Commodity Futures Trading Commissioner Sharon Bowen argued for granting authority to the CFTC to impose user fees on certain industry participants, during a CFTC reauthorization hearing held last week before the United States House Committee on Agriculture, Subcommittee on Commodity Exchanges, Energy and Credit.
CFTC Commissioners J. Christopher Giancarlo and Mark Wetjen also spoke before the subcommittee, with Mr. Giancarlo indicating that the CFTC should realign its regulatory agenda prior to requesting additional funding. Among other things, Mr. Wetjen argued for an amendment to bankruptcy laws to provide for individual segregated accounts for customers.
During her testimony, Ms. Bowen was not specific on the type of user fees she would recommend. However, she said, “there are many ways to structure such a fee, including establishing de minimis fees on all trades, fees on certain riskier trades, or annual fees on registrants.”
Ms. Bowen claimed that the Commission required additional resources to “keep pace with our duties.” She said that CFTC current underfunding “has been an obstacle to [the] industry, including end-users.” According to Ms. Bowen,
[w]ith a staff that is stretched so extremely thin, reviews of various applications by derivatives clearing organizations and exchanges can take longer, delaying those organizations’ efforts to improve and enhance trading for market participants. … And with a staff that is stretched so extremely thin, our rulemaking process will move much more slowly. Not only does that invite additional regulatory uncertainty into the markets we regulate, but it also means that we are less able to craft exemptions for end-users or market participants in a timely fashion, even for those entities who have a critical and real need for them.
During his appearance before the subcommittee, Mr. Giancarlo suggested that, before the Commission seeks additional resources, it should reduce “inefficiencies” in the Commission’s oversight. Mr. Giancarlo claimed that it is the CFTC’s own regulatory agenda that contributes to its overwork. According to Mr. Giancarlo,
[f]or example, managing the CFTC’s flawed swaps trading regulatory framework is expensive and time-consuming. Fitting the square peg of the CFTC’s swaps trading rules into the round hole of the established global swaps markets requires the Commission and staff to devote enormous resources to continuously explain, clarify, adjust, exempt and manipulate rules to allow rough swaps market operability. The Commission and staff must constantly add to the plethora of no-action letters, guidance, staff advisories and other written communications that go out to the market and participants. … The CFTC’s current swaps trading regulatory framework requires enormous bureaucratic “make work” to assure industry compliance. … Similarly, the CFTC’s proposed position limits rules are overly burdensome and will require substantial agency resources to implement and sustain. … [They] would partially duplicate—at US taxpayer expense—the management of position limits already being done by DCMs at industry expense. The CFTC should work to reduce these and other examples of inefficiencies before asking for substantial budget increases.
In his testimony, Mr. Wetjen identified a number of issues that the CFTC should rapidly address. These include (1) ensuring that differences are resolved with European regulators to ensure that US clearinghouse regulatory framework is assessed as equivalent to the European framework. Otherwise, European banks will be assessed a higher capital charge for clearing trades through US clearinghouses; (2) clarifying the CFTC’s requirement that block trades involving swap execution facilities must occur away from the SEF. This has caused difficulty for SEFs and futures commission merchants in complying with their pre-execution credit checking obligations; and (3) enhancing transparency regarding clearinghouses with respect to stress tests evaluating how much of a clearinghouse’s own capital should be used and under what circumstances in case of a major clearing member default.
Commissioner Wetjen also suggested that Congress should consider amending bankruptcy laws to permit the CFTC “greater flexibility with respect to the protection of customer funds.” Currently, said Mr. Wetjen, all customer property must be distributed ratably among all customers when there is an overall shortage following an FCM insolvency. There is no ability for the CFTC to design a framework that provides for individual customer funds segregation. According to Mr. Wetjen,
this requirement limits the commission’s flexibility in designing a model for the protection of customer funds that allows for individual segregation. … For customers who believe they can better protect their funds in the OTC marketplace this potential result is unsatisfactory.”
During his appearance, Mr. Wetjen also called upon the subcommittee to monitor developments that appear to be leading to a decrease in the number of FCMs. He indicated the subcommittee should “play a role” to help ensure that different regulatory authorities “do not pursue goals that are may be at cross-purposes with each other”—such as promoting central clearing of derivatives through financial regulation, and raising capital standards for global banks.
My View: I have often previously argued that regulators must be careful not to enact disparate regulations that, together, negate each other and fail to advance desired objectives. As Commissioner Wetjen observes, regulations that encourage central clearing of derivatives cannot be effective if other regulations discourage central clearing through capital surcharges. Likewise, the noble objective to encourage enhanced customer protection by requiring FCMs to use their own capital to fund customer margin deficiencies is frustrated if the same regulations encourage FCMs to require more funds up front from customers, thus increasing clients’ exposure to their brokers. On and on. Preferably in advance, but certainly periodically on an ongoing basis, regulators should step back and review holistically the impact of their regulations to assess whether desired objectives are being met, and, if not (or not as well as possible), revise them.