Regulators and lawmakers met on Capitol Hill Tuesday to discuss the implementation of Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act at a hearing before the House Financial Services Subcommittee on Capital Markets and Government-Sponsored Enterprises.
Title VII focuses on regulation of the over-the-counter swaps market, and much of the questioning Tuesday focused on provisions that would regulate overseas affiliates of U.S. institutions, as well as foreign market participants engaged in swap dealing with "U.S. persons."
Subcommittee Chairman Rep. Scott Garrett (R-NJ) opened the hearing by launching a salvo at the two agencies for failing to submit their prepared testimony on time. He continued by calling the implementation of Title VII a “train wreck” that could spur the migration of asset classes from the swaps to the futures market.
Rep. Spencer Bachus (R-Ala.) took a somewhat more moderate approach in his opening remarks, acknowledging the need for reforms while still expressing concern over possibly conflicting interpretations of what regulatory reforms are required under the legislation.
“If all derivatives were supposed to be traded on an exchange, then they would all be futures,” he said. “Derivatives are different from exchange-traded products, and imposing the listed futures or equities model on listed derivatives is not the mandate of Title VII.”
In his prepared testimony, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler addressed concerns over cross-border regulation. “During a default or crisis, risk knows no geographic border,” he said. “If a run starts on one part of a modern financial institution, almost regardless of where it is around the globe, it invariabiliy means a funding and liquidity crisis rapidly spreads to the entire consolidated entity.”
The CFTC has proposed a substituted compliance program, under which foreign market participants that comply with Dodd-Frank by complying with comparable overseas regulatory requirements.
Robert Cook, the director of the Securities and Exchange Commission’s Division of Trading and Markets, said that the agency plans to offer cross-border guidance in the near future. “As a rulemaking proposal,” Cook said in prepared remarks, “the release will consider investor protection and incorporate an economic analysis that considers the effects of the proposal on efficiency, competition and capital formation.”
At the hearing itself, Cook noted that this is a particularly crucial time for global financial regulations, as countries prepare to institute scheduled reforms. “There are a lot of jurisdictions that are on the cusp of implementing their G20 commitments,” Cook said. “Any one piece of it that doesn’t come along or that goes too far can disrupt the dynamic.”
A second hearing on Dodd-Frank, comprising representatives from the banking and financial services industry, is scheduled for this afternoon. That session will include testimony from Keith Bailey, managing director at Barclays; Michael Bopp, a partner at Gibson, Dunn & Crutcher; Samara Cohen, managing director at Goldman Sachs & Co.; Eric DeGesero, executive vice president of the Fuel Merchants Association of New Jersey; Thomas Deutsche, executive director of the American Securitization Forum; Christopher Giancarlo, the executive vice president of GFI Group Inc. and chairman of the Wholesale Markets Brokers Association, Americas; and John E. Parsons, a senior lecturer at the Massachusetts Institute of Technology's Sloan School of Management.