SEC.gov

Jun 30, 2023

Commissioner Jaime Lizárraga

June 7, 2023

In January 2011, the Financial Crisis Inquiry Commission, created by Congress to examine the causes of the 2008 financial crisis, issued its final, comprehensive report. That report delved into the outsized role that the unregulated swaps market played in causing the crisis and in destabilizing our financial system. A combination of virtually non-existent regulation and the glaring absence of any market discipline in the swaps market contributed significantly to market failures that necessitated massive taxpayer bailouts.

As the report explains, one type of swap -- credit default swaps, or CDSs -- facilitated the sale of complex financial products like synthetic collateralized debt obligations, or CDOs, which fueled the securitization pipeline in risky subprime mortgages. The accumulation of risk in these synthetic CDOs, the report concluded, "amplified exposure to losses when the housing market collapsed." Meanwhile, credit rating agencies, in one of the most noteworthy failures of gatekeepers in recent history, awarded the highest credit ratings to many of these complex and risky assets.

These assets, in turn, ended up on the balance sheets of many systemically important institutions. Banks in particular benefited from internationally-recognized capital standards that allowed for more favorable treatment to mortgage and mortgage-based assets, especially if these banks hedged their credit or market risks with unregulated swaps. The results, as the Financial Crisis Inquiry Commission documented so well, were catastrophic. The taxpaying public was placed in the unfair position of bearing the high costs of cleaning up a mess they did not cause.

To reduce the risk to our country of such costly failures, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. One key provision of the Act required the Commission to establish a robust framework to oversee security-based swaps more effectively.

To that end, the Commission is adopting a final rule to prevent fraud, manipulation, and deception in connection with security-based swaps. The Commission is also adopting a final rule that prohibits any person at a security-based swap entity from taking any action to interfere with or coerce the chief compliance officer, or CCO. Taken together, these rules will improve accountability, address misconduct, and promote compliance in the security-based swap market.

Although the anti-fraud and anti-manipulation portions of these final rules are vital, the Commission is also taking an important step to preserve and protect the integrity of CCOs at security-based swap entities.

As gatekeepers, CCOs have an important role to play in ensuring compliance with the federal securities laws. The integrity of the swaps market depends on CCOs being able to perform this role free from coercion, threats, manipulation, and any other form of undue interference. By prohibiting personnel of a security-based swap entity from taking any action, directly or indirectly, to improperly influence CCOs in the performance of their duties, the final rule accomplishes this goal.

I am pleased to support today's Commission action to adopt these rules in final form. In doing so, we will strengthen the security-based swap markets, improve accountability, deter misconduct, and fulfill our mission to promote fair and transparent markets.