From the September 01, 2010 issue of Futures Magazine • Subscribe!

Gensler: Correcting the record on OTC regulation


FM: Are you making progress on final rules for foreign exchange? The 10% margin rule caused quite a stir.

GG: We proposed a rule in January, we got over 9,000 comments. Under the Dodd-Frank statute we have 78 days from today to finalize those rules. We will finish this within 78 days [by mid-late October].

FM: What will be in it?

GG: I can tell you that under the Dodd-Frank [law] that we have to complete it 90 days from enactment or 78 days from now and we plan to do that.

FM: For years there have been attempts to clearly define your authority over retail forex. Does the law accomplish that?

GG: The [law] also includes in section 742 provisions with regard to retail commodity transactions including foreign exchange and in those provisions it provides that the federal regulatory authorities whether they be the banking regulators or the market regulators, like the SEC and CFTC, within a year of [enactment] shall prescribe rules and regulations that are necessary. We are a little ahead because we had already proposed a rule in January so we have 90 days to finish it; the other Federal regulators get a whole year because they haven’t yet proposed anything. All of the Federal regulatory agencies will be issuing retail foreign exchange rules. That is appropriate because in some instances these contracts are being done by banks, in some instances broker dealers, credit unions, sometimes futures commission merchants or retail foreign exchange dealers so I am pleased the bill included language that these various Federal agencies all would do rules to protect the public.

FM: Does this threaten the principle that the CFTC has exclusive jurisdiction of all commodity futures?

GG: Well, foreign exchange transactions were treated differently in the 1974 act due to the Treasury amendment, so this has been true for 36 years. The Dodd-Frank [law] provides a very strong approach that if you are going to do retail foreign exchange it has to be subject to rules and regulations proscribed by the appropriate federal regulatory agency: for banks, for broker dealers, for futures commission merchants and so forth. This is the first time there is an actual Congressional mandate that there has to be rules and regulation and it is very specific. We have already been in discussion with the banking agencies and the SEC on this in the last 12 days.

FM: Is there an attempt to normalize rules to avoid widely varied margin requirements as currently are proposed?

GG: There is an attempt to be as consistent as we all can be. That is all I can say at this time because we have to finalize our rule and they have to start upon their rulemaking.

FM: The CFTC recently proposed rulemaking to gather an account ownership and control report (OCR) on all accounts active in the United States. Why is this necessary?

GG: It is very necessary so that we can look across accounts regardless of where they are trading. We have an open comment period and it would be terrific for people to send in comments on it. The goal of such a rule is that we have account numbers and know exactly who is trading in the markets in a very accessible way. It is similar but not identical to what the SEC has put forward. We will do something similar to address swaps.

This will facilitate what our staff does. We get all the trading positions and all of the open positions of the markets we oversee every day but currently when that information comes in we have a trading number or trading ID but we don’t have the account owner behind it. This rule, and we are waiting for public comments, will facilitate what our staff does and it will allow them not to have to do the next phone call, the next follow-up to find out who’s account this is. It is part of an ongoing effort to makes things more efficient for our enforcement and surveillance people.

FM: A former CFTC chairman suggested that Congress could have saved time and effort by simply declaring swaps futures and allowing the CFTC to regulate them and provided exemptive relief when appropriate. Would this have bee more efficient?

GG: Congress passed a strong and historic legislation that took into consideration how the swaps markets work and it was important to take that into consideration. For instance there still will be bilateral swaps so that companies and municipalities can hedge tailored or customized risk that might not be on a trading exchange or standard enough to be cleared. It was very appropriate to make sure the swap dealers were regulated, in some instances that is similar to how futures commission merchants are regulated but this went further in a number of places and allows for the Federal banking agencies to set the capital margin for banks in swaps dealing but it also allows in the mandatory clearing and mandatory trading that there is still going to be some products that are so tailored and customized that they will be allowed to be traded bilaterally. The statute says that if you are a commercial non-financial entity that is hedging a risk, whether you are a large corporation or farmer, you are not required to use the clearinghouses.

FM: Did your background on Wall Street help in working on these rules? How have your former colleagues on Wall Street received this?

GG: I have found that it was very helpful — though I left Wall Street 13 years ago — to have the knowledge, albeit a little rusty, of these markets, of how a swap is structured, how risk management can be enhanced [and] how you can promote transparency. The President asked me to do this job and my job is to help promote the best public policy to lower risk to the American public and to promote transparency so markets work. That is a little bit different than the job somebody has when they are on Wall Street. Their job is about their clients and making money for their firm.

FM: How will the industry be different a year from now?

GG: I like to think that we will have finished our rule making because Congress has asked us to do that and that there would be many people in the industry looking forward to the affective date and that overall the market would be going towards more products being centrally cleared, more of it being on transparent trading platforms and the swap dealers themselves having some rules of the road on their business conduct and on how they reserve capital for this business.

FM: Will you still be there? What is your ambition for the future?

GG: I feel honored that the President asked me to do this job. It is a tremendous group of people I get to work with everyday. I sure hope I am still here. We have a lot to do, this isn’t just about rule writing, we also need to work with Congress to get the resources and grow this agency. We probably need to have nearly 400 more people, build the expertise to oversee some of these markets. There is a tremendous amount to do well past the rule writing.

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