absolute requirement for use of LEIs is emblematic of a policy approach that ignores the ever-increasing burden of regulation. Rather than appropriately calibrating our rules, such as by focusing on regulated entities, the majority of the Commission is voting in favor of blanket rules covering all market participants and dismissing commercial end-user concerns on the basis that they are not really that costly on an individual basis. I cannot support this type of inflexible approach that ignores the distributional effects of our regulations.

Apparently, an overwhelming bipartisan majority of Congress agrees that we should be particularly sensitive to effects of regulation on commercial end-users. Last week, 93 (93%) U.S. Senators and 416 (96%) U.S. Representatives voted for a bill that that includes language exempting commercial end-users from having to post margin on the derivatives transactions they use to hedge their unique business risks.

CFTC Commissioner Chris Giancarlo, in response to a question about his recent tour to meet end-users in Indiana and Kentucky, said it best when he stated: “It just reminded me that with every rule we write, every firm we audit and every investigation we undertake, there is a real person and a real market participant at the other end. We need to bear in mind that these are not just markets for traders, exchange operators and clearing houses. They are markets for real people trying to hedge real risk and control their costs. So it is vital to keep that in mind as we put out new rules.”[1] The majority of the Commission seems to have forgotten this point, and too often proceeds as if our rules will only impact the largest financial firms.

* * *

Let me be clear. I am not suggesting that it is inappropriate for Commissioners to seek to make changes to original Staff drafts. In fact, I myself raised a number of questions about certain provisions that were included in the drafts that were formally circulated to the Commission. As Staff well knows, I had strong reservations about the prescriptive nature of the governance provisions in the SDR release, as well as the requirement that CCO compensation, appointment, and removal require the approval of the majority of the SDR’s board.

Concerns about these issues have been apparent from the early days of the SDR proposal, as they were highlighted by former Commissioner Kathy Casey in her statement at the open meeting where these rules were proposed.[2] None of these problematic provisions were part of our statutory mandate under the Dodd-Frank Act, and I do not believe that the concerns first raised by Commissioner Casey at the proposing stage have been sufficiently addressed. Yet in an effort to compromise, I expressed my willingness to support the SDR rulemaking if reasonable changes were made to these provisions. However, not only were my comments rejected, but the Chair allowed even more objectionable provisions to be added to successive drafts.

Ultimately, what I object to in the rulemakings before us today is not that changes were made, but that reasoned positions were jettisoned in order to achieve ideological ends without sufficient justification. Certain Commissioner’s views were accommodated without regard for the impact they will have on our regulated entities, as well as the markets. The failure to acknowledge the real-world implications of our security-based swap rules will inevitably impair their effectiveness and could ultimately compromise the entire regime.

We are a long way from the end of our journey to finalize rules governing the security-based swap market. My hope is that we will learn from the mistakes that resulted in today’s divisive vote, and that future security-based swap market rulemakings will reflect common sense, cooperation, and compromise, rather than irrationality, inflexibility, and ideology.

Thank you. I have no questions.

[1] Alexander Osipovich, ‘Over-broad’ CFTC rules hurt end-users, Giancarlo says, (Jan. 7, 2015), available at (subscription required).

[2] See Commissioner Kathleen L. Casey, Speech by SEC Commissioner: Security Based Swap Data Repository Registration, Duties and Core Principles and Regulation SBSR-Reporting and Dissemination of Security-Based Swap Information (Nov. 19, 2010), available at

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