Tags: CFTC | House | Dodd-Frank | regulations

More Whining at House Ag Subcommittee Over CFTC Regulations

By    |   Friday, 26 July 2013 12:24 PM

The House Agriculture Committee's Subcommittee on General Farm Commodities and Risk Management, chaired by Michael Conaway, R-Texas, held the latest in a series of what appear to be investigative hearings into why the Commodity Futures Trading Commission (CFTC), chaired by Gary Gensler, persists in trying to impose derivatives regulation on trades involving U.S. persons, whether the trades are executed in the United States or abroad.

Evidently the situation has become so serious that the Committee has launched an inquiry into how the CFTC might need to be redesigned to take account of the expanded powers conferred on it three years ago by the Dodd-Frank Act.

This study will be conducted in connection with the reauthorization of the budget for the CFTC, whose five-year authority expires on Sept. 30. Gensler will have a chance to defend himself next Tuesday before the Senate Banking Committee, but in the meantime, the subcommittee called two of Gensler's fellow commissioners, one from each party, both former Senate staffers opposed to Chairman Gensler's position, to vent again complaints about the way the Commission is run.

Frank Lucas, R-Okla., chairman of the full Agriculture Committee, who looks and sounds almost exactly like Bill Clinton, stated that the reauthorization of the CFTC will be conducted concurrently with the enactment of a farm bill. (Press reports have documented the difficulty the House leadership is having in trying to pass the farm bill, losing in its first attempt because of divisions within its own camp over whether to include a food stamp extension and the generosity of farm subsidies at a time when market prices are high and farmland is booming.

Congress has only about 14 working days before Sept. 30 to get this and other controversial legislation done in an extremely contentious atmosphere between the parties and between the House and Senate.

In his opening statement, Chairman Conaway charged that the CFTC has been too aggressive in expanding the scope of its regulation and also that it is taking too long to issue the regulations.

At the same time, the industry that opposes the regulations has also complained that delays in implementation contribute to costly uncertainty as to what the rules will be. Conaway expanded his critique to include regulations issued last November to improve protection of customer funds that the industry contends are costly and impractical.

The industry perspective is the subject of a subsequent hearing to be covered in a separate article.

The ranking Democrat of the subcommittee, David Scott of Georgia, has been a frequent critic of the agency, especially when its regulations touched the activities of the burgeoning derivatives trading platform known as the Intercontinental Exchange, which is headquartered in Atlanta.

On this occasion, however, Scott praised the Commission for doing yeoman work to implement Dodd-Frank, and he expressed support for sufficient funding to support the personnel and technology needed to perform the expanded duties of the agency.

In his statement, Republican Commissioner Scott O'Malia referred to the principles of both the Pittsburgh communique of Sept. 25, 2009, and the Dodd-Frank Act of 2010. He stressed "challenges" presented by the CFTC's policy approach to the implementation of Dodd-Frank and its negative impact upon commercial end-users."

CFTC Commissioner Mark Wetjen, an appointee of Senate Majority Leader Harry Reid, D-Nev., referred to the issuance of guidance on the cross-border application of derivatives rules, and he suggested that the Commission's most important task could be completion, with the federal banking agencies, of the "Volcker rule."

A positive aspect of the commissioners' appearance is that they presented themselves as two young men who are working together to help implement the rules on the CFTC's lengthy agenda.

However, three years after the enactment of Dodd-Frank, the CFTC chose to issue guidance instead of a rule when its previous guidance expired on July 12, so that it now faces what O'Malia called an "artificial deadline" of Dec. 21.

The Securities and Exchange Commission (SEC) took the opportunity to take the lead by giving the industry a rule that allows for "substituted compliance" that would free the industry of having to comply with U.S. rules if foreign rules are deemed equivalent. (The SEC rules provide that the determination depends on the "facts and circumstances" of each case. This will require a lot of lawyering and could create a "mom and pop" opportunity for the prominent Democratic law firm where SEC Chairman Mary Jo White led the litigation department and her husband, a former SEC division chief, still practices securities law.)

Chairman Conaway asked the commissioners whether, at the end of the day, the United States and European Union could end up with derivatives rules that would provide for different margin requirements.

Wetjen responded that at the end of the day, the United States will probably have a lower margin requirement, but the two regimes will still be deemed equivalent.

The unmentioned animal in the room was the fact that Chairman Gensler's term has expired, and it looks like he will have to be replaced around the end of the year, even as the White House deals with the controversy over replacing Ben Bernanke as chairman of the Federal Reserve.

The CFTC is now down to four members with the recent departure of Republican Jill Sommers. Only a cynic would say that the stage is now set for the appointment of two new Senate staffers, one a Democrat to serve as chairman, and the other a Republican to replace Sommers.

At the big picture level, I have predicted all along that the Dodd-Frank Act would never be implemented, just as other landmark bills that were supposed to fix the financial crisis have failed to be implemented over the nearly five decades of the ongoing financial crisis.

The fatal flaw in the derivatives title is the so-called "end-user" exemption, and for the Volcker rule, it is the exemption for so-called hedging and market making. Another part of the formula for failure is the proliferation of agencies the industry can play off against each other to vitiate the statute and any regulations the agencies are able to issue.

A new episode in the crisis could occur at any time, including while Congress is on vacation next month.

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The House Agriculture Committee's Subcommittee on General Farm Commodities and Risk Management held the latest in a series of what appear to be investigative hearings into why the CFTC persists in trying to impose derivatives regulation on trades involving U.S. persons.
Friday, 26 July 2013 12:24 PM
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