Counterparties: Commissioners Found Taken Captive
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Today something strange happened: a dreary, easily overlooked vote at the Commodity Futures Trading Commission ended up on Gawker.
The 2010 Dodd-Frank act included a provision to bring the opaque world of derivatives — including the kind of trades which nearly brought down AIG — into something like an open market. Over the last three years banks have held 80 meetings with the CFTC officials on how swaps should be brought into public exchanges. Along the way, a proposed rule got pared back: Buyers would have to solicit two prices quotes from banks before purchasing a swap, instead of the proposed five quotes. That requirement will eventually increase to three.
The resulting rule is a small reform, but also preserves much of the status quo. Ben Protess writes that the move “could effectively empower a few big banks to continue controlling the derivatives market, a main culprit in the financial crisis.” (Five big Wall Street banks dominate more than 90% of the derivatives market.)
Wallace Turbeville, formerly of Goldman Sachs, says the two-quote requirement is too easy to game and invites LIBOR-like collusion on swap pricing. CFTC commissioner Bart Chilton voted for the measure, but quoted Churchill to suggest it fell short of full transparency: “The English never draw a line without blurring it.” Republican CFTC commissioner Jill Sommers was the only of the CFTC’s five commissioners to vote against the proposal.
The story of swaps regulation is emblematic of the larger story of financial reform. As Haley Sweetland Edwards’s terrific April piece on Dodd-Frank implementation describes, reforming America’s financial system now hinges on minute details like whether bills contain the word “appropriate”. The financial industry has adopted a death-by-thousand-cuts strategy; as Better Markets’ Dennis Kelleher says, it is “consistently and methodically getting strong rules weakened bit-by-bit, often behind closed doors.”
Jesse Eisinger, reviewing a new book on Dodd-Frank, says that even though it was written by smart, informed people, it left far too much for regulators to hash out:
Smart legislative and regulatory solutions may embrace flexibility and exemptions that banks can later exploit. Regulations that create clear, bright lines may seem simplistic and dumb. But such rules tie regulators’ hands, freeing them from banking influence.
— Ryan McCarthy
On to today’s links:
And, of course, there are many more links at Counterparties.