Nine Senate Democrats sent a letter to the White House urging the President to consider a nominee for CFTC Commissioner “who has the expertise, independence, and track record necessary to carry forward strong implementation of the derivatives reforms” of Dodd-Frank.
President Obama will have to nominate a new Commissioner to replace Bart Chilton, who announced that he will be stepping down on the same day that Timothy Massad was named to succeed Chairman Gary Gensler. According to the letter, the Senators are “deeply concerned” that some in the industry will view Gensler and Chilton’s departures as “opportunities to roll back or slow down essential reforms required by the Dodd-Frank Act.” In particular, the Senators are concerned that the industry will push the CFTC to:
- reopen the London Loophole and weaken key rules that prevent the risk of swaps traded through foreign subsidiaries of American firms from flowing back to the U.S. taxpayer;
- delay or weaken the “Volcker Rule” and other rules that protect taxpayers;
- loosen the limits on speculative trading in oil, energy and other commodities markets;
- allow major swap dealers in energy and commodities to avoid registration requirements;
- weaken requirements that most swap trades be cleared through central clearinghouses and traded on transparent execution facilities; and
- curtail enforcement activities deterring fraud, market manipulation and other market abuses.
The Senators urged the President to quickly nominate a candidate who has demonstrated knowledge in futures, options and swaps markets, as well as the skill and independence to continue progress on vital derivatives markets reforms, “even in the face of extremely stiff industry lobbying.”
Lofchie Comment: This seems an odd letter in a couple of respects. First, it could be read as critical of the President’s nomination of Timothy Massad to head the CFTC, implying that he has not “demonstrated expertise in futures, options and swaps markets” as called for in the letter. (Here is a link to Mr. Massad’s bio on the Treasury website.) Second, the statement that the CFTC’s refusal to share information with FERC is “unacceptable” seems to be a very severe criticism directed at CFTC Chairman Gensler, who is elsewhere praised.
Where I differ with the substance of the letter is in its assumption that a CFTC leader with experience, skills and independence in the derivatives markets would “ensure progress” on the various measures advocated by the Senators. There seems to me a good possibility that a person with such a deep skill set would be more concerned that forcing a greater volume of swaps on central clearing houses would increase systemic risk by centralizing tremendous amounts of credit in a few locations, forcing swaps onto untested swap execution facilities would dry up liquidity, and imposing position limits that lack an academic basis on energy markets would result in increased prices and volatility as “real commodity end users” found that their trading partners had diminished. While I recognize that reasonable persons may differ on these issues, what seems clear to me is that the Senators’ certainty on the positions that they advocate is too great and, thus, it would benefit even advocates of their positions to be mindful that their theories as to the way the markets function may not prove correct. By way of example, in another one of today’s news items, we cite a speech by Federal Reserve Governor Powell who says that “concentrating risk in a central counterparty could create a single point for failure for the entire system.” (See Fed. Governor Jerome H. Powell Delivers Speech Regarding OTC Market Infrastructure Opportunities and Challenges, November 25, 2013). In short, a little less confidence may be in order.