By Jon H. Harsch
© Copyright Agri-Pulse Communications, Inc.
WASHINGTON, April 13 – Depending on your perspective, the Commodity Futures Trading Commission (CFTC) is either moving much too fast or dangerously slowly in writing new rules to regulate the still unregulated derivatives market. Opening Wednesday's hearing on implementing new rules under the Dodd-Frank Wall Street Reform law, House Agriculture Subcommittee Chair Michael Conaway, R-Texas, charged that “it seems the CFTC has placed speed over deliberation. The CFTC has proposed an array of rules that, as they currently stand, exceed congressional intent and demonstrate a lack of regulatory focus amid a shortage of resources.”
Conaway also blasted the CFTC for “seemingly complete disregard for conducting a comprehensive cost-benefit analysis.” He predicted that “Rushing to regulate will have a harmful and punitive impact on non-financial businesses that were not a part of the problem.”
Subcommittee Ranking Member Leonard Boswell, D-Iowa, also voiced concern over possible impacts on end-users who he said were “victims in the financial crisis” and should not be penalized. He said the CFTC's focus should be on “preventing the markets from being manipulated by a few players, and making sure that never again are American taxpayers left with the bill.” Stressing the importance of getting the new rules right, he said “More than 38 million U.S. citizens, whether they are farmers, manufacturers, accountants, or municipal workers, are employed in a business that uses derivatives to hedge risk and protect against market volatility.”
As proof of how hard the CFTC is working to get the rules right, CFTC General Counsel Dan Berkovitz told congressmen that the agency is still in the process of digesting the input from over 8,900 public comments, 13 public meetings, 675 stakeholder meetings, and 598 staff meetings with other regulatory agencies. He also pointed out that while the Dodd-Frank law set a July 2011 deadline for finalizing new rules, he said the CFTC believes it has the authority to phase in implementation over a period of months after July, giving both the CFTC and the financial industry time to adjust gradually.
Berkovitz's comments didn't satisfy critics on either side. Conaway and other Republicans along with industry witnesses called for the CFTC to deliver a complete package of new rules and to put that out for further public comment before finalizing any rule. Conaway said this approach is needed because the full impact and possible unintended consequences can't be determined until stakeholders have an opportunity to analyze the total package.
Rep. Joe Courtney, D-Conn., criticized the CFTC from the opposite direction, saying the delay in finalizing new regulations is “delaying the recovery.” He charged specifically that the delay in setting position limits for energy trading gives speculators free rein to drive up oil prices.
Prof. Michael Greenberger of the University of Maryland School of Law was even more outspoken. He testified that “It is now accepted wisdom that it was the non-transparent, poorly capitalized, and almost wholly unregulated over-the-counter OTC derivatives market that lit the fuse that exploded the highly vulnerable worldwide economy in the fall of 2008.” Supporting the need for position limits, he said that excessive speculation in all commodity markets explains “why we are in an inflationary food and energy bubble at this time.”
Greengerger charged that the current obstacle to proper implementation of new derivatives market rules is “resistance by big banks and other financial institutions” determined to protect their highly profitable monopoly position. He said that if Dodd-Frank rules are properly implemented, “the huge profits of these and other banks will be diminished by the competition that a transparent market brings.”
Saying critics of new swaps regulation seem to have forgotten the global financial crisis caused by unregulated derivatives trading, Greenberger warned that Congress runs the risk of a second global financial if it allows the major financial institutions profiteering from unregulated markets to either block new rules or make them unenforceable by blocking adequate funding for the CFTC.
Terry Duffy, Executive Chairman of CME Group which calls itself “the world's largest and most diverse derivatives marketplace,” acknowledged that “The financial crisis focused well-warranted attention on the lack of regulation of OTC financial markets. We learned a number of important lessons and Congress crafted legislation that, we hope, reduces the likelihood of a repetition of that disaster.” Then he added that throughout the crisis, “regulated futures markets and futures clearing houses operated flawlessly.” He explained that “Dodd-Frank was adopted to impose a new regulatory structure on a previously opaque and unregulated market – the OTC swaps market. It was not intended to re-regulate the robustly regulated futures markets.”
Duffy warned that unless Congress forces the CFTC to change course, “The Commission's almost complete reversion to a prescriptive regulatory approach converts its role from an oversight agency, responsible for assuring self regulatory organizations comply with sound principles, to a front line decision maker that imposes its business judgments on the operational aspects of derivatives trading and clearing.” He said allowing the CFTC to implement its proposed rules would “impose indeterminable costs on the industry and the end users of derivatives.”
To read written testimony prepared for the House Agriculture hearing on Dodd-Frank rulemaking, click HERE.
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