CFTC / Economy / Regulation / U.S. Domestic Policy

Commodity Futures Trading Commission Meets AGAIN About the Dodd-Frank Act

From This Day Forth…

“Today we will consider a rule that helps broaden market access and promotes competition in the swaps market,” proclaimed Chairman Gensler. Emphasizing one of the important goals of the Dodd-Frank Act is to prevent risks in the financial sector from affecting the overall American economy in a negative manner. The intent of the rule includes promoting access, lowering risk, and to increase the transparency within the market. The people benefiting this rule, according to Gensler, include investors, retirees, homeowners, customers of pension and mutual funds, and community banks.

Promoting broad access to central clearing, and with the increased transparency, it is hoped that it will end up promoting financial integrity. Additionally, the Customer Clearing Rule would bolster risk management, as it would slash requirements for future documentation of swap deals. The rule would make the standards for the timely process of trades, which would in turn increase the rate of business overall.

Nothing Is Perfect In Paradise

Re-summarizing the aim of the rules, Commissioner Sommers stresses that this rule will provide access to clear and competitive execution of transactions and mitigation of counter-party credit risk. While also minimalizing the time frame between trade execution and acceptance, therefore increasing the markets integrity and will set out the basic risk management requirements for people participating in the clearing process. 

Believing that this final rule is seeking just, achievable goal that will result in a positive effect, she supports the rule. However, she is slightly troubled about how the commission continues to require massive modifications without recognizing the time and monetary costs it takes for people to comply. In addition, the commission must also take into account the technological feasibility of the people inside the market to be able to make the necessary changes and to acquire the needed technology. Sommers fears that more regulations will create walls and barriers inside the already economically fragile marketplace.

Raising the Bar

Reiterating his points from earlier hearings Commissioner Chilton reiterated that the task of the hearing was not a “be all, end all.” Comparing the Dodd-Frank Act to a mosaic, he insists that all the pieces should work together to make a larger more elegant picture. He insists that the commission thinks about how it is going to impact businesses and the market, and the need to avoid lessening the competition between businesses.

Asserting that the OTC Market is the “big kahoona” and the government is receiving “hundreds of trillions of dollars” it is especially important to make sure that the commission can balance everything accordingly. Appealing to the other commissioners’ patriotism he challenges them to double their efforts because the American people are watching and relying on them. 

The Lone Ranger

The only one on the commission who opposed the final rule was commissioner O’Malia. He did not like the final rule and he had a laundry list of objections and complaints. Though he supports the final rulemaking that combines customer-clearing documentations with other rules regarding the time frame of swaps, he says it lacks the sufficient technology to ensure such an occurrence.

O’Malia also looks at one part of the rule, which requires customers or clearing members to maintain standards of risk management, with a wary eye. This gives the commission with the power to go after the clearing members who fail to maintain the risk management behaviors. O’Malia says this rule calls into question whether the commission continues to view the designated self-regulatory organizations that the Designated Self-Regulatory Organization model provide as a practical option.

Accusing the commission continuously plays “hide the ball” by not providing enough details about the implementation of the rule.  He argues the schedule that the commission gives businesses to comply with the final ruling fails to give the public sufficient knowledge about how to adjust to the new rules and regulations. O’Malia has urged the committee “countless times” to establish a more concrete implementation timeline so businesses and people may adjust accordingly.

After another tirade about the failings of the commission, O’Malia laid down the law by expressing the three reasons why he does not support the final rule. First, they failed to develop a clear schedule that integrates the new rules; secondly the major rule undermines a self-regulatory approach that he favors. Finally, O’Malia thinks that the cost/benefit analysis suffers from a severe lack quantitative analysis.  He also wants to know why when the commission slows their work, why while doing so, they do not make sure the rule actually works.

Last, But Not Least

After attending a conference in which he participated on a panel pertaining to the topic of clearing and trade execution, Commissioner Wetjen feels like he has come back with valuable experience and new viewpoints about the rules which the commission puts into effect. He discovered that within the market there is a hesitation because rules approved do not allow enough risk management for people who need to upgrade their technology to be able to do so. On the other hand, Wetjen also heard from sources that the technology is readily available, and needs little time for it to be adopted. Moreover, from Wetjens experience on the panel he stated that even though there are risk management concerns, there is an overwhelming consensus that these risks not pressing ones.

Commissioner Wetjen supports the passing of the rule for several reasons. Its nature to ensure all market participants have access to clearing and deal making, the amount of strong risk management checks in place to prevent any disruptions in the market.

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By: Conor O’Malley

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