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CFTC Chairman Previews Dodd-Frank Rulemaking

May 22, 2012

CFTC Chairman Gary Gensler testified today before the Senate Banking Committee. His prepared remarks provide the following insights regarding upcoming Dodd-Frank rulemaking.

Cross-Border Application. Citing AIG and JP Morgan, Gensler said that his agency’s rules for swaps will apply to the foreign subsidiaries and offices of U.S. banks. He noted that when AIG’s London-based credit default swaps (“CDS”) brought that company to its knees, it was the U.S. parent and the U.S. taxpayer who felt the pain. Similarly, although the “London Whale’s” CDS trades for JP Morgan occurred in London, it is the federally insured U.S. parent who will apparently absorb the billion dollar losses.

International Standards. Anticipating critics decrying a “go it alone” approach, Gensler noted the efforts of Japan and the European Union to adopt mandatory swap clearing and swap transparency rules. The CFTC’s timeframe for CDS clearing broadly aligns with both Japan and Europe.  According to Gensler, the international community is closely coordinating on margin requirements for uncleared swaps, and is on track to seek public comment in June on a consistent approach.

Central Clearing. CFTC staff is preparing recommendations on clearing requirement determinations. The first determinations will be published for comment this summer and hopefully completed this fall. They will begin with key interest rate products, as well as a number of CDX and iTraxx credit default swap indices. The CFTC will then consider a final rule on the implementation of the clearing requirement and the end-user exception related to non-financial companies.

Position Limits. Last week, the CFTC published a proposed rule that would modify the CFTC’s aggregation provisions for limits on speculative positions. The proposal would permit any person with a 10 to 50 percent ownership or equity interest in an entity to disaggregate the owned entity’s positions, provided there are protections and firewalls in place to ensure trading decisions are made independently of one another.

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