In separate remarks at the FIA 40th Annual Law and Compliance Conference, CFTC Commissioners Brian Quintenz and Rostin Behnam described their respective regulatory priorities in contrasting terms.
Commissioner Quintenz advocated for concerted efforts to accomplish harmonization between SEC and CFTC swap regulation. According to Mr. Quintenz, firms that register as both swap dealers and securities-based swap dealers with the CFTC and the SEC, respectively, should be subject to different regulatory requirements only when there are “irreconcilable difference[s] between the securities and derivatives markets.” Further, Mr. Quintenz emphasized the importance of pushing for full harmonization where possible, noting that small differences often lead to a large cost for compliance. As to CPO/CTA registration for registered investment advisers, SEFs and data reporting, Mr. Quintenz argued that deference to the rules of the other agency may be appropriate. A firm engaged in trading and reporting swaps and security-based swaps should follow “one set of rules, instead of two,” he argued.
While Commissioner Behnam also spoke about SEC/CFTC harmonization, he emphasized more broadly that CFTC Chair J. Christopher Giancarlo’s agenda for regulatory change was overly ambitious. In Mr. Behnam’s words:
We’ve been waiting for deliverables in terms of Project KISS, Reg. Reform 2.0, and CFTC and SEC harmonization, and anticipating resolution of unfinished business in terms of the de Minimis exception, position limits, capital, and Regulation Automated Trading (Reg. AT). Since that time, we’ve received the Chairman’s white paper on “Swaps Regulation Version 2.0,” which purports to set the agenda for Reg. Reform 2.0. While I appreciate the Chairman’s transparency in setting forth his vision and, in his words, starting a dialogue, I can’t help but note that there is already a process for dialogue with market participants regarding potential rule changes – the notice and comment process for proposed rules under the Administrative Procedure Act. Adding another white paper just pushes back the timeline for getting to actual deliverables. It adds another step to the process. It also takes a lot of staff time when budgets are tight.
Commissioner Behnam went on to say: “If [CFTC] staff is directed to focus on reworking the broader framework for the swaps market in lieu of fine-tuning and building on the progress we’ve made since 2008, we risk creating greater uncertainty and impracticability at increased costs to market participants.”
Lofchie Comment: While one can be sympathetic to Commissioner Behnam’s skepticism of the need for regulatory change, and that such change itself can be costly, sufficient time has now passed since Dodd-Frank was adopted to evaluate many of the rule changes. Many of the rule changes have not only not produced the suggested benefits, but have had a negative impact on liquidity, have increased market fragmentation, and have materially increased costs to end users. Particularly given the tremendous speed with which the swap rules were adopted, and given that there is now sufficient data to evaluate at least some of the results that they have produced, there seems a great benefit in the rethinking suggested by Chair Giancarlo and CFTC Chief Economist Bruce Tuckman. It should also be noted that many of the observations made by Chair Giancarlo had also been raised by him when he was a Commissioner, but had not received the attention that they merited or the discussion that they deserved and now hopefully will receive.