Washington, DC – Michigan Senator Debbie Stabenow, Chairwoman of the U.S. Senate Committee on Agriculture, Nutrition and Forestry, today said as new rules are written for the swaps market, she’s committed to using her position to make sure the rules protect against crises like the market meltdown that left 8 million Americans jobless. Stabenow made the comments during a forum sponsored by Managed Funds Association (MFA), Institutional Investors and The Depository Trust & Clearing Corporation (DTCC).
“As we look back at what brought us here, there’s no question that the system, as it existed prior to reform, was broken. Eight million Americans lost their jobs because of reckless and irresponsible behavior,” Chairwoman Stabenow said. “My position is pretty simple – fix what’s broken. We know that despite the few bad actors who abused the system, derivatives play an important role in our global economy. More than 38 million Americans, many of them in Michigan, work at companies that use derivatives to legitimately manage their risk and many more, from pensions to municipalities, use them to protect against market volatility.”
Stabenow underscored the Committee’s jurisdiction in overseeing Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and reinforced her commitment to making sure reforms encourage job growth and much-needed investment.
Chairwoman Stabenow’s full remarks, as prepared for delivery, are below.
Thank you to everyone for coming out today to this forum to listen, learn, and participate in the very important dialogue that is taking place regarding our financial markets.
There is no question that DTCC is an important leader in these discussions and will be instrumental in achieving the transparency so vital to the success of regulatory reform. I am honored to be here today as the Chairwoman of the Senate Committee on Agriculture, Nutrition, and Forestry, the CFTC’s authorizing committee, and as a Senator who has been actively involved in Title VII.
As we look back at what brought us here, there’s no question that the system, as it existed prior to reform, was broken. 8 million Americans lost their jobs because of reckless and irresponsible behavior.
Bets and side bets were made on shaky assets; companies bet against their own clients – and the result was not only a failure of our financial markets, but a very real crisis of confidence that our markets themselves were not to be trusted.
My position is pretty simple – fix what’s broken. We know that despite the few bad actors who abused the system, derivatives play an important role in our global economy. More than 38 million Americans, many of them in Michigan, work at companies that use derivatives to manage their risk and many more, from pensions to municipalities, use them to protect against market volatility.
This is truly a historic time - the decisions made in the coming months will shape the derivatives regulatory landscape and global financial markets for decades to come. We can’t take this responsibility lightly. The Dodd-Frank Act was significant, fundamental reform. As the rules get written and as we move towards the “new normal” for the swaps market, I am committed to using my position to get the rules right. I hope that you will help me get there.
Oversight of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act is as important as any part of our responsibility on the Agriculture Committee – and I say that as we are about to write a new Farm Bill. But the agriculture community knows better than anyone about the importance of managing risk and of functioning markets.
Last year, Congress passed the Dodd-Frank Act to address the abuses in these markets and to give significant authority to regulators to prevent future crises. During that debate, I fought to ensure that the bill preserved the ability of American farmers, co-ops, manufacturers, utilities, and businesses to use derivatives to hedge legitimate business risks. These companies use derivatives to protect themselves from fluctuating currency exchange rates, interest rates, fuel prices, and commodity prices. This risk protection provides companies with the certainty to grow and create jobs.
While Congress greatly expanded the authority of the agencies, it also came with the understanding that they must take a thoughtful, cautious approach that reflects Congressional intent.
This includes following Congressional intent to protect end-users from burdensome margin requirements, which if imposed, would divert much-needed capital from investments and job creation.
Congress empowered end-users in other ways than just an exemption from clearing commercial hedges – we provided more choices for clearing, gave end-users more power with their swap dealer counterparties, protected proprietary information and existing contracts, maintained flexible credit arrangements, and preserved the use of non-cash collateral for margin.
Most importantly, we increased transparency in these markets. Transparency will provide important market and pricing information to buy-side firms; it will protect the integrity of these markets; and simply put, it levels the playing field.
Congress also protected customized contracts. While many contracts are standardized, liquid, and can easily be cleared and traded on a regulated platform, many other contracts are genuinely customized and not suited to this model. I felt it was important that we preserve the ability of market participants to tailor contracts to their unique business needs.
Given the strong legislative intent, the regulators still have broad new authorities, and the devil is in the details. While the regulators are thoughtful and dedicated to getting this right, they need to hear from market participants in order to get there.
The agencies, from the Fed to the SEC to the CFTC, need to hear about the costs and benefits associated with reform.
They need to hear specifics from your best technical experts.
They need to know if they are writing regulations too broadly or unintentionally pulling some market participants into the definitions.
They need to hear from you about how rules like those pertaining to Swap Execution Facilities and Swap Data Repositories could alter our markets and impact the relationship between the buy and sell sides.
And they need to know how and why real-time reporting or block-trading rules written incorrectly could harm liquidity.
Again, Dodd-Frank was fundamental, necessary, historic reform. But as we move towards a “new normal,” you need to work with the regulators, reiterating the message that these markets must function globally and that the new swaps regime must mitigate risk, not create it.
At my hearing on March 3, I asked Chairmen Gensler and Schapiro that they consider how new rules will fit together in a way that makes sense for the markets; whether that is phasing-in implementation or carefully sequencing the rules.
As you all know well, Chairman Gensler has stated publicly and in writing that he is going to do just that – he will use his authority given to him in Dodd-Frank to phase-in the final rules in three tranches and sequence those rules in a way that makes sense for the market.
I want to make sure that when these rules go live, the market infrastructure is in place, the technology is ready, and the market participants are able to meet the requirements of this law. The new accountability and transparency we have created is clearly in the public interest, and the most important thing is to get it right.
And we won’t get it right if the agencies don’t have the tools they need to do the job. Underfunding regulators that have just been given significant new authorities will pull staff away from the important tasks of registering participants, approving products, and regulating the markets, which may create more uncertainty and could actually harm competiveness.
These are dynamic, diverse markets, and we need to provide as much certainty as possible.
I look forward to working with everyone in this room, market participants, my colleagues in the Senate, and the regulators to make sure we get the implementation of these reforms right to protect our system from another crisis, while maintaining the competiveness of U.S. businesses and financial markets.
As a leader in the global financial markets, it is important for America to lead on strong, meaningful reform. But we need to be mindful of European and Asian regulatory reform efforts and not get too far ahead. The last thing we want to do is harm liquidity, dry up capital, or drive regulated markets out of the United States.
Given the potential unintended consequences, we are left with a fundamental question - how do we strike the right balance? Discussions with market participants and policymakers will help us find the answer. This is truly a historic moment and our conversations and comments matter more than ever. I look forward to working with you to help us define the new normal.