Michael V. Dunn

Commissioner

Commodity Futures Trading Commission

Managing Counterparty and Systemic 

Risk Under Dodd-Frank

November 17, 2010

1
Introduction

 The CFTC and its Mission

◦ Prior to the Dodd-Frank Act

◦ After passage of Dodd-Frank Act

 International Coordination

◦ Financial Stability Board

◦ G-20 Seoul Communiqué

◦ IOSCO Task Force on Commodity Futures Markets

 CFTC Rule Making Process

◦ Deadlines

◦ Solicitation of Public Comments

◦ Implementation and Consultation

2
Commodity Futures Trading Commission 

Mission Statement

To Protect Market Users and the Public from 

Fraud, Manipulation, and Abusive Practices 

Related to the Sale of Commodity Futures 

and Options, and to Foster Open, 

Competitive, and Financially Sound 

Commodity Futures and Option Markets.

3
The Commissioners

 Gary Gensler – Chairman of the Commodity Futures Trading 

Commission

 Commissioner Michael V. Dunn – Chairman and Designated 

Federal Official of the Agricultural Advisory Committee 

(AAC) 

 Commissioner Jill E. Sommers – Chairperson of the Global 

Markets Advisory Committee (GMAC)

 Commissioner Bart Chilton – Chairman of the Energy and 

Environmental Markets Advisory Committee (EEMAC)

 Commissioner Scott D. O’Malia – Chairman of the 

Technology Advisory Committee (TAC)

4
The CFTC

Prior to the Dodd-Frank Act

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CFTC Mandate

 To Regulate Commodity Futures and Option 

Markets in the United States

 The CFTC enables the commodity futures 

markets to better serve their vital function in the 

U.S. economy by:

◦ providing a mechanism for price discovery and

◦ a means of offsetting price risks.

6
U.S. Futures Exchanges 2010

 CME Group 

 Kansas City Board of Trade

 Minneapolis Grain Exchange 

 InterContinental Exchange 

 One Chicago

 CBOE Futures Exchange

 Chicago Climate Exchange
Number of Registered 

Commodities Professionals

Type of Registered Professional Number in 2009

 Associated Persons (APs) (Sales) 51,921

 Commodity Pool Operators (CPOs) 1,277

 Commodity Trading Advisors (CTAs) 2,568

 Floor Brokers (FBs) 7,114

 Floor Traders (FTs) 1,447

 Futures Commission Merchants (FCMs) 166

 Introducing Brokers (IBs) 1,694

TOTAL 66,187

8
The CFTC

After the Dodd-Frank Act

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Objectives of Title VII

Reduce systemic risks by:

◦ Comprehensive regulation of swap dealers and major swap participants (i.e. 

persons other than dealers who may pose systemic risks)

◦ Clearing for standardized swaps

◦ Transparent trading of standardized swaps on regulated swap execution 

facilities, including real‐time reporting of transaction data

◦ Centralized repository for all swap data, available to all regulators

10
Structure of Title VII

 Title VII is divided into Subtitles A and B

 Part I of Subtitle A addresses the division of regulatory authority between the 

various regulators, and specifically resolves how the CFTC and the SEC may 

resolve differences between them as to the scope of their respective regulatory 

authorities. 

 Part II of Title A describes the authority of the CFTC over those transactions 

that it regulates, defined as “swaps” and “security‐based swap agreements”.

 Subtitle B describes the authority of the SEC over “security‐based swaps.”

 The provisions of Part II of Subtitle A and Subtitle B generally are parallel to 

each other. 

11
Clearing

 Title VII requires that the CFTC will, on an ongoing basis, 

review swaps and categories or classes of swaps with a 

view to determining whether clearing should be mandated.

 Factors to be considered include: the existence of 

significant outstanding exposures; trading liquidity; and 

the availability of appropriate operational expertise and 

resources. 

 Where the CFTC determines that a particular type of swap 

should be cleared but no clearing organization accepts the 

swap for clearing, the CFTC may investigate and take 

appropriate action.

12
End‐User Exception to Clearing

 The end‐user exception to clearing covers counterparties that: are not financial 

entities; are using swaps to hedge or mitigate commercial risks; and have 

notified the CFTC and/or SEC as to how they generally meet their financial 

obligations associated with non‐cleared swaps.

 The CFTC is directed to consider whether to exempt depository institutions, 

farm credit institutions and credit unions with less than $10 billion in assets 

from the financial entity category. 

 Where clearing is not required, the non‐swap dealer and non‐major swap 

participant counterparty may nonetheless elect to require that the swap be 

cleared. 

