“Five years ago the swaps market contributed to a financial system failing corporate America and the economy as a whole,” Gensler said.
“AIG’s downfall was a clear example of what happens with such limited oversight,” he added.
The Dodd-Frank financial reform law, signed in the wake of that crisis, called for new rules to govern the derivatives market, and gave the CFTC new authority to write rules for the sector.
Those changes, Gensler said, have brought new transparency and accountability to the market.
An important component of those reforms go into effect on Oct. 2, when the agency’s rules will require derivatives traders to use specific execution systems routed through central clearing houses instead of private markets.
“Clearing houses lower risk to the financial system,” Gensler said on Friday. “It’s a better way than leaving all these trades bilaterally to the banks.”
Despite its greatly expanded oversight, though, Gensler said that his agency was still sorely lacking the funds to be as effective as it could be.
“The CFTC is currently an underfunded agency,” he said, noting that the number of people on staff “is not much different that we were 20 years ago.”
“Without sufficient funding the nation cannot be assured our agency can closely monitor for the protection of customer funds and utilize our enforcement arm to the fullest extent to go after bad actors,” he said.
Earlier this week, the CFTC fined a British derivatives broker $65 million for rigging the London Interbank Offered Rate (LIBOR), an interest rate that institutions use around the globe.
That rigging, Gensler said, “once again shows how LIBOR has been and can be readily and pervasively rigged,” and should spur the need to make sure those rates function effectively.
“I believe that we must ensure that these benchmark interest rates have market integrity, the same way we have to ensure market integrity for everything else in the securities and derivatives markets.”