Senate Appropriations Committee
Subcommittee on Financial Services and General Government
The FY2017 Budget Request for the SEC and CFTC
Tuesday, April 12, 2016
Key Topics & Takeaways
- Swaps De Minimis: Sen. Moran (R-Kan.) sought insight regarding the CFTC’s treatment of the swap dealer de minimis threshold in light of directives from the omnibus spending bill, and whether the amount would be moved from the current level of $8 billion. Moran specifically expressed concerns regarding the timing of such action, noting market participants would need time to adapt and comply with any changes. Massad answered that the CFTC takes all directions from Congress seriously and explained that the CFTC has done a preliminary study the received many comments, and that a review of these comments will help it to make a final decision. Massad further noted that he does not wish market participants to face a “compliance cliff” and indicated the Commission would seek to give market participants clarity and sufficient time.
- Clearinghouse Recognition: Sen. Durbin (D-Ill.) stated that U.S.-based clearinghouses must apply to be recognized in Europe in order to continue providing services to European market participants, and this requires a determination by the European Commission that the SEC has an equivalent regulatory regime. He asked why the SEC is taking so long to finalize its covered clearing agency rules, given that standards were agreed to by foreign and US regulators four years ago. White said the proposal is on the SEC’s agenda for this year, and that the SEC has been in discussions with European authorities throughout the process to ensure that markets are not disrupted.
- Market Liquidity: White said the issue of market liquidity is a concern, and that regulators have been looking at what might be causing deterioration but that they have not come to conclusion that the Volcker Rule or other regulations have contributed to a decline.
In his opening statement, Chairman John Boozman (R-Ark.) stressed the responsibility of Congress to ensure that funds are spent wisely by the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC), and that he would be interested in hearing how the agencies plan to operate more efficiently. Boozman then listed a series of concerns he has with various rulemakings, including: 1) coordination with other U.S. regulators, self-regulatory organizations and international regulators; 2) the Department of Labor’s (DOL) fiduciary rule and its impact on retirement options for low- and middle-income Americans; 3) cybersecurity; and 4) regulators’ abilities to keep up with technological innovations such as high-frequency trading.
Ranking Member Christopher Coons (D-Del.), in his opening statement, commented that the “forecast” for providing the agencies with their requesting funding “does not look promising” as Congress considers competing requests for limited resources. However, he warned that it is critical that the regulators get the resources needed, especially as they try to keep pace with market innovations, build up information technology, and ensure strong defenses against cyber threats.
Mary Jo White, Chair, Securities and Exchange Commission
In her testimony, White said the SEC has made “great strides” to strengthen its operations and programs, and highlighted completion of Jumpstart Our Business Startups (JOBS) Act mandates, the near finalization of all Dodd-Frank Act mandates, and continued reviews of equity market structure, public company disclosure effectiveness, and the regulatory regime for asset managers. However, she stated that significant work and challenges remain with the growing size and complexity of the markets the SEC oversees, and warned that without the requested funds her agency will be unable to keep pace with its responsibilities.
Timothy Massad, Chairman, Commodity Futures Trading Commission
In his testimony, Massad discussed the CFTC’s work in overseeing markets and deterring fraud and manipulation while still encouraging innovation. He said the CFTC has worked to mitigate excessive risks by harmonizing rules for uncleared swaps with global standards and increasing international cooperation. He commented briefly on new challenges such as cybersecurity and automated trading before stressing the importance of adequate resources necessary to create and enforce sensible regulation. Massad said the CFTC’s budget today “is simply not adequate.”
Political Contribution Disclosures
Boozman noted that the 2016 omnibus spending bill included a provision prohibiting the SEC from using funds to finalize, issue, or implement any rule or order on the disclosure of political contributions. He asked if the SEC has taken any actions towards crafting such a requirement. White answered that this is not on the SEC’s agenda and it is not planning on doing anything in this space this year.
Coons asked what the SEC is doing to improve cyber defenses. White commented that there is no higher priority or longer-term risk than cybersecurity, and that this is emphasized in all its areas of jurisdiction. She specifically discussed undertakings such as Regulation SCI for exchanges, clearing agencies and alternative trading systems (ATS) to enhance their resiliency and responses to incidents, as well as the priority of adding enough examiners to look at regulated entities’ cybersecurity practices.
Massad added that cybersecurity is a top priority as the CFTC looks at registrants, exchanges and clearinghouses, and that it also working on rules to require cybersecurity testing by registrants and on principles-based requirements.
Coons asked if the agencies have enough resources to oversee and understand high-frequency trading. White said the SEC would have enough resources if its overall budget request is approved, and mentioned related initiatives in equity market structure and a rule against disruptive trading during periods of volatility. Massad said the CFTC does not have the resources to keep up with high-frequency trading and stressed the importance of greater investment in personnel and technology.
