CFTC Commissioner Bowen Describes “Four Disruptive Elements” Driving Regulatory Activity

CFTC Commissioner Sharon Y. Bowen identified “four disruptive elements” that are “substantially responsible” for recent regulatory activity: technology, demographics, economics and institutions. In a speech at Northwestern University as part of the 2017 Brodsky Family Northwestern JD-MBA Lecture Series, Commissioner Bowen described these “disruptive elements.”

  • Institutions. Commissioner Bowen contended that the United States is experiencing a “crisis in our institutions, and that is a crisis for our markets, for our government, and for our society.” In order to “increase trust in institutions,” Commissioner Bowen stated, the CFTC must be “willing to be more aggressive in enforcing our rules fairly, including being willing to take individuals and institutions to court rather than just settle with them.” She asserted that the CFTC should fulfill the Dodd Frank Act requirement to “promulgate a regulation to improve governance” and “rebuild faith in institutions.”
  • Economics. Commissioner Bowen urged market regulators to be more aware of “how the overall economy is functioning and what effect market regulations are having on the economy.” She highlighted position limits rulemaking by the CFTC as an example of “democratizing . . . markets and making them more accessible and fair to consumers and investors.”
  • Technology. Commissioner Bowen identified technology and cybersecurity issues as key marketplace disruptors. She expressed optimism that the CFTC will complete its work on Regulation Automated Trading, and noted that the CFTC adopted enhanced cybersecurity safeguard requirements. She urged regulators to be “mindful of the human dimension of these changes and watch for ways to encourage technology while also supporting the people displaced by it.”
  • Demographics. Commissioner Bowen called on regulators to respond to demographic considerations and encourage companies, nonprofits and the government to increase diversity.

Lofchie Comment: Here are four other factors that greatly affect the financial industry in general, and CFTC-regulated entities in particular: (i) the costs of regulation, (ii) the pace of regulatory change, (iii) declines in liquidity and cross-border markets caused by regulation, and (iv) uncertainty about the imminence and outcome of regulatory enforcement actions based on ambiguous trading requirements. Those might not be the most impactful factors, but they certainly are worth Commissioner Bowen’s consideration.

Commissioner Bowen should consider why the number of registered futures commission merchants has dropped so precipitously in the last few years. It isn’t because of demographics or a loss of trust; it’s because firms can’t operate profitably. (Seee.g.this information from the CFTC. Note that the data is from year-end 2014 and the decline has since continued.) In the absence of any meaningful evidence that more expensive regulatory requirements are necessary, the notion that imposing more of them (e.g., more rules on position limits) in order to help sustain futures seems ill considered. Commissioner Bowen should acknowledge the problem that futures commission merchants have become too big to fail because all but a few have shut down. In that regard, it seems ironic that the story of Commissioner Bowen’s call for more regulation appears on the same day as a story about a major firm dropping out of the clearing business.

Click here to read other news stories regarding Commissioner Bowen.

Federal Reserve Governor Tarullo Resigns

Board of Governors of the Federal Reserve System (“Board”) Governor Daniel K. Tarullo submitted his resignation letter to President Trump. The resignation is effective April 5, 2017. Governor Tarullo’s departure will leave the Board with three vacancies.

Governor Tarullo served as Chair of the Board’s Committee on Supervision and Regulation and Chair of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation. He also served as the informal “Vice Chairman of Supervision,” a Dodd-Frank created position that was never filled by President Obama. In that capacity, Governor Tarullo has been recognized as the architect of much of the Board’s post-crisis policy and regulatory decision-making.

The four current Governors are: Stanley Fischer (term expires January 31, 2020); Janet Yellen (term expires January 31, 2024); Lael Brainard (term expires January 31, 2026); and Jerome H. Powell (term expires January 31, 2028). The term of current Chair Janet Yellen expires February 3, 2018. President Trump will have the opportunity to influence the direction of the Board by filling the three vacant seats, naming a new Chair, and filling key leadership positions.

