Tags: White | Gensler | SEC | CFTC

Gary and Mary (Jo) Perform Routines at Senate Banking Committee

By    |   Tuesday, 30 July 2013 02:14 PM

Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), and Mary Jo White, chairman of the Securities and Exchange Commission (SEC), performed their routine Tuesday at the Senate Banking Committee, chaired by Tim Johnson, D-S.D., at a hearing titled "Mitigating Systemic Risk in Financial Markets Through Wall Street Reforms."

They didn't attempt a high degree of difficulty and got a low grade from the East German judge. With the summer recess in sight, most of the judges didn't even show up.

The hearing deserves some attention, though, because there could be some "sleeper" ideas that could take on more importance later, after the dog days are over, than they do now. An alternative view is that no, there is nothing to look forward to, because the Mayans were right, the world ended last December, and all of our days will be dog days from now on.

In opening statements, Johnson asked for updates on the major outstanding Dodd-Frank regulations, while ranking member Michael Crapo, R-Idaho, challenged Gensler to defend differences between the CFTC's handling of derivatives regulation through guidance, no-action letters and agreements with foreign regulators, whereas the SEC has made greater use of the notice-and-comment process.

Crapo might have added that industry lobbies are happier with the results they are getting from the SEC than the CFTC, because the SEC is giving greater scope to "substituted compliance" that could free traders from U.S. regulation.

In their prepared statements, the regulators tended to play up the modest accomplishments of their agencies three years after the enactment of Dodd-Frank and to play down the obstacles that remain.

A special prize should go to Gensler, who concluded his statement by acknowledging that "a handful" of regulations remains to be done, and it happens to include capital and margin requirements, the Volcker rule and position limits.

In fairness to White, she has only been on the job since April, so she is not to blame for three years of floundering, but in time she will probably acquire her share of the blame and then blame the ongoing failures on a lack of resources.

Johnson asked for an update of the progress on the major regulations, and White responded with general comments about complexity and parallel work streams.

In contrast, when Johnson asked Gensler about whether substituted compliance would help to limit opportunities for regulatory arbitrage, Gensler gave a painfully detailed answer that should give lawyers plenty to work with, because it includes exceptions for emerging markets and insurance companies. This is in line with the general scheme of Dodd-Frank, which encourages all interest groups to peck away at the statute through exceptions, exemptions, waivers, no-action letters, court challenges and amendments.

When Crapo pursued his theme that the agencies need to be not just on the same page, but also on the right page, Crapo seemed to be mollified a bit by Gensler's detailed response that the CFTC would use a combination of agreements with foreign regulators and no-action letters to enable U.S. persons to fulfill some of the obligations they will incur as traders on foreign boards of trade. He promised to clarify by the end of the year specific instances where those efforts prove unsuccessful.

Robert Menendez, D-N.J., and Pat Toomey, R-Penn., both jawboned White to be lenient when the SEC adopts final regulations on money market funds, perhaps this fall. Toomey was especially energetic in trying to persuade her that disclosure of net asset values should be sufficient to inform investors without requiring the funds to do actual transactions at those prices, but White pointedly disagreed, saying, "You need to transact at a market rate, so disclosure doesn't deal with the gaming of the market price and the run risk."

Sherrod Brown, D-Ohio, and Jeff Merkley, D-Ore., both asked Gensler who is responsible for preventing banks from both controlling commodity warehouses and transmission mechanisms and trading in those markets, so that they would be in a position to manipulate prices.

Gensler responded that both the CFTC and Federal Energy Regulatory Commission have authority to police the markets, but the authority to allow bank affiliates to conduct those activities rests with the Fed.

Mark Warner, D-Va., made a hard pitch to White to implement the Jumpstart Our Business Startups (JOBS) Act before the United States loses its "first-mover" advantage. He argued that the promise of the Act could be "transformative" and that it is worth the risk that some people will lose money.

White responded that it is one of the issues on the many front burners they have at the SEC.

Kay Hagen, D-N.C., called on White to make sure the SEC does its best to put the industry position before the Department of Labor (DOL) as it works on regulations to clarify the fiduciary duty of investment advisers.

White carefully stated that the rule is up to the DOL, but she assured the senator, in effect, that she is conveying the industry position to the DOL.

Elizabeth Warren, D-Mass., uncharacteristically used her time to ask questions that were not very interesting at all.

In conclusion, I have said consistently that the toxic products of tomorrow, the ones that could trigger the next crisis episode any day, are being developed by the industry today. Based on this hearing, readers can look for these, still, in derivatives, money market funds, abuses by investment advisers and now in the dealings of banks operating through controlled commodities operations that can manipulate markets without effective regulatory intervention.

As the agencies eventually move forward with their controversial regulations, these hearings should get more interesting.

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Gary Gensler, chairman of the CFTC, and Mary Jo White, chairman of the SEC, performed their routine Tuesday at the Senate Banking Committee at a hearing titled "Mitigating Systemic Risk in Financial Markets Through Wall Street Reforms."
Tuesday, 30 July 2013 02:14 PM
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