Swaps De Minimis
Sen. Jerry Moran (R-Kan.) recalled that the omnibus spending bill included language directing the CFTC to issue a rule setting the swap dealers de minimis threshold at $8 billion or higher, and asked if the CFTC intends to comply and issue an interim final ruling. Massad answered that the CFTC takes all directions from Congress seriously and explained that the CFTC has done a preliminary study the received many comments, and that a review of these comments will help it make a final decision.
Moran said the language was meant to give market participants some certainty that they would not be subject to an arbitrary and disruptive drop to the de minimis level, and asked if there is a timeline for the rule. Massad replied that the CFTC intends to finish its report in the “next few months” to put the agency in a position to take action if it decides to do so. He added that the current rule is set to automatically drop the de minimis level to $3 billion in December 2017, so there is still time to act. Massad expressed that it is not the Commission’s intention to created “compliance cliffs”, and that he wishes to provide market participants with clarity and time to come into compliance with any changes.
Impact of Regulations on Liquidity
Moran stated that market events, recent studies and current and former regulators have raised concerns about the deterioration of market liquidity and the impacts of new market and prudential regulations. He asked if White agrees with these concerns. White answered that the issue of sufficient liquidity is a concern, and that regulators have been looking at what might be causing it but that they have not come to conclusion that the Volcker Rule or other regulations have contributed to a decline. She also mentioned a report from British Columbia that did not find a link between new regulations and diminished liquidity.
Moran asked if there would be any benefit to pausing the regulatory process and assessing the impacts of rules already implemented. White responded that she would not advocate for such a pause, but that regulators should instead carefully study all their regulations as they are developed, which she said the SEC already does.
Sen. Richard Durbin (D-Ill.) stated that U.S.-based clearinghouses must apply to be recognized in Europe in order to continue providing services to European market participants, which requires a determination by the European Commission that the SEC has an equivalent regulatory regime. He asked why the SEC is taking so long to finalize its covered clearing agency rules, given that the international standards were agreed to by foreign and US regulators four years ago. White said the proposal is on the SEC’s agenda for this year, and that the SEC has been in discussions with European authorities throughout the process to ensure that markets are not disrupted.
Sen. James Lankford (R-Okla.) suggested that there is some confusion in the market about the timing and consistency of regulations for swaps and security-based swaps. Massad stated that the CFTC and SEC are working “very well together” despite having “different things on [their] plates,” which might be causing one regulator to move faster than the other. He stressed that they are working to harmonize capital rules, swap data reporting and clearinghouse regulation “as much as possible.” White agreed and added that the SEC as laid out the sequence in which it will adopt its rules to minimize market disruption, which has also allowed it to take cognizance of what the CFTC and foreign regulators have done in these areas and to make rules compatible and consistent.
Boozman asked for an update on the SEC’s Dodd-Frank rulemakings for security-based swaps. White said the SEC has finalized over half the rules, and those remaining have been proposed. She said the commissioners are prioritizing the completion of Title VII rulemakings to make the dealer and reporting regimes live by the end of the year.
Lankford asked if White has any concern that the SEC is moving towards taking more political positions because of pressure from Congress to require disclosures on issues such as climate change and guns. White answered that the SEC’s independence is critical, but that pressure from Congress is “part of the territory.” When asked specifically about the high costs of provisions such as the CEO pay ratio and the conflict minerals rules, White said the SEC tries to make rules as cost effective as possible, but that it has to follow congressional mandates.
Boozman asked what the CFTC is doing to make sure its position limits rule is workable for farmers, manufacturers and energy producers. Massad commented that the CFTC has worked to ensure that it is fully-educated on the concerns of all market participants, and explained that it is focused on the process by which exemptions are granted and other aspects such as deliverable supply estimates. He added that the goal is to complete the rules this year.
Boozman asked whether the SEC has any oversight over the budget and operations of the Financial Industry Regulatory Authority (FINRA). White replied that the SEC does not have authority over FINRA’s budget, but that it does work to ensure that it carries out its core mission. She added that is it up to Congress to decide whether the SEC should play a role in determining FINRA’s budget.
Boozman expressed concern about the DOL’s fiduciary rule, and asked where the SEC is in its own process towards crafting a rule. White said it is her belief that the SEC should promulgate a rule, but that she is “just one vote out of five.” She added that staff has been directed to work on a recommendation, but that this is a complicated process that will take time. White also stressed that if the rule ends up depriving low- and middle-income investors of access to retirement advice, the SEC will have failed in its objective.
For more information on this hearing, please click here.
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