Lofchie Comment: Governor Tarullo pursued an expansionary regulatory philosophy. He believed that financial market participants fell into two categories: banks that were at least indirectly regulated by the Federal Reserve Board, and shadow banks that were improperly avoiding regulation by the Board. (See Fed Governor Examines Post-Crisis Financial RegulationGovernor Tarullo Delivers Speech Regarding Shadow Banking and Systemic Risk Regulation.) Throughout his tenure, Governor Tarullo seemed to be oddly hostile to the securities financing markets and largely indifferent to declines in liquidity in the financial markets. (See Federal Reserve Board Governor Tarullo Calls for Regulatory Approach to “Runnable Funding”.)

Governor Tarullo could have remained to complete his full term set to expire on January 31, 2022. It is clear, however that the Governor’s expansionary regulatory philosophy would have come into direct conflict with the views of the new administration. Governor Tarullo’s resignation is significant given the influence that he held over the regulatory direction at the Board.

Bank of England conference in honor of William A. Barnett – Call for papers extended

We are delighted to announce a conference in honor of CFS Director William A. Barnett at the Bank of England on May 23 – 24, 2017.

The call for papers has been extended to March 15, 2017.

Liquidity plays a pivotal role in financial markets, the banking sector, and the economy as a whole. Since the 2008-09 financial crisis, it has become increasingly necessary to understand the creation, dissemination, measurement and management of liquidity.

This conference seeks and invites proposals to understand and assess the macroeconomic implications of liquidity, the liquidity creation process, and the impacts of liquidity on financial markets and economic activity. Theoretical, empirical, quantitative, qualitative, institutional, and historical perspectives that address current theory and policy questions are welcome.

For details to attend the conference or submit papers:

Similarly, excellent peer reviewed papers will be considered for a special issue of the Journal of Financial Stability.

Public Advocacy Groups File Complaint in Response to “2-for-1” Executive Order

The Public Citizen Litigation Group, the National Resources Defense Council, and the Communications Workers of America affiliated with the AFL-CIO (collectively, the “Plaintiffs”) filed a Complaint with the District Court for the District of Columbia arguing that President Donald J. Trump’s “Executive Order on Reducing Regulation and Controlling Regulatory Costs” exceeds the President’s constitutional authority, violates the “take-care” clause of the Constitution, and directs agencies to engage in arbitrary and capricious actions. The Executive Order requires that certain executive agencies rescind at least two regulations in order to issue a new regulation (see previous Cabinet coverage here).

The Complaint claims, among other things, that the Executive Order:

  • “directs agencies to disregard the benefits of new and existing rules,” which will “force agencies to take regulatory actions that harm the people of this nation”;
  • “forces agencies to repeal regulations that they have already determined, through notice-and-comment rulemaking, advance the purposes of the underlying statutes, and forces the agencies to do so for the sole purpose of eliminating costs that the underlying statutes do not direct be eliminated”;
  • forces agencies to violate “the statutes from which the agencies derive their rulemaking authority and the Administrative Procedure Act” (“APA”); and
  • will slow the implementation of governing statutes “to a halt,” due to the new cost assessment requirements of any newly proposed or final rule and at least two existing rules, “although the new rule and the existing rules need not have any substantive relationship to one another and, with approval from OMB, need not even be issued by the same agency.”

Lofchie Comment: The intended point of the Executive Order – that regulators should (i) consider whether the sheer volume of regulations is killing economic growth and (ii) evaluate past rulemakings periodically to consider whether they still (or ever) made sense – is completely reasonable, but the effect is another matter. However sound-bite-worthy the notion of a 2-to-1 rule might be, that is all it should have been: a sound bite. Putting that notion into the actual language of the order made for a needless distraction from the order’s substance.

