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Growth Likely Under New CFTC Chief

Last week Gary Gensler, a former Goldman Sachs partner and Treasury official, was sworn in as chairman of the Commodity Futures Trading Commission. As he starts the job, the most ambitious agenda for financial regulation since the Great Depression is being parsed and negotiated.

The CFTC is in the thick of this effort in large part because it looks to be the regulator of credit default swaps, the derivatives blamed for causing the near-collapse of insurance giant AIG. Treasury Secretary Timothy Geithner recently proposed requiring central clearing of over-the-counter derivatives trading.

But there are a number of other, futures-related, regulatory issues Mr. Gensler promised to tackle. He made formal commitments on these matters to Senator Bernie Sanders of Vermont. Mr. Sanders had previously blocked Gensler's approval on the ground that during the Clinton administration the nominee worked to deregulate the financial industry and to exempt credit default swaps from regulation.

A theme that runs through the list of Mr. Gensler's promised regulatory initiatives is the need for greater authority for the CFTC to undertake these actions (Table). The Obama budget has already allocated a 10% increase in financing to the agency and the mood in Congress supports expansion in terms of both staff and authority.

While a larger and more powerful futures regulator is highly likely, its exact domain is uncertain because the Securities and Exchange Commission will probably get to administer some of the new requirements. Mr. Gensler does not favor the merger of the CFTC with the SEC, one possibility that has been put forth as a way of creating an over-arching regulator.

There is some uncertainty about the treatment of credit default swaps. Messrs. Geithner and Gensler want central clearing but leave it open how much of CDS will move to exchanges. Standardized contracts are expected to be listed on exchanges but that may be only a small portion of CDS contracts.

By contrast, a bill introduced by Senate Agriculture Committee Chairman Tom Harkin of Iowa goes beyond registering derivatives trades with clearinghouses and requires that all derivatives be on CFTC-regulated futures exchanges. He said the Administration's proposal for OTC derivatives is a step in the right direction but there is still more that needs to be addressed and he plans to move forward with the legislation

Banks such as Mr. Gensler's former employer Goldman, which would lose profits from the transfer of OTC trades to exchanges, favor clearinghouses rather than exchanges. Still, prospects look reasonably bright for the expansion of futures exchanges as well as the futures regulator.

Other regulatory focal points are margin requirements, trading through foreign futures exchanges and registration exemptions given to commodity pool operators. Changes in these may have an immediate impact on some futures traders, but it is not clear whether and how current practices will change.

Mr. Gensler promised to review these matters and left it at that. He may wish to retain as wide discretion as possible for future action, but he will be under pressure from Congress. If Iowa farmers complain about the effects of agricultural futures trading, for instance, Mr. Harkin might push for new position limits.

Gensler's Response to Senator Sanders

Selected quotes from the CFTC Chairman's statement before his approval by the Senate:

* We must urgently move to enact a broad regulatory regime that covers the entire over-the-counter derivatives marketplace. This regime should consist of two main components. One component is the regulation of the derivatives dealers themselves. The other component is the regulation of the marketplace.

* I will work with the Congress to provide the CFTC with the additional authority it needs to improve the transparency of the OTC derivatives market.

* We should subject all derivatives dealers to:

• conservative capital requirements.
• business conduct standards.
• record keeping requirements (including an audit trail).
• reporting requirements.
• conservative margin requirements.

* Position limits should be applied consistently across all markets, all trading platforms, and exemptions to them must be limited and well-defined. … I will ask CFTC staff to undertake a review of all outstanding hedge exemptions …

* I will work closely with Congress to pass legislation that will mandate registration of hedge fund advisers as part of a comprehensive package of regulatory reform. In addition, if confirmed, I will work with the agency staff to review all previously granted exemptions from registration as commodity pool operators.

* I support actions to close the “London Loophole” and ensure that foreign futures exchanges with permanent trading terminals in the US comply with the position limitations and reporting and transparency requirements that are applied to trades made on US exchanges.

* I look forward to working with Congress to give the CFTC unambiguous authority to promulgate rules and standards to achieve these goals. Such rules and standards governing treatment of foreign boards of trade should replace the issuance of “no-action” letters in this in this regard.