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

The Goldman Rule

Featuring Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), on our cover was a hard decision. Futures is a magazine for traders, who prefer to hear about markets, not regulations. But in this case there were multiple exceptions. First, Gensler was a trader. He actually ran the interest rate and currency trading efforts in Tokyo for Goldman Sachs, the breeding ground for future government honchos. Think of all those who made a mark on the government process who formerly walked the hallowed halls of Goldman: Robert Rubin, Jon Corzine, Hank Paulson...the list goes on. No slouches there. Perhaps some questionable decisions when they were in office, but overall, a group of smart people who come from a background much different than a typical government wonk.

The second reason Gensler made the cut: he's the man who will oversee the writing of many of the rules stemming from the Dodd-Frank Wall Street Reform and Consumer Protection Act that was signed by President Obama on July 21, 2010. The fact that he lived in the world of Wall Street gives him an edge on almost any other regulator whose agency will need to write and implement rules. Although he says it has been 13 years since he was at Goldman (he worked at the Treasury and held various advisory positions in between), he still brings a balanced view to his workload. Most regulatory staff come from within the government itself, groomed in the bureaucracy and often out of touch with the real world. And though there are exceptions, lead regulators are usually former lobbyists or lawyers.

Now, it's arguable that Goldman has too frequently populated the halls of government, and in fact helped create the situation the country is in today. After all, when Gensler was at Treasury, he fought against placing restrictions on over-the-counter (OTC) derivatives during the Commodity Futures Modernization Act debate. What a difference a financial crisis can make. Today, Gensler is an advocate of regulating OTC products and players, and believes the Dodd-Frank Act is not the watered down version many say it is.

So for these reasons, his trading background and the fact that the new regulations will affect many traders across the business, we thought Gensler was not only a good choice, but a necessary one. Putting a face with the man who will implement many regulatory changes perhaps makes him more accountable to the business. His interview with Managing Editor Dan Collins outlines some of the challenges for the CFTC, the business, and yes, traders (see "Gensler: Correcting the record on OTC regulation").

What will the legislation mainly affect? OTC derivatives and swap dealers. It probably won't impact traders much who don't use these products. OTC derivative swaps will be regulated by the CFTC and Securities and Exchange Commission (SEC) and for the most part traded on an exchange or "swap execution facility" and cleared through a clearinghouse. Non-standardized swap contracts that can't be exchange traded/cleared will need to be reported to a swap data repository. Further, most swap dealers will be regulated by both the CFTC and SEC. One law firm dissecting the Act noted that forcing OTC swaps to be cleared on exchange may help small funds negotiate better terms with dealers. But for hedge funds that use swaps, they could be labeled as "major swap participants," and be regulated as such.

Now the rule writing begins, and Gensler will work closely with SEC Chair Mary Schapiro, whose roots are deep in the futures industry. We believe understanding the business they regulate can produce fair rules; at least we hope so.

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