Derivatives Reform: Preparing for Change (CFTC’s Scott D. O’Malia)

This is a good speech that stresses balance, and does so quite neatly here:

Making the Intersection of Main Street and Wall Street Safer

I believe our challenge at the Commission is one of balance. We must develop regulations and market structures that achieve the primary goal of Dodd-Frank to reduce systemic risk within the financial system by improving transparency, competition, and open access, while still respecting the unique characteristics and preferences of the swaps market at the same time.

Picture a traffic intersection. At the center of the intersection is a traffic cop whose responsibility is to ensure that traffic continues to flow in all directions and, more importantly, that everyone—whether on foot or in an SUV—gets through safely and without incident. We are not here to stand in the middle of the intersection between Main Street and Wall Street and block it, because that would stop traffic—the flow of commerce in our markets—altogether. Rather, we must balance the needs of commercial end users and speculators, as well as the buy-side and sell-side, to make sure that everyone’s interests are protected and our markets continue to work properly to hedge risk and enhance price discovery.

This metaphor can also be applied to SEFs. SEFs will be the major intersections in the swaps market. In order to reach its overarching goal of maximum trading on SEFs, Dodd-Frank requires that multiple participants trade with one another on this facility to ensure that traffic flows without incident. It also requires both pre- and post-trade price transparency, so that everyone can watch where they are going and know where the best routes are. Our challenge is to make sure that our rules of the road create a trading environment that will attract liquidity and facilitate product standardization so that we can meet the goals of the Dodd-Frank Act and the needs of the industry. Failure to recognize important variables and the difference between types of asset classes and participants by trying to create a one-size-fits-all solution will set us up for just more failure.

Please read his speech in the link above from the CFTC website. It is a good speech, just as other grand speeches from regulators in the past were. The key will be to see the action after the speech, and the pace of that action.