A regulator run amok

Regular readers in this forum might remember that a federal agency dubbed the Commodity Futures Trading Commission has generated plenty of concerns. Now Bloomberg Businessweek informs us that CFTC’s outgoing chairman has decided to generate as much regulatory havoc as possible before he heads out the door.

Gary Gensler is sending a message to Wall Street: I am not leaving Washington quietly. In his final weeks as chairman of the Commodity Futures Trading Commission, Gensler has had the agency issue more than a dozen advisory opinions that close loopholes or tighten rules that govern the largest financial firms and swaps traders. The opinions, which were not voted on by other commissioners, covered such issues as regulation of overseas derivatives trades and competition in the swaps market.

President Obama has nominated Timothy Massad, a Treasury Department official, to succeed Gensler, whose term has expired and who must leave by the end of the year. Gensler is “trying to do an awful lot in a very short amount of time,” says Fred Hatfield, a former Democratic CFTC commissioner who now works at Patomak Global Partners, a regulatory consulting firm in Washington. “He’s leaving as little to chance as could be possible.” …

… The move most distressing to the banks is an advisory the CFTC issued on Nov. 14 closing a loophole that allowed banks to avoid agency oversight by setting up swaps deals in the U.S. and then booking them at their affiliates in London. The advisory says that traders based in the U.S. who arrange, negotiate, or execute a deal even on behalf of an overseas affiliate must comply with Dodd-Frank. Swaps are private agreements that allow investors to speculate or hedge their risks on interest rates, currencies, and bond or loan defaults.

The banks are concerned that the rule could disrupt current deals and expose their overseas businesses to more regulation. Rob Nichols, president of the Financial Services Forum, which represents the chief executives of the major Wall Street firms, says that his members want to make sure regulators in the U.S. and Europe are “rowing in the same direction” so the global swaps market isn’t disrupted, and that Gensler’s guidance on foreign trading is “counterproductive.” On Nov. 26, Gensler said the banks would have two months to comply with the rule.

Republican CFTC Commissioner Scott O’Malia criticized the foreign trading advisory as “regulatory insanity” in a Dec. 3 speech. A spokeswoman for EU financial services chief Michel Barnier said Barnier was surprised by the move, which seemed to go against an earlier deal Gensler had cut with the EU.

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