CFTC Commissioner J. Christopher Giancarlo called for a “thorough and unbiased analysis by U.S. financial regulators and their overseas counterparts of the systemic risk of unprecedented capital constraining regulations on global financial and risk-transfer markets.” Commissioner Giancarlo observed that there have been “at least twelve major flash crashes since the passage of the Dodd-Frank Act” including last week’s “abrupt ‘flash crash'” of the British pound. He asserted that:
[Regulators] can no longer continue to avoid the question of whether the amount of capital that bank regulators have caused financial institutions to take out of trading markets is at all calibrated to the amount of capital needed to be kept in global markets to support the health and durability of the global financial system [emphasis in original].
In reference to a Cabinet comment by Steve Lofchie on May 27, 2015, Commissioner Giancarlo asked the following question: “How big will the next flash crash have to be before we realize that markets in which few are able to take risks are markets that are very risky?”
Lofchie Comment: In addition to Commissioner Giancarlo’s concerns about market liquidity, his request for an “unbiased analysis” of the the systemic risk of “unprecedented capital constraining regulations on global financial and risk-transfer markets” is noteworthy. Regulators seem either reluctant or incapable of assessing whether their rulemakings have been successful, or whether certain benefits of the rulemakings might be outweighed by unintended consequences. On that topic, see this recent story about central clearing, in which we ask whether regulators are capable of judging their own work.