In an address before the CME Global Financial Leadership Conference, CFTC Chair Timothy Massad described the Commission's accomplishments in derivatives regulation and emphasized that he does not expect that administration to effect a "wholesale repeal" of the Dodd-Frank Act because "there's a growing consensus that the reforms made to bring transparency and oversight to the swaps market made sense."

Chair Massad urged continued focus on:

  • technological changes regarding rulemakings that address (i) cyberattacks, (ii) automated trading, and (iii) blockchain technology;
  • clearinghouse risk and market liquidity regarding (i) the effects and the consequences of reforms with central clearing, and (ii) "whether the various reforms to enhance the capital of [the] largest banks, and put limits on certain activities, have adversely affected liquidity"; and
  • international concerns because there cannot be "modern regulation of global markets without extensive international cooperation and coordination."

Chair Massad called for unity across party lines:

I believe the issues I have outlined will be important regardless of the political composition or leadership of the CFTC. These issues pertain to fundamental changes in our markets; I hope that they can be addressed without partisan divisions.

Commentary

It is to be expected that the members of a departing administration will seek to preserve as much of their agenda as possible, but when Chair Massad declares that the "fault lines of our debates [about Dodd-Frank] . . . [are] largely about the details of regulation, not overall goals," he goes a bit too far. Ditto for his assertion that a "growing consensus" now believes that such reforms "made sense."

Members of the incoming administration, and those who reside on Capitol Hill (especially new members of Congress who have no stake in Dodd-Frank) might ask whether it was a good idea to "implement an entirely new framework for swaps regulation in a short amount of time," as Chair Massad insists. They might also ask if it was necessary for the government to prescribe which swaps must be cleared by a derivatives clearing organization and traded on an exchange. Additionally, they might question whether it makes sense to impose a rigid position limit regime, which the CFTC is now contemplating, on a sector of the market – energy and metals – that had nothing to do with the financial crisis of 2008. Finally, they might ask whether it is prudent to mandate clearing for that huge market, given all that we know about the dangers of consolidating risks in one central party. As Mercatus Center scholar Heister Peirce observed, central clearing "has a valuable place in the derivatives markets, but regulatory attempts to force it come at a cost." Hester Peirce, "Five Years Later, Dodd-Frank Is Looking Pretty Haggard," Real Clear Markets (May 20, 2015).

It is precisely those costs that a new administration should consider when evaluating whether the regulatory scheme that was implemented makes sense. If the primary rationale for regulating swaps, as Chair Massad once observed, is "to bring the derivatives markets out of the shadows," then aren't there less intrusive ways to do so than creating "an entirely new [regulatory] framework"? Wouldn't mandating swap data depositories for both cleared and uncleared swaps be sufficient?

These are the kinds of questions that new leadership should consider before agreeing to a purported consensus on goals for such an important part of today's financial markets.

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