While both President Obama and Congress have proposed a boost in funding for the Commodity Futures Trading Commission (CFTC) in fiscal year (FY) 2011, CFTC Chairman Gary Gensler said more funds would be needed for his agency to implement sweeping Wall Street reforms, which exponentially increase the number of exchanges and clearinghouses that the CFTC will have to regulate.
In February Obama proposed a budget for the CFTC of $261 million for FY 2011 -- a 55% hike ($93 million) over the budget of $168.8 million in FY 2010 (see Daily GPI, Feb. 3). The Senate Appropriations subcommittee with jurisdiction over the CFTC boosted the amount to $286 million for FY 2011, which begins Friday for the federal government.
Senate Banking Committee Chairman Christopher Dodd (D-CT) and Rep. Barney Frank, chairman of the House Financial Services Committee, co-wrote and shepherded the financial regulatory reform legislation through Congress. It was signed into law by Obama in July (see Daily GPI, July 22).
"Though we have the resources to write the rules required by Dodd-Frank, we need more staff to implement and enforce them in the years to come," Gensler told the Senate Banking Committee Thursday. "We will need significant more resources [in] about a year from now to actually implement these" new rules, he said.
"The next year of rule writing will test the very talented staff of the CFTC. Our staff has significant expertise regulating the on-exchange derivatives markets that will translate well into regulating the over-the-counter [OTC] swaps markets. Still, we need significant new resources," Gensler said.
Gensler told the committee that the CFTC will be busy writing regulations to implement the Dodd-Frank legislation through mid-December. The CFTC has established 30 teams to write the rules and is working with other regulators, such as the Securities and Exchange Commission (SEC).
Sen. Jack Reed (D-RI) said the collaboration between Gensler and SEC Chairman May Schapiro was "very recent but commendable." The two federal agencies have had a long history of not working well together. Schapiro said the cooperation from Gensler has been unlike anything she's seen in all her years in government.
Dodd said it was important that the close relationship between the two agencies continue, even after Gensler and Schapiro leave office. "Anything you can do to institutionalize that so the people don't drift away...will be very, very helpful," he told Gensler. Gensler said he was dedicated to that effort.
Gensler said a priority of the CFTC in the months ahead is to designate some clearinghouses as systemically relevant.
Sen. Richard Shelby of Alabama, the ranking Republican on the Senate banking panel, questioned Gensler about the steps he was taking to "ensure that your personal aversion to end-user exemption does not interfere with your agency's mandate to carry out the Dodd-Frank [act]." The new law regulates OTC transactions for the first time by requiring them to be traded on regulated exchanges, much like stocks, and to be cleared in a clearinghouse in order to limit excessive speculation in markets.
However, it grants an exemption to end-users that use derivatives to legitimately hedge their commercial risk rather than for speculative purposes. Gensler was opposed to any kind of exemption while the bill was being drafted in Congress.
"We're going to adopt exactly what you have" in the legislation, Gensler told Shelby. "There's a clear end-user exception for anyone who is hedging or mitigating commercial risk...That's completely what we're going to do, is comply."
Of the 30 rule-writing teams at the CFTC, Gensler said six teams are focused specifically on rules regulating the swaps marketplace. "One team is working jointly with the SEC on defining key terms, such as 'swap dealer' and 'major swap participant.' Another team is working on registration requirements for dealers. We also have teams working on business conduct standards, capital and margin requirements and rules for segregating customer funds," he said.
Gensler said the CFTC expects as many as 200 entities to register with the agency as swap dealers. These would include about 80 global and regional banks currently known to offer swaps in the United States; about 60 affiliates of existing swap dealers; approximately 40 non-bank swap dealers currently offering commodity and other swaps; and about 20 potential new market makers that wish to become swap dealers.
The CFTC will also regulate major swap participants because, while they are not swap dealers, their "participation in the swaps market is substantial enough to significantly affect or present system risks to the economy or the financial system as a whole," Gensler said in his testimony.
The Dodd-Frank bill requires standardized swaps to trade on either exchanges or swap execution facilities (SEF). "It is anticipated that as many as 30 new entities will register as SEFs or DCMs [designated contract markets]. That is in addition to the 16 futures exchanges that we already regulate," Gensler said.
"At the CFTC we have six teams focused on rules related to clearing, including determining which contracts will be subject to the mandatory clearing requirement. Though we do not yet know the total number of contracts that will be submitted for clearing, and the Commission may be able to group many by class, the largest swaps clearinghouse currently clears nearly one million unique contracts," he told the committee.
"It is anticipated that the number of registered derivatives clearing organizations will increase from 14 to around 20 as a result of the Dodd-Frank act."
And the legislation requires that rules establishing position limits be completed within 180 days from the date of enactment for energy and metals, according to Gensler.
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