Thank you, Chair White.
I want to start by thanking staff for their hard work on these
releases that would establish new requirements for risk management,
operations, and governance of certain registered clearing agencies and
propose amendments to our clearing agency definitions. Clearing
agencies are vital pieces of our market infrastructure, and their role
in the financial markets is only increasing. That is why I want to
express my particular appreciation to the staff for the thoughtful way
in which they have developed these requirements, which are based on our
history of experience regulating clearing agencies, applicable
international guidance, and feedback from market participants and other
regulators. This was no easy task, and the quality of these
releases is a testament to your efforts.
The topic of clearing agency oversight has been dominated as of
late by the Principles for Financial Market Infrastructures ("PFMI"),
developed under the auspices of the Committee on Payment and Settlement
Systems and International Organization of Securities Commissions.
[1]
Around the world, regulators are being pressured to conform to these
standards. It must have been tempting for staff to merely seek to
codify the PFMI and then congratulate themselves for a job well
done. This would have been the easy approach, but it would have
been the wrong approach. Simply porting over international
standards would have failed to fully account for the agency's obligation
to regulate these entities under the mandates of the Securities
Exchange Act of 1934, and ignored the unique perspectives we have gained
through years of supervision in this area.
I support both the adopting and proposing releases we are voting on
today because they reflect a staff decision to not take the easy way
out. Rather, they correctly seek to establish effective regulation
tailored to the Commission's unique mandate and experiences, while
creating a regulatory structure that is consistent with the PFMI.
The tremendous pressure to align our rules with the PFMI throughout
this rulemaking process brought to my mind another situation in which
the Commission acted based on pressures from international prudential
regulators. In 2004, the Commission adopted rule amendments to the
broker-dealer net capital rule that established the consolidated
supervised entity ("CSE") program.
[2]
This program was implemented in response to international
developments in prudential regulation. As a result of these
developments, affiliates of certain U.S. broker-dealers that conducted
business in the European Union ("EU") needed to demonstrate that they
were subject to consolidated supervision at the ultimate holding company
level that was "equivalent" to EU consolidated supervision.
[3] The CSE program was intended to meet that standard.
The Commission's faithful implementation of the CSE program,
however, could not compensate for the fundamental flaws in the
international prudential regulatory framework – the so-called "Basel
Accord" – that led to the global financial crisis. In the
aftermath of the financial crisis, the same prudential regulators who
pressured the Commission into submitting to the "Basel Accord" spread a
variety of false narratives blaming the CSE program for the financial
crisis rather than acknowledging their own failures.
[4]
Like the CSE program, the Commission has once again been called
upon by the international regulatory community to implement new
regulations aimed at addressing risks in the financial system, this time
related to clearing agencies and other financial market
infrastructures. And again, we have acted in a manner consistent
with those standards, as have the Commodity Futures Trading Commission
("CFTC") and Federal Reserve. I can only hope that history will
not repeat itself and we will not once again be left defending a
regulatory system that was doomed from the start.
I have said many times that the current state of central
counterparty clearing agency ("CCP") regulation is one of the things
that keeps me awake at night. To be clear, that is not because I
question the abilities of our staff at the Commission, or the usefulness
of the enhanced rules in today's releases. I know that we have an
incredible team of people working day and night to supervise these
entities, and I credit staff for their careful consideration of how our
new rules can best address risks to the clearing system.
Unfortunately, I am concerned that our best supervisory programs cannot
overcome bad policy decisions.
In early discussions surrounding post-crisis financial reform,
Dodd-Frank Act policy-makers settled on CCPs as a near-miraculous way to
address risk in the financial system. For example, former CFTC
Chairman Gary Gensler said "By guaranteeing the performance of contracts
submitted for clearing, the clearing process significantly reduces
systemic risks."
[5]
Soon policy-makers began to view these long-standing cogs in the
market infrastructure as giant black boxes that took in risk, and then
poof, magically eliminated it from the system. With this
simplistic view of the markets in hand, policy-makers then determined
that the most effective way to address risks in the system was to cram
as many transactions as possible into CCPs via the Dodd-Frank Act's
extensive clearing mandate. For example, former Treasury Secretary
Tim Geithner said "We will
force all standardized OTC derivative contracts to be cleared through appropriately designed central counterparties."
[6]
[Emphasis added.] Thus, in an effort to reduce risk to the
financial system, Dodd-Frank Act policy-makers jammed more and more
increasingly risky and complex financial products into these critical
infrastructures.
Not surprisingly, it did not take long for market participants and
regulators alike to recognize that in their efforts to reduce systemic
risk, the Dodd-Frank Act did the exact opposite. It created an
entirely new class of too-big-to-fail entities with the power to bring
down the entire financial system. This fact is openly acknowledged
in the two releases we are voting on today, and is never far from my
mind when I consider the Commission's uphill battle to oversee CCPs
operating under ill-conceived government clearing mandates.
While I believe that staff has done an admirable job setting up a
principles-based framework for CCPs to manage these risks to the best of
their ability, I still fear that ultimately these entities, and the
international norms designed to mitigate their risks, will not be able
to account for the short-sighted effort by those in Congress and the
regulatory agencies that sought to cram as much risk as they could into
these entities.
I support today's adopting and proposing releases as the best
approach we currently have at setting heightened standards for the
clearing agencies we regulate. However, this entire effort has the
eerie feeling of re-arranging deck chairs on the Titanic. I hope
that history will prove me wrong, but I fear that the Dodd-Frank Act has
created too many icebergs for our financial system to safely navigate.
Thank you. I have no questions.
[1] See
Committee on Payment and Settlement Systems and International
Organization of Securities Commissions, Principles for Financial Market
Infrastructures (Apr. 2012),
available at http://www.bis.org/publ/cpss101a.pdf.
[4] See
Speech by SEC Staff: Remarks at the National Economists Club: Securities
Markets and Regulatory Reform, Erik Sirri (Apr. 9, 2009),
available at https://www.sec.gov/news/speech/2009/spch040909ers.htm and Andrew W. Lo, Reading about the Financial Crisis: A Twenty-One Book Review, Journal of Economic Literature, 50(1): 151-