Senator Warren Cites Industry Support for Fiduciary Rule

Senator Elizabeth Warren (D-MA) wrote to Acting Secretary of Labor Edward Hughes to urge him not to delay the April 10, 2017 effective date of the DOL’s Fiduciary Rule. The letter was a response to President Donald J. Trump’s Memorandum on the Fiduciary Duty Rule, released on February 3, that directed the Secretary of Labor to examine the rule to determine whether it may “adversely affect the ability of Americans to gain access to retirement information and financial advice.” In her letter, Senator Warren asserted that “a decision to rescind . . . or to delay implementation of this rule . . . would rip billions of dollars in retirement savings from the pockets of hardworking Americans and put it straight into the hands of giant financial institutions.”

Senator Warren summarized letters received by “leading” finance companies that support the implementation of the rule as “good for workers.” Senator Warren also observed that these “companies have made what [one company] describe[d] as ‘significant capital investments’ in actively preparing for the rule’s implementation.” She argued:

“To be sure, not every financial company shares this full-steam-ahead support for the DOL rule . . . [b]ut the overwhelming voice of financial firms is clear: they support the goals of this rule. . . .”


Lofchie Comment: Senator Warren’s letter provides some useful information, but judging by the excerpts she cited from the letters she received, the information is tailored closely to her views and may not represent a fair reading of companies’ full letters. Even so, her claims merit scrutiny:

1) Regarding the claim that the Fiduciary Rule will save investors $17 billion: this is highly speculative. One could just as easily claim that investors would lose the same amount of money if they were (a) deprived of access to investment advice, and (b) encouraged to move to fee-based accounts, since many investors might be better off with transaction-based accounts.

2) It is true that some firms favor the adoption of the Fiduciary Rule, especially those that will benefit from it as a matter of competitive advantage. Other firms oppose it because they will be injured by it as a matter of competitive advantage. Senator Warren prefers quoting the former to quoting the latter.

3) Senator Warren quotes a number of firms as favoring the “core objective” of the Fiduciary Rule (or language to that effect). These firms, undoubtedly, also support mom and apple pie. Good rulemaking is about more than vaguely good intentions.

4) That firms are prepared to comply with the rule is not a compelling argument. If firms want to stay in business, they have no choice but to comply with government directives. That says nothing about whether the directive is sensible.

Ultimately, the problem with the Fiduciary Rule is this: in the case of securities transactions, the SEC should be responsible for making rules concerning suitability. Having one set of rules adopted by the SEC as to the transactions for an individual’s personal account, and another set of rules adopted by the DOL as to transactions for an individual’s IRA, is simply no way to run a regulatory system.

CFTC Staff Provides Temporary Relief Concerning Aggregation Notice Filings for Position Limits

In a letter to the SIFMA Asset Management Group and ISDA, the CFTC Division of Market Oversight (“DMO”) granted time-limited no-action relief to certain market participants, who are eligible for an exemption from aggregation, from having to comply with notice filing and certification requirements that are scheduled to become effective on February 14, 2017. In granting this relief, the DMO stated that it will not recommend enforcement against market participants for failure to file a notice when relying on certain aggregation exemptions from position limits.

The DMO acknowledged the claim of market participants that they “will not have adequate time to also prepare the new notice filings and certifications required by Commission Regulation 150.4(c),” and noted that such preparation is “particularly problematic” for asset managers who “already have a full plate of regulatory compliance responsibilities.”

The CFTC also announced the creation of a new portal that will provide the “form and manner” for filing aggregation exemption notices. The portal will be available to participants who choose to file a notice with the CFTC of their intent to take advantage of certain aggregation exemptions starting on February 11, 2017.

Lofchie Comment: The substance of the relief is notable, but so is CFTC staff’s consideration of the “full plate” of new compliance burdens to which firms are subject. Clearly, a new administration is at work at the CFTC.