 The appropriate committee of a public company’s board or governing body 

must review and approve any decision to rely on an exemption from the 

mandatory clearing or exchange trading requirements.

 Special rules for affiliates.

13
Swap Data Repositories

 Title VII requires swap data repositories to accept data from swap 

counterparties, confirm the accuracy of that data and maintain the data 

pursuant to standards to be established by the CFTC, including direct electronic 

access to the CFTC and systems for monitoring and analyzing data and making 

information available to regulators.

 SDRs are required to register with the CFTC and make available on a 

confidential basis all data obtained by the swap data repository, including 

individual counterparty trade and position data, to each appropriate prudential 

regulator, the Council, the SEC, the DOJ, any other person that the CFTC 

determines to be appropriate, including foreign financial supervisors (including 

foreign futures authorities), and foreign central banks and foreign ministries.

 SDRs also are required to establish and maintain emergency procedures, 

backup facilities, and a plan for disaster recovery that allows for the recovery 

and restoration of its operations and the timely fulfillment of its responsibilities 

and obligations.

14
Title I ‐Systemic Risk Regulation

 Title I of the Dodd‐Frank Act creates the Financial Stability Oversight Council to 

serve as an early warning system identifying risks in firms and market 

activities, to enhance oversight of the financial system as a whole and to 

harmonize prudential standards across agencies. The new Office of Financial 

Research will serve as the information‐gathering arm of the Council.

 The Council is empowered to identify “systemically important” nonbank 

financial companies, thus bringing such companies under regulation by the 

Federal Reserve, and to recommend heightened prudential standards for the 

Federal Reserve to impose on these companies. The Council also has the power 

to recommend heightened prudential standards to primary financial regulators 

to apply to any activity that the Council identifies as contributing to systemic 

risk.

 The Council must seek to resolve supervisory jurisdictional disputes among 

Council members if certain conditions are satisfied, including at the request of 

an agency involved. Recommendations by the Council, to be taken by 2/3 vote, 

are not binding.

15
Financial Stability Board

 Established in 2009, after London G-20 meeting, to coordinate at 

the international level the work of national financial authorities 

and international standard setting bodies to develop and promote 

the implementation of effective regulatory, supervisory and other 

financial sector policies. 

◦ Comprised of 24 national authorities including all G-20 

members.

◦ Secretariat located in Basel, Switzerland

 Successor to the Financial Stability Forum (FSF), an international 

forum created in 1999 to enhance cooperation among national 

and international supervisory bodies to promote stability in the 

international financial system.

16
G-20 Seoul Communiqué 

 The G-20, which was established in 1999, brings together 

major industrialized and developing economies to discuss 

key issues in the global economy. It is the premier forum 

for international economic discussion on issues related to 

global economic stability.

 As chair, Korea hosted the Leaders’ Summit, comprised of 

the leaders of the G-20 nations, on November 11-12 and 

published a statement at its conclusion.

17
FSB and Systemic Risk

 Systemic risk continues to be a focus for the global 

financial regulatory community.

◦ In the Seoul Communiqué, the G-20 Leaders endorsed 

the Financial Stability Board’s (FSB) policy framework 

that will subject these systemically important financial 

institutions (SIFIs) to “liquidity surcharges, tighter large 

exposure restrictions, levies and structural measures.”

◦ By mid-2011 the FSB, along with national authorities, 

will identify globally-active SIFIs and plans to identify 

additionally requirements for these institutions by 

December 2011.

18
Over-the-counter Derivatives

 Market regulators also have been increasing their 

international coordination to limit the risk posed 

by the over-the-counter (OTC) derivatives 

market.

 At the 2009 Pittsburgh Summit, the G-20 

Leaders declared that all standardized OTC 

derivative contracts should be cleared through 

central counterparties by the end of 2012. 

Additionally, all OTC derivative contracts should 

be reported to trade repositories.

19
Commodity Price Volatility

 Volatile commodity prices increase uncertainly and could 

inhibit global economic recovery. 

 To combat this risk, the G-20 Leaders called on the IOSCO 

Task Force on Commodity Futures Markets, which is cochaired by the CFTC, to develop further work on the 

regulation and supervision of the commodity derivatives 

markets and to report to the FSB its next steps in April 2011. 

 Query – Is U.S. timeline to far in front of other regulators? 

20
International Cooperation

 CFTC has a long history of international 

coordination with foreign regulators

 This international outreach has intensified since 

the passage of the Dodd-Frank Act.

◦ Regular calls with European Commission directors to 

harmonize rules.

