Timothy Massad speaks before 30th annual ISDA meeting
Thank you for inviting me today, and I thank Eric for that kind introduction. It’s a pleasure to be here.
It is thirty years since ISDA was created, and thirty years ago I was a young associate at the firm that did the legal work to create ISDA. And at that time I got involved in a project that consumed the next couple years of my life. As some of you know, I was part of a small group of lawyers and bankers who drafted the original ISDA standard forms – a U.S. law form and a U.K. law version. There were endless meetings to try to get the two forms to be as similar as possible – a precursor of sorts to today’s cross-border harmonization efforts. Diane Genova, the treasurer of ISDA, was in all those meetings.
Ultimately we got the job done. And I don’t think any of us could have predicted just how important that process would be. Those forms, coupled with the other pioneering work done to create standards and consistency – such as the process for establishing that netting of swaps would be respected under bankruptcy law around the world – created a foundation for the growth of a global industry.
Back in those days, never would I have guessed that decades later I would be standing here, as the chairman of the regulatory agency with the leading role in regulating this market, a market that is now measured in the hundreds of trillions of dollars.
The timing of my remarks is also significant in another respect. In addition to this year being the thirtieth anniversary for ISDA, this year, and indeed this past Tuesday, marks the 40th anniversary of the CFTC. The agency was formed as a separate entity on April 21, 1975, having been part of the Department of Agriculture prior to that time.
The occasion of our 40th anniversary underscores the dedication and hard work of the agency’s staff. Needless to say, everything that our agency has accomplished is a credit to their tireless efforts. I also thank my fellow commissioners for their efforts, particularly their willingness to work constructively together. We may not always agree, but I know that we are all committed to making sure our markets continue to thrive and work for the many businesses that rely on them.
And while I am on the subject of cooperation and collaboration, I want to thank our regulatory colleagues in Canada. In particular, we have had excellent ongoing relationships with Louis Morisset and his staff here in Quebec, as well as Howard Wetson and his team in Ontario. And I also want to thank Howard for his work as a Vice-Chairman of IOSCO.
The derivatives markets have become integral to the growth of the global economy by enabling businesses of all types to manage risk. But as we learned in the fall of 2008, these markets can create significant risks as well. The build-up of excessive risks that were not well known or understood contributed to the intensity of the global financial crisis – the worst since the Great Depression – one that cost eight million Americans their jobs.
And so we are engaged in creating a new regulatory framework for that market, and we have made great progress. The percentage of cleared transactions in our markets has increased dramatically – from around 15 percent in December 2007 to approximately 75 percent today. This enables us to better monitor risk, as well as reduce it through compression and other efforts. We have implemented oversight of swap dealers. We have implemented a framework for making swap trading more transparent.
And through our data collection efforts, we know far more about what is going on in this market than we did at the time of the crisis. There is more work to be done in all of these areas, but I see many parallels to the securities reforms launched in the 30’s and 40’s, and I believe we will look back on our current reform effort similarly: that is, today as then, we are putting in place a sensible framework built on the principles of transparency and market integrity.
Our Priorities and Recent Progress
Today, I want to discuss some of the issues on our agenda for the months ahead. Let me summarize some of our priorities briefly and then turn to some specific issues. First, we have been fine-tuning our rules in a number of areas to address concerns of commercial end-users, because it is essential that, as we implement this new framework, commercial companies can continue to use the derivatives markets effectively to hedge commercial risk. This has included adjustments to reporting requirements and measures to facilitate access to these markets by end-users. We will continue to look at these types of issues in the future. A second priority has been to finish the few remaining rules mandated by Dodd-Frank, such as margin and position limits.
We are also focused on harmonizing rules with other regulators – domestic and international – as much as possible. We are working hard on improving and standardizing the data collection and analysis efforts as well.
And we remain committed to a robust enforcement and compliance program to prevent fraud and manipulation.
This has been an active week for the CFTC. Just this morning, the agency along with our colleagues at the Department of Justice, the Financial Conduct Authority and New York’s Department of Financial Services announced a settlement with Deutsche Bank over charges of manipulating their LIBOR submission. With today’s action, the CFTC has imposed over $4 billion in penalties against 13 banks and brokers to address LIBOR and FX benchmark abuses. Today’s settlement also represents the highest fine in the agency’s history.
In addition, earlier this week, the Commission and the Department of Justice brought civil and criminal charges against an individual whose actions we believe contributed to the market conditions that led to the flash crash of 2010. We worked closely not only with the Justice Department, but also the FBI, the U.K. Financial Conduct Authority and Scotland Yard on this case. As these cases illustrate, we will do everything in our power to pursue those who attempt to engage in fraud or manipulation in our markets. There is nothing more important than the integrity of our markets.
Let me turn now to highlight a few of the items on our agenda for the coming months in two categories: issues pertaining to clearing and risk, and those pertaining to trading.