Swap Data Repositories, or SDRs, will-guess what-collect data. With Dodd-Frank, that OTC trading will be conducted on regulated exchanges-many on Swaps Execution Facilitates, or SEFs. OTC trading, however, accounts for upwards of $650 trillion! Off the chart again! That’s globally, to be fair, but a lot of it is here in the U.S. To put it in perspective, the CFTC previously regulated around $5 trillion in annualized trading on registered exchanges. After all, it was those very markets that were a major part of the problem that caused those two catalysts (that we discussed earlier) to react. Fortunately, Dodd-Frank has provided us with one. Well, for years hundreds of trillions of dollars’ worth of trading taking place in the over-the-counter (OTC) space was totally off the chart. What we can do is to summarize the types of things we are doing and put them into three categories: Transparency, Market Integrity and Accountability.ġ-Transparency: Has anyone heard of the Snellen Scale? It’s the eye chart you read when you visit the optometrist. So, now let me go through all 60 rules and show you how the observer effect has affected them-just joking. Whenever those things occur, rules and regulations are bound to change from those originally envisioned. Other agencies and even brethren regulators in other countries are consulted.
Public comments are collected from interested observers. First, the rules aren’t written in a vacuum. And what’s going on is influenced to a large extent by an observer effect. While it may not look like it, the Dodd-Frank implementation experiment is coming together a piece at a time. In financial reform too, there is an observer effect. It’s so small that it’s not even observable to us.īear with me. The mercury in the thermometer changes ever so slightly throwing off the result in a minuscule way. The same is true when you take your temperature. So do you get a perfect reading? It’s probably a very close reading but the observer effect prevents it from being perfect. If you go to check the air pressure in your tires-at least if you’re like me-it’s almost impossible not to let a little air out first when you put the gauge on the valve stem. Sometimes the very instruments used to observe something create the change. There’s a term in physics called the “Observer Effect.” Anybody heard of it? It refers to changes that the very act of observation causes when any phenomenon is being observed. Now then, maybe a little physics review is in order. One thing is for sure, all of these rules, these different experiments, are in one way or another, inter-connected, regardless of which agency is writing them. We at CFTC have done a little better with our experiments, having completed about two-thirds of our 60 rules. Of those 398 Dodd-Frank rules to be promulgated under the Act, only about 33 percent are complete. But there were 398 rules that needed to be put into test tubes and experimented with before they were deemed appropriate. I will be the first to admit to you that it’s been a slow process. Now scientists, I mean regulators, are in the process of implementing that financial reform. That fundamental economic force led to the creation of something novel: Dodd-Frank. It was an economic force that created havoc of which we’re still trying to pull our way out. Nine million people lost their jobs and millions more their homes. Taxpayers were stuck with a hideous bailout.
Institutions that were thought to be too big to fail-failed. Those two things together caused a reaction that created the economic chaos, our Great Recession. The catalyst for all that was two-fold, according to the congressionally established Financial Crisis Inquiry Commission, or FCIC: Regulators and regulation, or lack thereof and the captains of Wall Street who took advantage of the lax rules and regulations. We all know that in 2008, we began experiencing the most disastrous economic meltdown since the Great Depression-a colossal collapse. Maybe a little review will help set the stage for where we are. As part of that, we will of course want to talk risk-a reason you’re here at Risk USA.Īs we get started, I’ll remember Albert Einstein’s quote: “You do not really understand something unless you can explain it to your grandmother.” So, I’ll try to keep the science and the financial markets stuff pretty straightforward. Let’s talk about science as our guidepost for what’s going on with financial regulatory reform under Dodd-Frank-that is: the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Let’s do something a little unconventional this morning. Good morning! It’s good to be with you today. “The Observer Effect” Commissioner Bart Chilton’s Speech to Risk USA 2012, New York, NY
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