By Jon H. Harsch
© Copyright Agri-Pulse Communications, Inc.
WASHINGTON, Feb. 10 – Swaps market regulator Gary Gensler found it hard Thursday to satisfy either critics wanting tough new rules in place quickly to prevent another market collapse or those concerned that any new rules will drive up transaction costs and drive lucrative derivatives business overseas.
Answering House Agriculture Committee questions in a hearing to review progress with implementing last July's Dodd-Frank financial reform law, Commodity Futures Trading Commission (CFTC) Chair Gensler predicted that “The reforms mandated by Congress will reduce systemic risk to our financial system and bring sunshine and competition to the swaps markets. Markets work best when they are transparent, open and competitive. . . Lowering risk and improving transparency will make the swaps markets safer and improve pricing for end-users.”
Gensler acknowledges that due to the complexity of the rule-making task which 31 CFTC committees have been working on, not all rules will be in place by the July deadline set by Congress. He added the warning that if Congress does not provide more funding, the CFTC won't have the manpower or new technology needed to implement and enforce the new rules.
Lawmakers expressed particular concern that the CFTC may impose margin requirements and thus higher costs on end-users who rely on derivates to hedge their business risks. Gensler offered two reassurances. First, he explained that “Transactions involving non-financial entities do not present the same risk to the financial system as those solely between financial entities.” As a result of this distinction, he said “proposed rules on margin requirements should focus only on transactions between financial entities rather than those transactions that involve non-financial end-users.”
Gensler's second point was that both for the margin and capital rules still being hammered out and for the rules already drafted, all interested parties should submit comments. He explained that the CFTC will consider all comments – even if the official comment period has already closed.
Rep. Vicky Hartzler, R-Mo., told Gensler that the common thread of comments she's hearing is that “your staff is going far beyond what the bill's original intent is.” She said the proposed rules “will be very onerous on businesses” and that small businesses don't have the resources to wade through and comment on the mass of proposed rules. She quoted from a Kansas City Board of Trade letter charging that along with regulating previously unregulated OTC trading, the CFTC is proposing “unnecessary and extremely prescriptive regulations on already regulated derivatives markets,” noting that “the regulated markets were not the cause of the 2008 financial crisis.” Gensler responded that he welcomes such comments and is committed to ensuring that the CFTC does not go beyond congressional intent in its rule-making.
Questioned closely by Agriculture Committee Chair Frank Lucas, R-Okla., Gensler said that while the CFTC doesn't plan to impose margin requirements on end-users, CFTC expects to leave in place the current practice under which swaps dealers can require end-users to post margin, “exactly as it is today.” Ball Corporation Senior VP & CFO Scott Morrison, on a panel of expert witnesses at the hearing, warned that “A requirement for end users like Ball Corp to post margin to its counterparties would have a serious impact on our ability to invest in and grow our business.” Further, he pointed out, even if the CFTC exempts end-users from margin requirements, if margin is required “somewhere in the system” as a Ball Corp transaction moves through the system, then “it is going to come back to me in higher costs.”
Rep. Timothy Johnson, R-Ill., asked CME Group Executive Chairman Terry Duffy whether “CME has been victimized” by “what some people see as regulatory excesses.” Duffy responded that the CFTC's plan to regulate markets which did not cause the 2008 collapse and which have been operating well “doesn't make a bit of sense to me.” Duffy called on Congress to relax its July 2011 deadline for CFTC to finalize its new rules.
Duffy concluded that “This Congress can mitigate some of the problems that have plagued the CFTC rulemaking process by extending the rulemaking schedule so that professionals, including exchanges, clearing houses, dealers, market makers, and end users can have their views heard and so that the CFTC will have a realistic opportunity to assess those views and measure the real costs imposed by its new regulations. Otherwise, the unintended adverse consequences of those ambiguities and the rush to regulation will impair effective exchange innovation and stifle the most important growth paths in our industry, including the clearing of OTC transactions. Indeed, the threat of such policies has already driven major customers to move business off U.S. markets.”
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