James Matsumoto/SOPA Images/Sipa USA via AP Images
The Commodity Futures Trading Commission regulates the multitrillion-dollar derivatives market.
Back in July, the financial reform community was extremely upset at Joe Biden for foot-dragging on naming regulatory appointments. Among the multiple vacancies was a seat on the Commodity Futures Trading Commission (CFTC), which regulates the multitrillion-dollar derivatives market. At the time, this vacancy led to an equal number of Republicans and Democrats on the commission, creating stalemates on any aggressive rulemaking. The chair, former Debbie Stabenow staffer Rostin Behnam, was only serving in an acting capacity; no permanent chair had been announced.
Since that time, reformers have been somewhat mollified. There have been a couple of good appointments, like former Sherrod Brown staffer Graham Steele as Treasury Department assistant secretary for financial institutions, and Consumer Federation of America director Barbara Roper as a key adviser to the Securities and Exchange Commission. And the CFTC situation belatedly took care of itself in the short term. Republican commissioner and crypto enthusiast Brian Quintenz abruptly decided to step down at the end of August, presumably because of a looming job offer.
This gave Democrats functional control of the CFTC starting September 1. The Biden administration also added a vote of confidence to Behnam by floating in the media that they would appoint him as permanent chair. While there are now two vacancies on the commission, they would likely be filled in tandem, so Democrats have a durable majority, and can commence with reining in the derivatives market.
Which makes a release from the CFTC on August 31, the final day of the 2-2 deadlock, so confounding and frustrating. The commission agreed to a specific industry request within 11 days of receiving it, hampering implementation of a regulation that dates all the way back to the 2010 Dodd-Frank Act.
Substantively speaking, this is annoying, not distressing. But it could signal that Behnam, newly boosted by the White House, is someone who sees his role as providing constituent service to the entities he regulates, not aggressively challenging the banks.
The saga of this particular rule mirrors much of the post–Dodd-Frank improvements, which have sadly taken far too long to implement. The rule involves swap dealers, who are middlemen that facilitate the trading of certain types of derivatives outside of central clearinghouses. Before the financial crisis, these dealers were thinly capitalized and really unable to absorb a major loss that could cascade through their creditors and the broader financial system.
It could signal that Behnam sees his role as providing constituent service to the entities he regulates, not aggressively challenging the banks.
Dodd-Frank theoretically fixed this by subjecting swap dealers to minimum capital requirements. The goal was to add safety to the system. The CFTC initially put out a proposal on this back in 2011, but it was never implemented during President Obama’s tenure. Key to this was the need for financial reporting. The CFTC did not have the data available to assess the effect of any capital requirements, making the entire thing largely theoretical.
After much back-and-forth, the commission eventually finalized the rule during the Trump administration, in July 2020. Even while approving minimum capital requirements, statements made at the meeting announcing the final rule suggested that most swap dealers would not need to add any additional capital at all, giving new meaning to the word “minimum.” This created a false hope that everything in the system was just fine, despite undercapitalization being a major factor in spreading of losses through the financial system in 2008, necessitating bailouts.
At least, however, the CFTC did mandate capturing the required data to assess the effects of the capital rule, giving a key entry into the derivatives market. The financial reporting necessary was scheduled for October 6.
But in an August 20 letter obtained by the Prospect, two trade groups, the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA), asked for a delay in reporting requirements for swap dealers tied to banks. They argued that these dealers are already subject to significant reporting of the same data by other regulators.
If the banks are already giving out the data, it doesn’t seem like it should be a problem to give it to the CFTC (the trade groups argue that what the CFTC wanted would have to accord with different accounting principles, but really we’re talking about a few extra calculations and forms, not a significant burden). But the usual course of action for banks is to limit compliance as much as possible to save on manpower. So they asked for an assurance that, if they didn’t give the exact reporting that the CFTC wanted, they would not enforce the rule.
It took all of 11 days for the CFTC to respond, agreeing in their own no-action letter to everything the trade groups asked for. In fact, though there was no specific time frame requested by the trade groups, the CFTC made the no-action letter effective for two years, or until the adoption of revised reporting requirements, whichever comes first.
There’s somewhat less than meets the eye here. The CFTC will still be able to get the information given to other regulators for bank swap dealers, which should be enough to determine whether a rule that was ultimately written hastily late in the Trump administration is effective. Then the agency can always go back and fill in the gaps.
This takes the CFTC off the field and puts more pressure on other regulators, when one of the major features of Dodd-Frank is a lot of redundancy.
But sources with experience at the CFTC say that this was rather accommodating for a Democratic-led agency. There was no advance notice or public comment before granting this relief. Given their wording, the trade groups would likely have accepted shorter-term relief, and certainly there was no compelling reason to set it at two years. Furthermore, the reporting requirements weren’t scheduled to be implemented for another month. There was no need to jump on the banks’ request quickly.
A no-action letter essentially puts the issue to bed for the duration; it’s extremely rare that the time frame would be shortened. This takes the CFTC off the field and puts more pressure on other regulators, when one of the major features of Dodd-Frank is a lot of redundancy so no one regulator failing would collapse the system. The lack of coordination is concerning. Plus, to do this on Quintenz’s last day, right before getting the majority, makes it seem like hiding behind the fig leaf of regulatory gridlock.
The action got the attention of Sen. Elizabeth Warren (D-MA), a lead financial-regulation advocate in the Senate. “Delaying these reporting requirements is nothing more than a gift to the biggest banks,” Warren said in a statement to the Prospect. “We need a CFTC that protects our financial system and stands up to the big banks, not defers to their every whim.”
The CFTC has not yet responded to a request for comment.
It’s the deference that is the main issue here. Behnam has a Hill staff background, and while staffers are often the most dedicated and knowledgeable group of people in the Capitol, due to their lack of decision-making power, they are typically put in the position of hearing everyone out and making them happy. A principal regulator doesn’t have to be in that defensive crouch. They don’t have to give the industry all their demands in a matter of days. They could grant a short-term extension rather than two years. They could make their regulated entities sweat a bit, force them to do things that are uncomfortable. Instead, the choice made was to accommodate the banks’ request.
We’ve been here before with this regulatory agency. Under Obama, one of the Democratic CFTC commissioners, Mark Wetjen, was also a former staffer, in Harry Reid’s office. He quickly became a hindrance to stronger regulations at the commission, consistently forcing compromises with industry, and this grew even worse when he became acting chair after Gary Gensler left in 2013.
Behnam has assurances of getting the chair, though it hasn’t been formally announced. For his first real action after that to be a quickly produced favor for the banking industry has many reformers concerned, and wondering whether somebody else should be found for the chair slot. It’s a bad signal as to who will matter most to him: the banks, or the public. The Biden administration has at best ignored financial regulation thus far. They can just accept this troubling situation, or find someone better to run the CFTC.
