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.
FM: Is it clear what OTC products fall under CFTC jurisdiction and what goes to the SEC? What falls under both? Have you and Chairman Shapiro created a strategy for how the two agencies will work on specific mandates?
GG: Congress has spoken and there is a very good understanding. We are directed to write joint rules on the definitions of swaps and securities-based swaps and other key terms in the statute, but it is clear that some products like securities-based swaps that are based on a single or narrow based underlying securities, the SEC will regulate; and some products called swaps in the statue, which relate to interest rates, currencies, commodities and the broader-based securities, like those based on the S&P 500, would be regulated over here continuing jurisdictional understandings that have been in place since the Shad Johnson Accord but we will jointly write a rule on it and there are some areas on these broad-based securities swaps where the SEC will retain anti-fraud and anti manipulation and be able to see records but Congress has well defined it and the SEC and CFTC are working well together and will come up with a joint rule on these definitions in line with what Congress has done.
The approach the statute took was that each agency will be working closely with the other to make sure the rules are consistent with each other but some swaps will trade on and be cleared by SEC-registered trading houses and clearinghouse and some will be under the CFTC.
FM: Have the exchanges put in place a plan to clear OTC products?
GG: This is going to evolve. The law just passed 12 days ago. We have yet to propose rules. Allow us the next year to write rules on the clearing of OTC derivatives and then allow the exchanges to comment and react.
FM: A little over a year ago, you called for some form of fungibility in how OTC products are cleared. Has that shaped up the way you would like it in the law?
GG: It does provide that the clearinghouses for swaps have to offer their clearing services regardless of where you might have put on a transaction. So if you have done a transaction on one swap execution facility or another, if it is economically equivalent, then the clearinghouse has to take it. They can’t favor one execution facility over another. That is important because it helps promote competition among these exchanges and swap execution facilities. At the same time the bill did not require that any clearinghouse take the credit risk of another. Clearinghouses under the new law, which goes into affect next summer, would have to accept for clearing economic equivalent swaps — this does not speak to futures —regardless of whether it was entered in to one regulated exchange vs. another regulated exchange.
FM: What is your mandate as it pertains to position limits?
GG: The Dodd-Frank Act expanded the CFTC’s authority to set position limits and also directed us in a more clear way to actually do that and expanded it to [OTC] derivatives as well in something called aggregate position limits including the aggregate of [OTC] derivatives and on-exchange derivatives called futures. So, for the first time we are supposed to look across all of these markets. It sets a timeline of within 180 days we are supposed to do position limits for energy products and metals and in 270 days we are supposed to do that on the agricultural products.
FM: What will be the impact of the law on futures traders?
GG: Markets work best when there are rules of the road and they are clear and transparent rules that help promote transparency and lower risk. What Congress has done and what the SEC and CFTC is about to [do] is to make theses markets better for all of the end users that use these swaps and futures. It will bring more consistent regulatory practice to futures and swaps. We go from a situation where futures were regulated and swaps weren’t [despite similarities]. Now they both will be regulated for transparency and clearing and the dealers will be regulated. The goal is to make markets work better for the American public.
FM: What have you learned from your study of the flash crash and what actionable items have you spotted?
GG: We are going to have another joint advisory meeting next week. When we are able to finish the report we will be in a better position to tell you about the recommendations.
FM: The SEC’s initial circuit breakers have already resulted in some trades being busted. Breakers if too narrow can be manipulated. Is there a danger of overreacting and creating a bigger problem?
GG: We haven’t finished the report or had recommendations on the futures markets. We don’t have new rules, we have the current circuit breakers across markets—securities and futures markets — we are taking a look if any of those need to be changed. The SEC working with exchanges put in place some timeouts, these five minute pauses, when the price of a stock moves by a certain percent. Even that is a pilot program.
The review is ongoing. We are still looking at the across markets circuit breakers and how those worked. They were not triggered on May 6 but we are taking a close look at them to see if we should suggest any changes in them.
FM: One criticism of the new rules was that it would move markets overseas. Are you confident global regulators will adopt similar rules to avoid regulatory arbitrage?
GG: We have spent a lot of time consulting with international regulators, [all U.S. regulators: Treasury, the Fed and SEC] have been consulting a great deal, we even have been a part of the President’s meeting with other heads of state at the G20 meetings. I remain optimistic. We are the second nation to move forward; Japan has moved forward before us. The European Parliament will be taking up legislation this fall specific to derivatives that have many of the same features. And though we are different cultures and have different politics, we will end up with comparable approaches to oversight of the derivatives marketplace. (See: "Global regulatory reform: Let the game playing begin.")
FM: How important is that?
GG: I am optimistic that we are going to work to harmonize this. Capital at risk knows no geographical boundary so it is very important to work with our international counterparts to get as consistent as possible.
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.
