CFTC Presents its Own Version of “Game of Thrones”

An Alternative Investment Management Association (AIMA) breakfast seminar at Ernst & Young headquarters in New York on June 14th confirmed turmoil and intrigue within the CFTC. While we cannot speculate on the amount of violence and sex behind the scenes, the level of political intrigue is on par with the quest for the Iron Throne (for reference, see hit HBO series, “Game of Thrones”).

The Laven Partners U.S. team joined a number of hedge fund managers and industry insiders to hear former SEC Commissioner, Kathleen Casey, the Chairwoman of AIMA, opine on the state of cross-border derivatives regulation at both the SEC and CFTC.
The backstory for all this is the aggressive role that the CFTC has played in attempting to overhaul the regulatory environment in the swaps market. In the US, the CFTC is generally charged with regulating swaps, with the SEC having joint oversight of “securities” based swaps (or “securities futures products” in regulatory parlance). While both agencies are trying to address the issue of cross-border oversight, the CFTC has been playing a petulant King Joffrey to the SEC’s more reasonable Ned Stark (no “GoT” reference to go unturned).

Discussions revealed the extent to which politics and gamesmanship have overtaken discussions at the CFTC and spilled over abroad in anticipation of the July 12th swaps regulatory deadline. In a surprise move last year, the CFTC avoided rulemaking in favor of issuing broad-reaching “guidance” on swaps trading, a decision that did not allow for public comment. The SEC went in a different direction, instead articulating rule proposals that were more in line with industry expectations.

The lack of rulemaking and expansive international reach of the CFTC raised concerns with Capitol Hill about diminished American access and competitiveness in the swaps market.  The U.S. House of Representatives responded by limiting the powers of the CTFC in regulating foreign banks that trade swaps provided their home countries implement appropriate regulation. The law also pressed the issue of joint rulemaking between the SEC and CFTC on cross-border issues, further adding fuel to the already contentious fire of whether the impending July 12th deadline should be extended.

Many have argued for the CFTC to delay swap-trading requirements until the end of the year to allow European regulators to showcase their own plan. Two CFTC commissioners have called the self-imposed July 12th deadline “arbitrary,” and a handful of global finance ministers have expressed concerns about an overreach of the CFTC’s jurisdictional powers directly to U.S. Treasury Secretary Jack Lew. Even within the CFTC, there is no consensus among commissioners, with a split in approach largely along political party lines. Chairman Gary Gensler and Commissioner Bart Chilton have declared their support for finalization of the swaps plan before the deadline in order to “provide certainty to markets now.” However, Chilton was alleged to have recently offered a softer compromise, suggesting that the Commission should grant U.S. foreign bank affiliates extra time to comply with regulations.

The CFTC’s internal divisions and the increasingly elevated nature of swaps regulation are further taking place within the backdrop of shifting leadership at the CFTC. Gensler, who has served as Chairman since 2009, is set to finish his term at year-end. Onlookers such as Casey, who has called the situation “fluid and dynamic,” expect the drama to reach new heights in the coming weeks. So we cannot even speculate about who will be sitting on the CFTC throne next year.

From our seat in this theatre, the CFTC seems to be winning battles now, but the balance of power may just be tipped from overseas. The EU, like Khaleesi sailing in from distant shores, has a dragon or two up her sleeve and isn’t likely to allow such an aggressive expansion of US regulatory authority into her domain. Stay tuned for more high drama.

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