Goldman Sachs's Gary Gensler and the CFTC

Gary Gensler, alumnus of Goldman Sachs, has already been discussed elsewhere on this blog where we presented his previous incarnation as one who wished to exempt CDSs and other derivatives from regulation.

The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was signed into law on July 21, 2010, gives both the CFTC under Gensler and the SEC regulatory powers over derivatives known as swaps. The Act repeals the exemption from regulation for security-based swaps. Regulators have to consult with each other before implementing rules or issuing orders. Both CFTC and SEC consult with the Federal Reserve about defining swap related terms.

How well is the CFTC fulfilling its mandate? According to a January 13, 2010, Bloomberg article by Asjyln Loder, the commission members are divided. There is a lack of data on OTC derivatives; the mandate of the Commission is being challenged regarding "control of prices;" a proposed rule to gather information on unregulated swaps was not approved so that more time is needed to gather data. There are no reliable analyses to support excessive speculation affecting regulated markets and none to support that position limits will prevent excessive speculation.

Another article at ccstrade, says there is disagreement about the legal rights of CFTC to enforce rules limiting speculation. The commission has made progress on limiting the number of contracts a single firm can hold. Gensler affirms: "The CFTC does not set or regulate prices. Rather, the commission is directed to ensure that commodity markets are fair and orderly to protect the American public."

In a February 18, 2010, article by Matthew Leising (Bloomberg Businessweek), Gensler is pushing for transparent and open market places on exchanges and SEFs (Swap-Execution Facilities) that may meet with resistance from the banks:

Banks to Thwart CFTC on Swap Rule, Oliver Wyman Says
by Matthew Leising - Bloomberg Businssweek

(Updates with CFTC meetings on SEF rules in ninth paragraph.)

Feb. 18 (Bloomberg) -- A Commodity Futures Trading Commission plan to ensure open access to swap-trading systems will be thwarted by banks, who want to exclude customers and trade only among themselves in part of the market, according to consulting firm Oliver Wyman.

The proposed rule, now open to public comment while the final version is written, requires any qualified swaps investor to have “impartial access to the market” to trade the contracts on so-called swap-execution facilities. That could open the current inter-dealer market, where only banks are allowed to trade with each other, to allow in their clients, such as money managers and hedge funds.

“The definition of SEFs is not yet ready, and we understand the banks are heavily lobbying against this,” Robert Urtheil, a partner at Oliver Wyman who co-authored a report this week with Morgan Stanley on the future of the capital markets structure, said in an interview yesterday. “The market structure will stay as it is, with an inter-dealer market and a dealer-to-client market.”

That’s because billions of dollars are at stake, Urtheil said. The largest dealers make a collective $30 billion a year by executing fixed-income swaps, such as for interest rate and credit risk, with their customers, compared with $3 billion to $5 billion a year from trading fixed-income futures, said the New York and Frankfurt-based consultant. Keeping their customers separated from other dealers would prevent the swaps market from becoming like the futures market and help preserve their revenue, he said.

Oliver Wyman is a unit of Marsh & McLennan Cos., the second-biggest insurance broker.

CFTC Rules

The CFTC rules will bring more participants into the wholesale market for inter-dealer services because clearinghouses that back the swaps traded on SEFs will broaden the base of investors to transact with, said Christopher Giancarlo, executive vice president of GFI Group Inc., an inter- dealer broker. Clearinghouses lower counterparty default risk among users by sharing risk.

“You’re still going to have a two-tiered structure,” said Giancarlo, a former chairman of the Wholesale Markets Brokers’ Association of the Americas, an inter-dealer broker trade and lobbying group.

“Everyone I’ve spoken to realizes that the times are changing and are preparing for a bigger wholesale market,” he said.

Read the entire article here