The Commodity Futures Trading Commission (CFTC) and Congress set far too an “ambitious” schedule to implement rules bringing the $300 trillion U.S. derivatives market under agency oversight for the first time, said a former CFTC commissioner.

“If blame is to be given [for not meeting the statutory deadlines], you’d have to put it to some extent with the agency, but to a larger extent [with the] Congress,” said former CFTC Commissioner and Acting Chair Sharon Brown-Hruska during the televised Platts Energy Week program on July 24.

Congress gave the agency a one-year statutory deadline — until July 16 — to issue many of the final rules to implement Title VII of the sweeping Dodd-Frank Wall Street Reform Act. But the Commission has just begun the phase of voting out final rules. “This was a very ambitious agenda. The agency has worked very hard to try to achieve this…but it really was not realistic,” said Brown-Hruska, who now is vice president in the securities and finance practice at NERA Economic Consulting in Washington, DC.

Because time was running out, the agency in June agreed to postpone compliance until the end of the year for those Dodd-Frank provisions that were “self-effectuating” — did not require final rules to take effect on July 16 (see NGI, June 20). The CFTC’s action provides temporary relief under Dodd-Frank for derivative transactions primarily involving financial commodities, energy commodities and excluded metals. It also extends to Dodd-Frank provisions that do not require rulemaking but reference “swap,” “swap dealer,” “major swap participant” or “eligible contract participant,” which the CFTC has not yet defined.

Just over a week ago week marked the one-year anniversary of President Obama signing into law the landmark Dodd-Frank legislation that lays the groundwork for the biggest overhaul of the financial regulatory system since the 1930s (see NGI, July 26, 2010).

Brown-Hruska said she sees the CFTC adopting position limits to restrict market speculation, but she believes they are an “overblown solution” to addressing high energy prices and volatility. “Position limits have existed for many, many years…so it’s not a new concept. But it is the levels of limits that they’re proposing and it’s the degree of federal intervention into markets that’s at stake here. In the past, the exchanges have been able to set the position limits themselves. The Chicago Board of Trade, the Nymex [New York Mercantile Exchange] have been able to set the position limits based on the ups and downs of energy prices,” she noted.

But Dodd-Frank puts the CFTC in charge of setting position limits. “That’s a concern and that’s why it’s having difficulty passing,” Brown-Hruska said.

When she was acting chair, Brown-Hruska said she directed the CFTC’s economic staff to “study the behavior of managed money — hedge funds in the markets — [to determine] whether they were causing high prices in energy markets. The results came back, [the] answer was ‘no.'” Later she noted that her CFTC colleagues conducted a study of the impact of index investors on the energy market, and again the answer was “no increase in volatility, no effect on prices.”

While Dodd-Frank calls for mandatory clearing of derivatives, Brown-Hruska said energy started moving in that direction after the collapse of Enron Corp. “The energy markets [were] already going through a burst of the bubble when Enron collapsed, and a lot of OTC [over-the-counter] energy assets were being put into clearinghouses — [CME] ClearPort [and] ICE Clear.

“So we saw the movement of energy already onto clearing platforms, but it was a market-determined decision; it made sense. Now we can see the CFTC is going to mandate that more go onto clearinghouses. This is an expensive proposition for the energy industry, and so it could be quite painful for a lot of firms within the industry.”

Brown-Hruska said she believes that current CFTC Chairman Gary Gensler will have a “mixed” legacy. On the one hand, “I’m very proud in some sense of the reputation that he’s brought to the agency, and the hard work that’s he’s shown,” but she noted that “he’s actually made some enemies.”

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