Last week, I wrote about the Commodity Futures Trading Commission's budget crunch and how the agency had to cut its technology allocation to hire additional staffers to write the Dodd-Frank derivatives reform rules.
At last week’s TabbForum conference, CFTC Chairman Scott O’Malia said that the agency couldn’t allocate more money to technology because it had spent $15 million hiring people to write the rules and watch over the industry.
I am now more educated about the politics driving the agency’s cash flow problems.
Here are some facts:
The CFTC was given $550 trillion of the $600 trillion swaps market to oversee vs. the SEC, which picked up about $55 trillion of the swaps market (credit default swaps piece). The CFTC has a total staff of 600 and a budget of $168 million, while the SEC has a staff of 3,700 and a budget of $980 million. Chairman Gary Gensler has asked Congress for $260 million. Meanwhile the SEC asked for an additional $200 or $300 million to increase its budget up to $1.2 billion.
Isn’t this a bit lopsided? From a public policy perspective, sources on Capitol Hill who are close to the Dodd-Frank rule writing process feel the CFTC has been dealt “an unfunded mandate.”
It’s no secret that Wall Street firms are lobbying various Republican Congressmen to persuade them not to grant more money to the regulatory agencies. In fact, some sources contend that Wall Street is deliberately working behind-the-scenes to defund the main Dodd-Frank regulator. Derivatives dealers and banks would like nothing better than to continue trading OTC derivatives in the dark. If this were the case, they could hold onto the $60 billion in profits they made last year.
At the recent Tabb Forum on OTC Derivatives reform, large firms such as Barclays, Goldman Sachs, UBS, and Blackrock expressed concerns about the costs of mandatory clearing and warned that liquidity could disappear when standardized contracts are migrated to swap execution facilities (SEFs). There was a lot of talk about clients such as pension funds needing to sign new documentation, and how the re-papering could take six to 18 months.
All of this may be true, but it’s also true that bringing transparency into the swaps markets could increase the volumes, bring in new institutional participants and reduce transaction costs since a public ticker displaying the last trade, bid and offer and volume would be created. But it would no doubt, narrow spreads and decrease the banks’ profits. Dealers would still make money on bespoke and customized swaps, but they would make fractions of what they make now on the commoditized swaps.
The CFTC genuinely deserves to have a legitimate budget to oversee the huge responsibility. Meanwhile, the SEC, which has nearly $1 billion, is asking for more money too. While the SEC has more people and resources, it didn’t too a very good job in the past, as in the case of missing (or ignoring) the Madoff fraud. Let’s remember, the CFTC was given the lion’s share of the OTC derivatives swaps market because the $33 trillion futures market has avoided a disaster through the operation of clearing houses, intraday monitoring and real-time risk management.
While the big brokers are spending hundreds of millions of dollars to comply with Dodd Frank clearing and execution, the question is how much are they spending behind-the-scenes on lobbying to “defund” the CFTC and make it less ineffective? Perhaps they are looking to create self-regulatory organizations to do the monitoring. Well, that didn’t work so well the last time, when Bear Stearns and Lehman Brothers collapsed and A.I.G. Financial products nearly brought down the financial system.
Yet, with the current climate in Washington, it’s unlikely that Congress will voluntarily grant the CFTC more money to hire people or purchase systems. I predict the CFTC will use its emerging technology committee to figure things out on its own and with some luck, drive a hard bargain with its Congressional penny pinchers.