This is the second of two articles of the recent hearing of the House Agriculture Committee at which complaints of industry representatives about the prospect of implementing the derivatives title of the Dodd-Frank Act were aired, and industry representatives asked for a legislative remedy to achieve the regulatory relief to which they think they are entitled.
The first article
reported on the testimony of Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), which has the burden and authority, shared in part with the Securities and Exchange Commission, to promulgate regulations to implement these provisions. Nearly three years after Dodd-Frank was passed, much work remains to be done by this divided Commission while Gensler coasts along past the expiration of his prescribed term, which expired last spring.
It is evident from the hearing that a package of cats and dogs is being assembled by members of both the House Agriculture and Financial Services committees to satisfy the demands of an array of interest groups unhappy with the slow and uncertain rulemaking process at the CFTC. The process might even be worse than most of the witnesses suggested it is, because the CFTC spent its early time dealing with relatively minor provisions and left the regulated community frustrated that the crucial definitions, such as what a swap is, were put aside.
As a result, members of the CFTC community complained that they didn’t know whether they would be subject to the new rules and couldn’t know until the basic definitions were in place, and the Commission more or less responded that if you’re in this business, you know who you are, and we will give more time for compliance if it is needed.
Gensler said from the beginning that he was not going to try to meet the statutory deadlines in Dodd-Frank, but that he was going to focus on being thoughtful and getting the right outcome.
Meanwhile, so little has been done, that nearly three years after the process began, it is still too “early” to judge the results.
The remainder of this article will set forth two examples of the kinds of issues the legislators are attempting to deal with through the seven bills that have been introduced so far. As more hearings are held, more details will emerge, but the broad outlines are visible. Additional bills that may be dropped into this mix will probably fall into these categories:
1. Technical issues.
The best example is the issue raised by the Depository Trust & Clearing Corporation (DTCC), the cooperative financial market utility that has been in the forefront of establishing the swap data repositories (SDRs) to which the various trading platforms in the United States and other leading markets in the United Kingdom, European Union and Japan would report their trade data for use by market participants and regulators.
This is a key component of the vision of a reformed and regulated swaps market. Due to strict privacy rules in the European Union, the CFTC is insisting that the SDRs agree to indemnify any entity that shares data against the risk of any abuse of these data. The DTCC objects that this is unworkable, the CFTC says it will continue to negotiate over this issue, but the DTCC has run out of patience and wants an exemption.
Even the lone critic of the legislative proposals among the witnesses, Wallace Turbeville of Americans for Financial Reform, agreed that this need for relief on the part of the DTCC can be accommodated without doing violence to the goal of Dodd-Frank of creating a safer, more competitive, more transparent swaps market.
2. Fundamental issues.
At the other extreme are demands by the Securities Industry and Financial Markets Association (SIFMA), a leading trade association representing the financial firms that make markets and trade swaps for relief from the so-called push-out and margin requirements of title VII.
The push-out provisions require that derivatives activities of banks be conducted through separately capitalized subsidiaries and affiliates rather than in the banks themselves. Ken Bentsen, acting CEO of SIFMA, complained that this idea was introduced at a late hour, but it really dates back to 1999 when a similar concept was included in the Gramm-Leach-Bliley Act and the industry fought it for a decade with the help of friendly regulators and ultimately prevailed.
Turbeville cited figures for the largest financial institutions showing that they each have 2,000 or 3,000 subsidiaries already. The real issue is that banks don’t like to have to deploy capital. This is also the issue with margin requirements.
The sponsors of Dodd-Frank promised derivatives end users, represented by two witnesses at the hearing, that they would not have to post margins. This was a mistake, and now the end-user lobby is complaining that the bank regulators are forcing them through the back door to post margins they were assured would not be required.
The result, they argue will be higher electricity rates, less capital formation and less job creation. Apparently, no one has ever broken the news to these people that for all of the advantages derivatives offer for risk management, even hedging is risky and requires that some margin be posted, mainly as a buffer against adverse market moves and the failure of counterparties to meet their obligations.
At the big picture level, I predicted during the debate on Dodd-Frank that, as was the case with other so-called “reform” legislation that was supposed to end the financial crisis, ultimately it would not be implemented due to the lobbying power of the financial industry and the sway it holds over regulators and legislators, some of whom, like Bentsen, are bound to leave Congress and go to work for the industry.
Thus, Dodd-Frank became an exercise in enacting hundreds of regulations, then exempting the respective interest groups serially from the Act. This movement got rolling when auto dealers were exempted from the consumer protection provisions at the outset of the bargaining. Gensler said at the outset of the regulatory process that 500 entities had come to the Commission seeking exemptions.
Rep. Colin Peterson, D-Minn., is undoubtedly correct in predicting that this bunch of bills will be ignored by the Senate, but as long as well-heeled trade groups can afford to hire lobbyists, and they can, the drive for exemptions from Dodd-Frank will proceed until the ultimate goal of total obliteration is achieved, and the “too big to fail” banks are once again free to continue to grow with the tacit backing of the federal government, secure in the knowledge that they will be bailed out whenever future episode of the financial crisis threaten the global financial system.
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