CFTC Struggles to Find the Rhythm of Regulation

The U.S. Commodity Futures Trading Commission (CFTC) is struggling to find a rhythm for new rules meant to curb systemic risk in the financial system.

Bloomberg is now reporting that the CFTC may delay derivatives compliance rules for overseas wings of U.S. Banks JPMorgan Chase & Co. and Goldman Sachs Group Inc. These no-action orders would temporarily preclude large banks from risk-management requirements; they could keep open loopholes that undermine a large portion of already executed regulation. Why would the CFTC undermine its own regulation?

The move toward no-action orders and cross-border exemptions makes sense given the CFTC’s meeting with foreign regulators last week. Tellingly, the regulators issued an agenda, not for regulation itself, but for the rhythm and process of cross-border regulation moving forward.

Two Processes for CFTC Regulation: Regulate then Relieve

There is discord between CFTC commissioners about the organization’s current process for implementing derivatives reform. For CFTC Commissioner Gary Gensler, it’s a simple matter of establishing, and then phasing in, compliance.

“We have and will continue to grant requests for phased compliance,” Gensler told Bloomberg.

It’s difficult to tell whether this is a considered process on the part of the CFTC, or just an aftereffect of potential lawsuits and friction with the industry. More than 40 no-action or other non-enforcement letters have been issued since the beginning of the year; it’s hard to chalk this up to “phased compliance” upon request.

This is perhaps why commissioner Scott O’Malia has suggested the CFTC has inadvertently established a process of regulate then relieve.

“In addition to the rulemaking process, we have in effect been forced to set up a parallel exemptive process to provide relief from these rules,” he said.

Of course, O’Malia would come down on the side of fewer rules. But others, like former CFTC head Jeffrey Harris, think the no-action letters are taking away from crucial regulation.

“Maybe four years from now someone will ask why they issued all these no-action letters taking all the teeth out of the law. There needs to be some method and mechanism to go back and revisit these once final rules are in place,” Harris said.

CFTC Enforcement Blitzkrieg

If the process for finalizing and derivatives regulation has been slow, confusing, or too labored, the CFTC’s approach to domestic enforcement issues has been the exact opposite. The agency has announced seven enforcement actions or settlements in the last week alone. These include various Ponzi schemes, commodity pool scams, and acts of fraud and false registration.

Check out CFTC statements here.


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