The battle for derivatives regulation rages on, and the CFTC, led now by Gary Gensler, is in the mix. The financial reform bill didn't end it. Bills only specify the broad outlines of reform, while how the bill is actually implemented and the particular rules put out are being fought over today-- largely under the radar screen of the public and of political activists.
WASHINGTON—Gary Gensler's mission to turn his tiny agency into a regulatory powerhouse is running into trouble.
The difficulties include resource strains, discord among commissioners and accusations that the Commodity Futures Trading Commission isn't taking enough care as it writes at breakneck speed rules that will transform the derivatives market.
Now Mr. Gensler is facing another challenge as congressional Republicans, set to take control of the House in January, mull delaying the July 2011 deadline for the CFTC to write dozens of new rules mandated by the financial-regulatory overhaul.
In the wake of financial crisis, many of us came to know the story of Brooksley Born, the little known head of the Commodities Futures Trading Commission (CFTC) who waged an ultimately losing war with the Fed, the SEC, the Treasury and Congress to regulate the OTC derivatives market. Her story is one of "if only."
Today, Gensler is in her same role. Gensler, who worked for Goldman Sachs and helped pass the Commodities Futures Modernization Act of 2000, which protected derivatives from CFTC regulation, was widely criticized by progressives when he was appointed. In What's the Problem with Gary Gensler? an April 2009 article describes how Gensler's role in helping pass CFMA inspired a hold by Senator Sanders. Yet by then Gensler (unlike Summers, Rubin, Greenspan or Bernanke) had already recanted, saying,
"I believe that both our financial system and our regulatory structure failed the American people,"
By March 2010, in the article Goldman Deal-Maker Now Advocates Regulation detailed Gensler's transformation from Born opponent to Born disciple.
“I think he is doing very well,” [Born] said in an interview. “He certainly seems to be committed to robust oversight of derivatives and limiting excessive speculation and leverage.”
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The proposals [championed by Gensler] include forcing the big banks that sell derivatives to conduct their trades in the open on public exchanges and clear them through central clearinghouses, so that any investor can see the prices that dealers charge their customers. Today, those transactions are bilateral and private.
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The banks, for their part, sense a threat to the billions of dollars in profits they earn each year from trading in these complex derivatives...Already, it seems, industry lobbying is watering down the changes.
In the financial reform bill, Congress repealed the part of the Commodities Futures Modernization Act that protected derivative swaps from regulation. And it gave most of the authority to regulate derivatives to the CFTC, the agency Gensler heads, so what comes out of his leadership will be critical to the success of the bill.
The Republican commissioners on the CFTC are already trying to undermine Gensler. They use the same language they used for the health care bill. Gensler is "moving too fast", they say. They want more time, supposedly for writing better rules, but in reality for weakening and slowing down reform. Recently, Gensler was forced to postpone a vote on a major rule because the Republican commissioners wanted more time to "discuss" it. They will soon have allies in Congress:
New Jersey Republican Rep. Scott Garrett, chairman of the incoming House Financial Services capital-markets subcommittee, said Congress needs to slow the CFTC's pace until it better understands how regulators are interpreting the financial law. "The rule-making bodies, especially the CFTC, seem to be eager to move along at this faster than anyone can keep up with," said Mr. Garrett, who will try to slow the process with heightened congressional oversight.