In the latest issue of the The Risk Desk, CFTC Commissioner Dan Berkovitz shared his perspective on Dodd-Frank's impact on the energy sector, futures commission merchant ("FCM") consolidation and position limits.
Mr. Berkovitz praised the CFTC for getting it "about right" regarding the "energy revolution" and the "regulatory revolution" after Dodd Frank. He also said that end users have exceptions for clearing and margins, and lesser recording burdens.
On energy and banking, Mr. Berkovitz stated that the enforcement situation is drastically different compared to ten years ago. According to Mr. Berkovitz, there are now "more standards, more of a focus on compliance" and fewer "big enforcement actions." He observed that the compliance costs of Dodd-Frank have not been excessive for the energy sector considering the improvements to market integrity. Further, Mr. Berkovitz added that enhancements in regulation and the improvement in the industry go "hand in hand."
On the topic of FCM consolidation and, specifically, the "halving of that sector," Mr. Berkovitz said that the primary role of regulators is to address regulatory barriers. He noted that the energy and banking industries are being viewed generally by industry participants in the context of "increasing concentration" and "increasing information costs."
Mr. Berkovitz also expressed support for position limits, saying that Congress intended for the CFTC to put limits on energy, metals and agricultural commodities.
Commentary / Bob Zwirb
Commissioner Berkovitz's view that the energy sector benefits from recent regulatory initiatives, in particular to "the regulatory revolution with Dodd-Frank," and his claim that this "improvement in regulation and the improvement in the industry go hand in hand," needs to be considered in context. Although he acknowledges that the energy sector today is undergoing "increasing concentration" attributable in part to increased "regulatory barriers," Mr. Berkovitz seeks to add indirectly to such barriers by calling for the imposition of position limits on the energy sector, a move that the CFTC's own CFTC Energy & Environmental Markets Advisory Committee states "poses a serious threat to energy market liquidity."
Likewise, in claiming that "the enforcement situation is totally different from what we saw 10 years ago, with Enron and all the rest," Mr. Berkovitz makes no mention of the role that regulation played in that "situation," in particular the flawed regulatory design that disconnected the wholesale and retail markets for electricity in the California power market, and the state ban on entering into long term purchase deals or hedging contracts that exacerbated the crisis. See, e.g., Analyzing California's Power Crisis, The Amazing Powers of the CFMA, and Lay Off. It goes without saying that Dodd-Frank did nothing to address these regulatory flaws.
Finally, Commissioner Berkovitz's statement that "as regulators, we can only really speak to . . . regulatory barriers . . . that are not appropriate or are inappropriately discouraging activity that we should otherwise be encouraging," understates the role that regulators should take here. For regulators need to do more than "speak" to such barriers, but actively seek to avoid contributing to, or imposing them in the first place, and remove those unnecessary or inefficient ones that are currently on the books.
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