When Regulatory Reforms Become Political, and Personal

It is not breaking news that US regulatory reform has turned political, at least in the case of OTC derivatives reform. Most recently views of the SEC and CFTC diverge on how much this market should be regulated. On swap trades, for instance, CFTC wants users to request five quotes before they trade while the SEC only mandates users to obtain a quote from at least one bank, more aligned with the existing practice. The lighter SEC approach has earned allies in the Congress, with the passing of the Swap Execution Facilities (SEF) Clarification Act. It seems like the moderates are seeing a silver lining.

Previously, the disagreement between the Republicans and Democrats steals the limelight. In an attempt to bottle hatred against Wall Street (displaying in the form of the Occupy Wall Street movement), the Republicans were proposing seven new bills in attempt to limit, what in their view is, the uncapped expansion of CFTC jurisdictional reach in the $600 trillion OTC derivatives market.

The Republicans were concerned that the regulatory reforms introduced by the CFTC in recent months would significantly heighten the regulatory costs of funds which had relied on derivatives to merely hedge everyday risks. They contended that the CFTC reforms would further dampen the already depressed economy, with unemployment stubbornly fixed at a staggering 9 percent. One of the bills, for instance, will exempt commercial “end-users” such as utilities, manufacturers and airlines from posting cash reserves on swaps. Democrats continued to be skeptical if these bills would provide leeways for Wall Street to get around regulations. Gary Gensler at CFTC reiterates that the new regulations are not intended to harm business and merely are required for monitoring purposes; but in the eyes of the investment community, the toughened stance taken by Gensler is discomforting.

In spite of the most recent turn of tides, it is still difficult to deny that US regulatory reform has chartered into dangerous territory and can adversely affect the most routine operations of US financial institutions. For instance, the SEC has been bold enough to push through the Volcker Rule, which attempts to ban proprietary trading and investment of banks in hedge funds significantly if not altogether. If realized, the rule will kill off an important source of revenue for banks, potentially leading to an even more illiquid economy and recession. Indeed, some commentators think that US regulatory reforms have become retaliatory.

The Reuters article on Republicans taking aim at US derivatives reform can be accessed here.  

Reuters report on SEC proposing Volcker Rule, swap dealer plan can be accessed here.  

Financial Times report on swap execution facilities in November can be accessed here.