Gary Gensler was sworn in as chairman of the Commodity Futures Trading Commission (CFTC) on May 26, 2009 amid a turbulent debate over regulation. His confirmation fight was a tough one as his previous work in the U.S. Department of Treasury as under secretary of domestic finance caused two Senators to hold up his confirmation because of his vigorous support for keeping over-the-counter (OTC) derivatives exempt from regulation in the Commodity Futures Modernization Act of 2000.
It is ironic, then, that Gensler would arguably become the Administration’s most forceful advocate for regulating OTC markets. Prior to his work at the Treasury, Gensler worked at Goldman Sachs for 18 years and became a partner, leading to the impression that he was the wrong man at the wrong time to head the CFTC.
However, Gensler has won over Congressional critics while perhaps adding a few critics from the ranks of his former colleagues on Wall Street. We spoke with the chairman 12 days after President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 about what comes next.
Futures Magazine: Any major legislation regarding regulation leaves a lot of work for the regulators in the rulemaking. We are hearing that this is doubly true in this case. Is that how you see it?
Gary Gensler: Congress passed strong, historic derivatives legislation that for the first time comprehensively regulates the dealers and also mandates that the standard part of the market comes to clearinghouses and transparent trading platforms. There is a series of rules that we have been asked to write working along with the SEC [Securities and Exchange Commission] and in some cases with the Federal Reserve and the other prudential regulators. I have a great deal of confidence in the people here at the CFTC and their ability to do this job.
FM: Given the added discretion in the law, where do you draw the line as to rulemaking and policy setting? What do you see as the intent of Congress as it pertains to your responsibilities?
GG: The clear intent of Congress was to lower the risk to the American public and to promote transparency in markets that were not regulated here or [overseas]. As we go about rule writing, we are going to look to the statute. It is over 340 pages of legislative text specifically on derivatives. Congress has actually given a great deal of specificity and guidance to our rulemaking.
FM: Is there less discretion than some have indicated?
GG: With regards to the derivatives legislation, Congress through this last year and a half of debate, has passed a very strong and detailed bill so we are going to follow that. Where we are asked to give further rules to implement the statute, we are going to take significant public comment, but a great deal of the policy decisions were decided by Congress. Standard derivatives will be coming to exchanges, there will be real-time reporting of those transactions on a regular basis [and] there is mandatory clearing. The major policy decisions were debated and resolved through Congressional action.
FM: You have been one of the stronger advocates of this legislation. Many analysts say lobbying efforts watered down the bill and the end result is a much weaker law.
GG: I thank you for suggesting that I was an advocate because it was the right thing to help the American public. The bill that was passed is very strong. Each of these mandates for clearing and trading — there is a narrow end user exemption for commercial non-financial companies hedging a risk — we will publish a rule on. Congress decided that if you are a swap dealer, if you are a financial entity, your transactions will need to come to clearinghouses and trading venues; if you are non-financial and you are using it to hedge a commercial risk, you get to choose whether or not it comes to a clearinghouse.
We, as is appropriate working with the SEC, will have rules in this area but that is spelled out in the statute. Swap dealers, major swap participants and financial entities are mandated to use the clearinghouses and trading platforms and if you are a commercial end user hedging a risk you don’t. There certainly are going to be things we will have to address in rule writing.
FM: Is the CFTC as it is currently staffed capable of accomplishing all of the rulemaking that will be required?
GG: As it is related to rule making this is an excellent and experienced staff. The CFTC has been overseeing on exchange derivatives for decades. We also, with the help of Congress, have been able to grow in the last year and a half. We will, however, need significant new resources to oversee these markets. That responsibility comes a year from now when this law becomes effective. So we do have the resources to write the rules but we still need to work with Congress for additional resources for when we actually have to oversee these markets.
FM: The legislation requires a great deal of cooperation between the CFTC and SEC. This has been quite difficult in the past. Can you change this pattern?
GG: The SEC and CFTC have been working together very well in this administration. Chair [Mary] Schapiro and I both were designated for our jobs on the same day and have been working closely, and the staffs have worked well together. We did a joint report last year on possible ways to harmonize our rules, we had two public hearings in September of 2009, we went on to achieve legislative success together on this derivative package and we have been working together reviewing the market events of May 6 and we have set up a joint advisory committee on matters. We have a very strong and good working relationship, which will continue through these important rule writing efforts.
Chair Shapiro and I met to layout the whole rule writing effort the day before the president signed the bill, the day after we and the majority of our team leaders had a meeting and in the last 12 days since the president signed the legislation there has not been a day that has gone by where our various rule writing teams haven’t been on the phone or in person with the SEC. It is a very constructive and full engagement between the staffs and at the commissioner level.