◦ Solicitation of comments on rules from the European 

Commission, UK FSA and Japan FSA. 

21
Memoranda of Understanding

CFTC has entered into:

 Regulatory memoranda of understanding (MOUs) with regulators in 

key major market jurisdictions. 

 Enforcement MOUs including the IOSCO Multilateral MOU Concerning 

Consultation and Cooperation and the Exchange of Information 

(2002) as well as bilateral MOUs with foreign regulators.

 Boca Raton Declaration on Cooperation and Supervision of 

International Futures Markets and Clearing Organisations (1996) -

Specifically for sharing information if certain triggering events occur 

that affect exchange members financial resources or large exposures.

22
Overview of the Dodd-Frank 

Rulemaking Process

23
General Requirements

 Some of the rulemakings are mandatory, some 

discretionary and joint with the SEC

 Some of the rules require coordination with 

other Federal regulators and some require 

consultation (e.g., consult and coordinate with 

the SEC, the Fed and the prudential regulators 

before commencing any rulemaking regarding 

swaps...)

24
Deadlines

 The rulemakings have various deadlines –the 

global deadline is 360 days after enactment.

 Some rules have a 90 day deadline, e.g., retail 

forex

 Some rules have a 180 day deadline, e.g., 

position limits for exempt commodities and 

conflicts of interest and governance

 Some rules have a 270 day deadline, e.g., 

position limits for agricultural commodities

25
Deadlines

 Some rules have a one year deadline, e.g., 

swap dealer and major swap participation 

registration

 The longest deadline for rulemaking is 24 

months for the joint recordkeeping rules under 

Title 2

26
Process

 Staff charted all the rulemakings from 

Dodd‐Frank 

 These rules were then clustered in 30 

groups 

 Each group was assigned a team leader

 Each team was then populated with 

appropriate staff from the Commission’s 

Divisions and Offices

27
MOUs, Reports, Studies

 Dodd‐Frank also requires the Commission 

to do more than just rulemakings

◦ 2 Memoranda of Understanding with FERC 

(avoiding conflicting and duplicative regulation 

and information sharing)

◦ 5 reports (e.g., abusive swaps, growth or decline 

of derivatives markets in the US and abroad)

◦ 6 studies (e.g., position limits, swap and clearing 

regulation in the US, Asia and Europe) 

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Solicitation of Public Comments

 Staff has created mail boxes for each of the 30 

rulemakings on the Commission’s web site to 

receive comments from the public on the 

rulemakings prior to publishing the proposed 

rules

 In addition, the Commission has issued a 

Federal Register release that also solicits 

comments from the public on the rulemakings 

prior to publishing the proposed rules

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Solicitation of Public Comments

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Implementing Dodd-Frank

 Two Principles We Are Following:

1. comply fully with the statute’s provisions and 

Congressional intent to lower risk and bring 

transparency to these markets

2. consult heavily with both other regulators and the 

broader public, including many participants in the 

futures markets

31
Consultation with Fellow 

Regulators 

 CFTC staff and Commissioners have had nearly 

200 meetings with our fellow regulators on 

Dodd-Frank implementation

 Consulting with international regulators to 

harmonize our approach to swaps oversight

32
Public Input

 Staff or Commissioners have at least 325 meetings with 

individuals from the public regarding swaps regulation

 Transparent rule-writing efforts

◦ Website postings of all meetings, participants, 

discussions, and materials received

◦ Publishing proposed rules

◦ To date - four public meetings regarding 17 proposed 

rules

◦ In total – there will be close to 100 proposed rules

33
Public Meeting 11/19

 The Commission will hold its 5th public meeting to 

implement rules pursuant to Dodd-Frank on November 

19th. The rules that will be considered include:

1. Swap data repositories;

2. Real-time public reporting of swap transaction data;

3. Data recordkeeping; and

4. Protection of collateral of counterparties to uncleared

swaps, and treatment of securities in a portfolio margining 

account in a commodity broker bankruptcy

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Conclusion

 Congressional mandate to establish rules to implement 

Dodd-Frank by July 15, 2011

 Two paths to follow:

1. Set an example for the rest of the world to follow by developing 

carefully crafted rules that address the abuses that led to the 

financial meltdown; or

2. Develop rules that are too timid to prevent another financial crisis 

or too restrictive and possibly drive business to less regulated 

markets.

 The choice is truly in the hands of the public. The 

Commission will not be making final decisions until the 

public has had the opportunity to comment on all of 

these rules.

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Thank You! 

Questions? 

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