The King Is Dead; The CFTC Limps On

 

Outgoing CFTC Chairman Gary Gensler delivered his farewell speech on 27th December 2013, calling himself “darn proud” of pretty much everyone associated with his time at the agency, including his daughters and their “Captain Grandpa”. While he gave a full summary of the agency’s achievements under his tenure, he only alluded briefly to the many issues that will face his successor, saying “this agency really does need more resources”. Only time will tell whether Chairman Gensler’s departure marks a turning point for the CFTC; either way, it is a vantage point from which we may assess their performance in overseeing the most fundamental  U.S. financial reforms since the 1920’s, and look ahead to the challenges still to be overcome.

Back at the 2010 dawn of Dodd-Frank, the CFTC was a small, sleepy agency overseeing the relative backwater of the futures and options markets; it now oversees the largest markets in the world, is undeniably awake, but unchanged in size. This disparity is the reason behind its “shoot first and issue no-action letters later” policy. Its continuing lack of funding and consequent small size has both freed it from bureaucratic impotence, while rendering its decisive action ineffective. The CFTC has an operating budget of $195m, the SEC by contrast has $1.4 bn., even the UK’s FCA is funded to tune of £432m p.a.,$ equiv. – $712.8m. Its oversight has increased tenfold, while it’s budget has slightly shrunk. Gary Gensler announced in October 2013 that employees would be put on a 14-day furlough due to budget constraints, this despite the agency having collected $1.7 bn. in fines over the previous year (the money going to Treasury not the CFTC). On the face of it, his massively laudatory departing speech was not praise enough.

However, even in the presence of political deadlock, the CFTC has a vital job to do- a job at which it was (perhaps heroically) failing even during the departing Chairman’s tenure. The agency enacts rules, all almost inevitably subject to no-action prevarication, and then clarifies the confusion with an all-too challengeable disregard for the Administrative Procedure Act. Trade reporting and transparency is the focus of the Dodd-Frank act, but the agency is swamped- unable to process and analyse the data which it demands. On 27th December, it increased the notional “size” of the swaps market it oversees by $40 trn. to $430 trn , the third such material data error in the year. Under-resourced and largely staffed by lawyers and economists, the CFTC is arguably unfit for its purpose as a huge data reporting and analysis organisation. It is a testament to Gary Gensler that they achieved as much as they did during his time.

The CFTC starts the New Year with only three Commissioners- the acting Chairman Mark Wetjen, the Republican Scott O’Malia and the soon to be departing Bart Chilton. Timothy Massad- the Obama-nominated, but yet to be Senate-confirmed new Chairman is something of an unknown quantity. Having previously presided over the bank-friendly TARP bailout, many commentators have assumed he may lack his predecessor’s bulldog fortitude.   Whatever his determination, the agency will still be struggling with a flawed rulemaking process, already-drafted rules which are unworkable, well-funded legal challenges on both counts and a funding crisis which speaks to the true political will behind its purpose. The likely forecast for 2014 is – continuing fog.

This piece is cross-posted from Regulatory Reform with permission.