Sargen on Trump’s Trade Policy


  • During the election campaign, Donald Trump ran for office on restoring lost jobs in manufacturing by renegotiating trade deals and imposing tariffs on imports from countries that are deemed to hurt American workers. Now that he is President, market participants are focusing on what he will do.
  • One of his first decisions will be his stance on a “border adjustment tax” (BAT), a key provision in the House Republican tax bill that is intended to incent U.S. companies to produce at home rather than abroad.  In an interview last week, Mr. Trump indicated he favors a simpler approach of imposing stiff duties on countries that disadvantage U.S. workers and U.S. based companies that shift production abroad.[1]
  • A key problem with the President’s trade policy, however, is that it runs counter to market forces.  Because the dollar’s value is mainly driven by capital flows, stronger growth and rising U.S. interest rates threaten to propel it higher.  Also, the President’s fiscal stance of lowering tax rates but not broadening the tax base would likely balloon both the budget and trade deficits.
  • The bottom line: President Trump’s efforts to reduce the trade deficit and restore lost jobs in manufacturing are likely to fail.  Moreover, his policy of raising tariffs is bound to invite retaliation in which all parties would lose.

President Trump’s Views on Trade and the Dollar

Throughout the Presidential campaign, Donald Trump articulated a stance on international trade that reflects his long-standing views.  At the core, his world view is mercantilist: International trade is a zero sum game with winners and losers, and the losers are countries that run trade deficits.

While Mr. Trump’s views on trade are at odds with the post-war order, in which free trade was seen as a means for promoting world growth, he was by no means the only candidate to abandon free trade principles.  Indeed, in the wake of the 2008 financial crisis, for the first time in modern history no presidential candidate ran on a pro free-trade platform.  Where Mr. Trump stood apart from other candidates was his call to renegotiate existing trade arrangements and his threats to impose heavy duties on countries and U.S. businesses that are deemed to pursue policies that harm U.S. workers.

Now that he is president, Mr. Trump has announced the United States will withdraw the U.S. from the Trans-Pacific partnership, and he is planning to meet with the leaders from Mexico and Canada to discuss NAFTA.  One of the first legislative decisions Mr. Trump will make is his stance on the issue of a border adjustment tax (BAT), which is a key provision in the House Republican tax bill. The BAT is called a “destination based cash flow tax,” because it does not include export revenues in corporate taxes, while it excludes imported items from costs. The Republican leaders in the House favor the idea because: (i) it incents businesses to produce at home rather than abroad; and (ii) it is estimated to raise $1 billion in tax revenues over a decade that would help fund the proposed cut in the corporate tax rate to 20% from 35%.

The BAT concept is very controversial, because it is untested and critics contend it could be disruptive to businesses with global supply chains.  Proponents contend this is not the case, because they claim there would be offsetting movements in the dollar.  For example, if U.S. exporters were able to reduce the price of a product sold abroad, it would increase demand for dollars and boost the value of the dollar.  Accordingly, some economists estimate that if the corporate tax rate were lowered to 20% the dollar would likely appreciate by about that amount, although that issue is subject to debate.

In a recent Wall Street Journal interview, Mr. Trump stated the BAT proposal was too complex, and he favors a simpler approach of raising tariffs on imported goods including those from overseas’ operations of U.S. based companies.  He also expressed concern that the dollar was “too strong” in part because China holds down its currency, the yuan: “The yuan is ‘dropping like a rock,’ Mr. Trump said, dismissing recent Chinese actions to support it as being done simply ‘because they don’t want us to get angry.”

It remains to be seen what the final legislative outcome will be.  Some commentators believe the House Republican leaders will continue to press for a BAT; however, to gain the President’s approval, they will have to compromise on provisions of the pending tax bill.  As discussed below, the House Republican tax bill is intended to be revenue-neutral, whereas the proposal that Mr. Trump favors would increase the budget deficit significantly.

An Inconsistent Trade Policy: Lessons from the 1980s

Whatever the outcome, President Trump’s approach to trade and the dollar is flawed, in my opinion, because it ignores the impact of market forces on the dollar and the trade balance.  In this regard, there are several valuable lessons from the experience of the Reagan presidency in the 1980s that apply today.

