CFTC Chairman Gensler Testifies on Implementation of Dodd-Frank and Its Jurisdictional Reach

CFTC Chairman Gary Gensler testified before the Senate Committee on Agriculture, Nutrition & Forestry, and addressed the CFTC’s regulation of the swaps and futures markets.  According to Chairman Gensler, “the public is benefiting.” Chairman Gensler indicated that the CFTC had adopted 80% of its required rules, though he did not discuss how many had come into force.  He said, “As it is sometimes the case with human nature, the agency receives many inquiries as compliance deadlines approach.” 

Chairman Gensler did not indicate in his speech that there were any material problems implementing what he described as the “common sense rules of the road,” although he did say that some swaps dealers may be moving trades offshore to avoid the application of Dodd-Frank. 

On the question of whether hedge funds would (eventually) be treated as U.S. persons under Dodd-Frank (currently a non-U.S. organized fund would not be treated as a U.S. person), Chairman Gensler said, “collective investment vehicles, including hedge funds, that either are managed (or otherwise have their principal place of business) in the United States, or are directly or indirectly majority owned by U.S. persons [should not be able] to avoid the clearing requirement – or any other Dodd-Frank requirement – simply due to how they might be organized.”

As to the issue of the CFTC’s reauthorization and budget for next year (noted in the next news item), Chairman Gensler said, “The CFTC is currently funded at $207 million. To fulfill our mission for the benefit of the public, the President requested $308 million for fiscal year 2013 and 1,015 full-time employees.”

Lofchie Comment:  Although Chairman Gensler did not indicate there were many ongoing problems with the implementation of Dodd-Frank, he did touch at least indirectly upon one problem that I think is material:  neither dealers nor customers want to do swaps business in the United States.  Although I am sure that the United States will be able to force some parties to keep their swaps business here, in the long run, it is likely to prove a difficult task to keep the financial industry here by mandate.

On the issue of a mandate, swaps markets participants should note that Chairman Gensler suggested a significant expansion of the application of the “U.S. person” definition to hedge funds beyond that which is set forth in the CFTC’s most recent guidance on the subject, and he suggested that the CFTC would seek to force those funds that fell within an expanded definition of “U.S. person” to keep their business in the United States.

Query:  if the United States forces swaps “U.S.” customers to do business in the United States, does that mean other countries will respond by requiring their local customers to do business only in their home countries or regions?  If so, is that a good result for the U.S. economy?

Click here to view speech in full (links externally to CFTC website).