The head of the Commodity Futures Trading Commission (CFTC) Thursday pointed a finger at Wall Street for its lackluster support for regulation of the over-the-counter (OTC) derivatives market as proposed in the sweeping financial reform package that is pending in Congress.
“Let there be no mistake: Wall Street has not been enthusiastic about this reform. They would prefer transparency only be brought to the regulators or at most that regulators just publish aggregate trading data rather than real-time trade information,” CFTC Chairman Gary Gensler said in a speech in Florida to the Futures Industry Association.
Over the years, “Wall Street…has benefited from opacity and inefficiencies in the over-the-counter derivatives market, a market dominated by a handful of dealers in this county. But in this particular market and at this time in our history, we need markets that work for the American public,” he said.
The off-exchange OTC market has exploded to a $300 trillion notional amount in the United States, which is “by some measures nearly 10 times the size of the regulated futures market,” and yet it remains unregulated, Gensler noted.
Gensler has repeatedly urged Congress to regulate — with no exceptions — the entire OTC market, requiring that transactions be centrally cleared and traded on regulated exchanges. However House legislation, which was passed in December, would grant an exemption from mandatory clearing for commodity trades involving end-users or commercial traders hedging bona fide commercial risk (see Daily GPI, Dec. 14, 2009).
Sen. Christopher J. Dodd (D-CT), chairman of the Senate Banking Committee, on Monday is expected to unveil a sweeping financial reform proposal, which would include regulation of the OTC transactions.
“Wall Street appears to be aligning themselves with corporate end-users in an effort to exempt customer transactions from central clearing. While only 9% of the market represents transactions between dealers and nonfinancial end-users, Wall Street seems to be making the case that financial end-users also should be exempt” from OTC regulation, Gensler said. It would be similar to the exemption granted to bona fide hedgers of commercial risk in the House bill.
“This could possibly leave 60% of the clearable market outside of clearing. Wall Street might express partial support for a clearing requirement, but when it comes to the trading requirement, they appear rather allergic. After all, Wall Street has a fiduciary duty to its shareholders and will look to maintain its information advantage,” he noted.
Gensler said the proposed $47 million increase for CFTC in the Obama administration’s fiscal year 2011 budget will enable the agency to keep a closer watch on the markets, including energy futures, that it oversees. “With this increase, the CFTC will be able to move toward state-of-the-art automated surveillance and compliance and conduct more regular examinations of our registrants.
“This will improve the efficiency of the agency and of the markets. If over-the-counter derivatives reform is enacted, even further resources will be needed,” Gensler said.
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