One of the main lessons is that the dollar’s value is determined primarily by international capital flows, rather than international trade flows.  During the Reagan era, for example, the combination of a resurgent U.S. economy and high U.S. interest rates relative to those abroad attracted massive capital inflows that sent both the dollar and the U.S. trade deficit to then record levels.

U.S. interest rates today, of course, are considerably lower than in the 1980s; nonetheless, they are still well above those abroad. The dollar currently is at a 14-year high on a trade-weighted basis, and it has surged since the presidential election.  Should the U.S. economy accelerate, as President Trump is seeking, the Fed is likely to tighten monetary policy further, which would drive the dollar even higher.  Similarly, if China continues to experience capital flight, the Chinese yuan is likely to depreciate further, despite efforts of the authorities to limit the decline.

A second lesson is the trade imbalance is likely to widen considerably if the budget deficit increases materially, as was the case in the 1980s, when the U.S. ran “twin deficits” (see chart). The intuition is that increased government spending on the military and infrastructure is likely to boost imports but do little to increase exports. More fundamentally, the national income identity holds where the imbalance on trade is equal to the sum of the budget imbalance and the saving-investment imbalance in the private sector. If the latter is unchanged, the trade deficit increases directly with the change in the budget deficit.

U.S. Budget and Trade Imbalances as a Percent of GDP

Source: Bureau of Economic Analysis, Dept. of Commerce.


In this regard, a lot hinges on the type of tax legislation that is forthcoming. Specifically, there is an important difference between the House Republican tax bill, which is designed to be deficit-neutral, with the plan that Mr. Trump campaigned on, which independent research institutions estimate would add about $6 trillion to federal debt outstanding over the next ten years. The primary reasons are the Trump plan calls for deeper cuts in the corporate tax rate to 15% versus 20% in the pending House bill, and the Trump plan does not seek to broaden the tax base, whereas the House bill does.

The bottom line, therefore, is that if President Trump’s efforts to boost economic growth via tax cuts and increased government spending unfold, the trade deficit is likely to expand considerably.

The Worst Outcome: A Needless Trade War

While President Trump’s trade policies are unlikely to produce the results he is seeking, the worst outcome for financial markets would arise if the policies culminated in an unnecessary trade war with China, Mexico, and other countries.

It is hard to tell at this juncture whether President Trump’s call for duties in the neighborhood of 35% on imported items from certain countries is a negotiating ploy to extract a better deal, or whether he is serious and will follow through.  Based on his selection of Cabinet appointees to handle trade matters, however, this threat should not be taken lightly.  They include Peter Navarro, a China critic to head the new National Trade Council, Wilbur Ross as Secretary of Commerce, and Robert Lighthizer, a lawyer who represents industries seeking government protection via trade barriers.  At the same time, President Trump appears determined to declare China a currency manipulator, even though the Chinese Government has spent one trillion dollars in foreign exchange reserves in an attempt to limit the yuan’s depreciation against the dollar.

Should the Administration pursue such a course of action, it would inevitably invite retaliation, either in terms of reciprocal duties on goods from the U.S. and/or diminished purchases of U.S. treasuries.  One may wonder why the U.S. would run this risk when unemployment is below 5% and overseas economies are fragile.  And while financial markets have shrugged off the possibility thus far, global investors are likely to turn wary if a trade war were to materialize.

One of the most disturbing aspects of all this is how world leaders today have lost sight of the benefits that free trade has conveyed on the U.S. and global economy during the post-war era.  From the early 1980s, when globalization took off, until the mid-2000s,    there was a fairly steady expansion of both world trade and economic growth, with world trade expanding at roughly twice the pace of global GDP growth, and free trade policies played a critical role (see chart).  However, in the wake of the 2008 financial crisis, both global growth and the volume of world trade slowed markedly. This development, in turn gave rise to populism around the world, which threatens to bring increased protectionism that could undermine what was achieved during the post-war order.

