On March 14, the House Agriculture Committee held a hearing titled “Examining Legislative Improvements to Title VII of the Dodd-Frank Act” to put pressure on the Commodity Futures Trading Commission (CFTC) to satisfy the demands committee members are getting from their constituents to be held harmless from the ongoing, seemingly interminable process, now in its third year, of promulgating regulations under the derivatives title of the Dodd-Frank Act.
The hearing was originally scheduled to be held the previous week, but was postponed due to a forecast generated by an obsolete weather model for significant snow in the capital that did not materialize.
In his opening statement, Committee Chairman Frank Lucas, R-Okla., announced that he is preparing a legislative package of provisions to respond to complaints regarding the rising costs and complexity of the pending rules for farmers, ranchers, rural electric cooperatives and other businesses that use derivatives to hedge their operations. Lucas said he is working with a bipartisan coalition from the Agriculture and Financial Services committees to prepare this bill for possible introduction after the spring recess.
In his response, ranking Democrat Collin Peterson from Minnesota, who was previously chairman of the committee and led the drafting of the House provisions of title VII, urged Lucas to give the CFTC more time to do its work during the summer and wait for the farm bill to be done, then take up any needed legislative fixes as part of the scheduled reauthorization of the CFTC. In any case, he confidently predicted that the Senate would not act on whatever legislation the House passes.
Lucas seems determined to ignore Peterson’s advice, because the sponsors of the draft legislation are eager to show their constituents that they will advocate the positions of the various interest groups, no matter how irrational, before the beleaguered and dysfunctional financial regulators.
CFTC Chairman Gary Gensler’s testimony was followed by a panel representing the groups that are fueling the legislative movement with position papers and political contributions. This article will discuss Gensler’s testimony, and the next article will report on the panel. The theme is that this regulatory process remains stalled, and all of the parties involved are seeking to gain some short-term advantage from the stalemate, if only to keep the various trade groups engaged.
At the risk of getting mired in the jargon of the debate, three issues illustrate why the process of implementing Dodd-Frank is proving to be so protracted and difficult:
1. Crossborder application. As was the case with previous hearings by the House Financial Services Committee and the Senate Agriculture Committee, legislators have been hearing from foreign bankers and regulators about how the Dodd-Frank rules could affect foreign banks operating in the United States and U.S. banks operating abroad. Gensler has warned that it is necessary to control the risks associated with these activities, because when trades go wrong, the risk migrates back to the United States, regardless of where the trades take place.
He tried to assure legislators that he is working with foreign regulators to arrange for so-called “substituted compliance” where foreign regulation is equivalent to that of domestic regulators. However, interest group constituents are impatient for action.
2. Residual risk. The CFTC has proposed regulations to deal with intraday imbalances in customer accounts to provide reassurance that accounts of customers with positive balances are not being raided during the day to support deficits in the accounts of other customers. This protection will require the posting of margin to offset this intraday risk. Gensler has testified that the Commission has received about 125 comment letters from the industry complaining about the costs of customer protection measures.
In his appearance before the Senate Agriculture Committee, he appeared a bit astonished at the pushback he was getting from firms that engage in this movement of customer funds during the day. This is a very complicated issue, and the debate is certain to become more heated whenever the Commission adopts and seeks to implement a final rule.
3. Cost/benefit analyses. Whenever industry groups complain about increased costs, it has become standard practice to add a complaint that the Commission has not conducted adequate analyses of the costs and benefits as required by statute and an executive order. One of the Commission’s regulations has been rejected on this ground, and the conservative D.C. Circuit’s receptiveness to this argument has encouraged industry groups and Republican commissioners to be even more aggressive in making it.
Democrats respond that the costs of the 2008 financial crisis episode in terms of lost jobs and asset values also need to be considered. This presents yet another complication in an already difficult process in implementing Dodd-Frank rules in the face of determined industry opposition.
I have predicted from the outset that the Dodd-Frank Act would prove to be yet another example of legislation that was supposed to put an end to the support of failed banks and policies but ultimately would not be implemented. After every episode, some landmark bill was enacted, but the crisis has proceeded apace.
Unfortunately, Dodd-Frank is proving to be another flawed product, and even the useful provisions it contains are unlikely to be implemented. The industry has switched its strategy from one of insincere apology in the immediate wake of the 2008 episode to one of presenting the financial industry as the victim of the crisis and of zealous regulation that threatens economic growth.
Accordingly, the outlook is for the battle over Dodd-Frank implementation to continue, as Congress joins the industry in opposing implementation of the legislation Congress itself enacted. Meanwhile, the 2008 episode continues to fester in the background, masked temporarily by open-handed monetary policy and support for “too big to fail” banks.
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