From the July 01, 2011 issue of Futures Magazine • Subscribe!

Dodd-Frank: Why the holdup?

The CFTC immediately incurred pushback from clearinghouses when it proposed imposing higher capital requirements on clearinghouses that it deemed "systemically important" than on those that aren’t, as well as a new regime for segregation of customer assets for swap clearing.

CME Group Executive Chairman Terry Duffy — long a proponent of mandatory clearing and settlement — was one of several to criticize these and other proposals on May 25, while testifying before a U.S. Senate subcommittee on banking.

"A focus of Dodd-Frank is to bring the OTC swaps market into a regulatory scheme similar to that which allowed the futures markets to function flawlessly throughout the financial crisis," said Duffy. "If the CFTC and the SEC are to meet the goals of Dodd-Frank to transition from the world of unregulated, uncleared OTC trading to a world more nearly approximating the highly successful futures clearing model, they should adhere to the principles [that] have proven already effective in the management of risk."

He argued that imposing lower capital requirements on non-systemically important clearinghouses would make it possible for them to lure business by offering lower clearing costs.

He proposed instead subjecting systemically important clearinghouses to more frequent stress tests, but added that his argument is not about specific rules that the CFTC has proposed, but about whether the CFTC has overreached by proposing those rules.

"Although Dodd-Frank granted the CFTC the authority to adopt regulations with respect to core principles, it did not direct the CFTC to eliminate principles-based regulation," he said. "Rather, Dodd-Frank made clear that (clearinghouses) were granted reasonable discretion in establishing the manner in which they comply with the core principles."

He added that the CFTC seemed to be moving from its time-tested role as a principles-based regulator to a new role of a rules-based regulator.

"The rigid rules being proposed by the CFTC with respect to risk management are unnecessary and destructive of innovation and competition," he said. "Risk management is not an assembly-line type of process that can be commoditized, codified and deployed in such a way as to ensure that risk management regimes of (clearinghouses) remain prudent and agile."

Futures Industry Association (FIA) President John Damgard agrees and says, essentially, that the good guys are being painted with the same brush as the bad guys."The regulated exchanges and clearinghouses performed well through all this turmoil," he says. "They’ve basically shown they know how to get the job done through self-regulation, and that they do a better job through self-regulation than they would under a more restrictive regime, so it makes no sense to subject them to the same rules that you would subject to people who didn’t get the job done."

Don Thompson, managing director and associate general counsel of JPMorgan Chase, took a different tack.

"Central counterparties do not eliminate credit and market risk arising from derivatives," he said. "They simply concentrate it in a single location in significant volume."

He warned that the concentration of risk could be offset only by more regulation.

Over the next few months, Democrats and exchange bosses will be working hard to agree on rules they all can live with, while opponents will try to delay implementation until after the 2012 elections.

That’s a far cry from the way Glass-Steagall began. In the early years after implementation, it was strengthened and expanded — and partly credited with supporting one of the more stable periods in U.S. banking history.

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