Growth in Volume of World Goods Trade & Real GDP, 1980-2015

Source:  International Monetary Fund, World Economic Outlook Database, October 2016.

[1] See WSJ article, “Donald Trump Warns on House Republican Tax Plan,” January 16, 2017.

Core Principles for Regulating the United States Financial System…

President Donald J. Trump signed (i) an Executive Order setting forth “Core Principles for Regulating the United States Financial System” and (ii) a memorandum regarding the Department of Labor’s fiduciary rulemaking.

The Executive Order directs the Secretary of the Treasury, along with the heads of the FSOC member agencies (i.e., the Federal Reserve, the FDIC, the OCC, the CFPB, the SEC, the CFTC, the NCUA, and the FHFA) to issue a report within 120 days, and periodically thereafter, to address whether existing laws, regulations, and similar requirements are consistent with the Core Principles.

In a presidential memorandum, President Trump directed the Secretary of Labor to “prepare an updated economic and legal analysis” of the fiduciary rule. The rule was set to go into effect in April. The Secretary of Labor was instructed to review whether the rule: (i) has “harmed or is likely to harm investors due to a reduction of Americans’ access to certain retirement savings offerings, retirement product structures, retirement savings information, or related financial advice”; (ii) has resulted in dislocations or disruptions within the retirement services industry, and (iii) is “likely to cause an increase in litigation, and an increase in the prices that investors and retirees must pay to gain access to retirement services.” After such review, if the Secretary affirms any of the negative effects listed above, or if it determines that the Fiduciary Rule is otherwise inconsistent with any of the stated priorities in the presidential memorandum, then he is directed to propose a rule that rescinds or revises the Fiduciary Rule.

House Votes to Nullify SEC Resource Extraction Rule

By a vote of 235 to 197, the House of Representatives passed a joint resolution (H.J. Res. 41) to nullify an SEC final rule regarding the disclosure of payments by resource extraction issuers, Exchange Act Rule 13q-1 (the “Resource Extraction Rule”). The Resource Extraction Rule was mandated under Section 13(q) of the Securities Exchange Act, which was added by Section 1504 of the Dodd-Frank Act. The rule requires issuers to disclose certain payments made to government entities for the commercial development of oil, natural gas or minerals.

Lofchie Comment: For a long time, the Resource Extraction Rule had been criticized by Republicans as inadequate to achieve its intended purpose and irrelevant to the mission of the SEC. Seee.g.SEC Commissioner Gallagher Speaks on the Priorities and Mispriorities of the SEC (with Lofchie Comment).

CFTC Grants Exemptive Relief from Certain RIC Liquidation Requirements

Subject to specified conditions, the CFTC Division of Swap Dealer and Intermediary Oversight granted exemptive relief to certain CPOs from CFTC Rule 4.22(c)(7) requirements to obtain participant waivers. The relief allows the CPOs to provide unaudited financial statements in conjunction with Annual Reports when liquidating a series of an SEC-registered investment company (“RIC”).

In granting this relief, the CFTC noted the difficulty for a CPO to obtain written waivers from each participant of a series fund given the difficulty in determining the identity of pool participants who purchase their ownership interests through financial intermediaries.

Lofchie Comment: This small exemptive action, which is not, of itself, terribly significant from a market perspective, is a great example of why the CFTC’s withdrawal of the historical exemption that SEC-registered investment companies had previously from regulation as a commodity pool was unwise. SEC-registered investment companies are astronomically regulated by the SEC. Adding an additional layer of CFTC regulation is just an expense to RICs and is a drain on the resources of the CFTC, which has quite enough to do without creating more needless work for itself.

Given the new administration’s drive for the elimination of wasteful regulation, the CFTC should look at the restoration of the “commodity pool” exemption for registered investment companies. See prior comments on this issue: CFTC Adopts Harmonization Rules for Registered Investment Companies (with Delta Strategy Group Description, Lofchie Comment and Mehta Comment).