INTERVIEW: Volcker Rule, derivatives in U.S. business lobby’s sights for new year
By Emmanuel Olaoye, Compliance Complete
The U.S. Chamber of Commerce has been a leader in contesting U.S. regulators’ implementation of the Dodd-Frank Act. Lawsuits challenging the Securities and Exchange Commission and Commodity Futures Trading Commission over the justification for the rules have stopped some rules in their tracks and forced the regulators to hire more economic analysts.
With a new Congress due to start on January 3, Compliance Complete sat down with three senior officials at the Chamber to discuss their priority issues for 2013. These include the Volcker rule banning risky trading by banks, exemptions for non-financial users of derivatives, the role of the Financial Stability Oversight Council in money-market fund reform.
The officials who spoke to Compliance are Jess Sharp, managing director at the Center for Capital Markets Competitiveness, Alice Joe, executive director at the Center for Capital Markets Competitiveness, and Tom Quaadman, vice president at the Center for Capital Markets Competitiveness. Sharp follows the Consumer Financial Protection Bureau and the derivatives rules in the Dodd-Frank Act. Joe deals with reforms in the money-market fund industry and systemic risk. Quaadman covers the Volcker rule and the Basel III capital rules.
Interview questions and answers have been edited for clarity and length.
Q: What does the chamber see as the top priorities for derivatives rules?
Jess Sharp: The CFTC and the banking regulators led by the Fed have proposed margin rules that don’t align with one another. Neither agency has finalized their margin rules. The Chamber and two other trade associations and hundreds of companies have formed the coalition for derivatives end users. This is a group of manufacturers, energy companies, and agricultural companies that use derivatives to manage their day to day business risks. They are banding together to argue primarily against mandatory margin requirements by the regulators.
They have their proposed rules but not the final rules. My understanding from both the CFTC and the banking regulators is they likely won’t have final rules till sometime next year. It may not even be until the second quarter next year.
The banking regulators and the CFTC have reopened their comment periods. The issue is still fresh and they are still receiving new public input as recently as a couple of weeks ago. I see that as a top issue.
Q: With the margin issue, what is the chamber doing to make its case?
Jess Sharp: We’ve had pretty good luck with the CFTC. We’ve been at this for a long time. We’ve weighed in on the comment record. We’ve had direct meetings with the agency and we’ve worked with members of Congress who have an interest in this issue as well and have lent their support about the advocacy and end users. I think we got a good result on the CFTC proposed rule. It more or less exempts non-financial end users from having to meet more government-imposed margin requirements.
The other banking regulators’ proposal isn’t as good. In fact its sort of doubly bad because they effectively say that every over-the-counter transaction has to be margined. They go one step further to sort of set up a process — a filter if you will — that every transaction will have to go through to determine what level of margin will be required.
So we know that there is some sort of regulatory risk here with the Fed and the banking regulators. Even based on the proposed rule, we don’t know the extent of that risk. That is a problem and we’ve been weighing in with the banking regulators and members of Congress to demand that they get it right and that they sync up with what the CFTC has done.
We are bringing it to Congress’s attention that there is a regulatory split and regulators are poised to impose margin requirements on a group of companies that the drafters of Dodd-Frank said should be exempt from margin requirements. There was pretty clear intent from the Dodd-Frank Congressional record about exempting end users from margin rules.
A legislative exemption from Congress would be ideal at this point, just to cut through the confusion at the regulatory level.
We are working with the regulators doing the best we can to convince them that there is a real problem that the Feds have identified, and they don’t feel they have the authority to do what we are asking for even if they wanted to. So we’ve asked for legislation.
Q: If you get Congress to write legislation to exempt non-financial end users, can regulatorsonfusi pull back from the process?
Jess Sharp: The answer is absolutely. Legislation can short-circuit a bad result by the regulators. Of course it comes down a little bit to a question of timing. We are not expecting a final margin rule until the second quarter of 2013. We have legislation that is primed in the Senate that is ready to go right now and we’re calling on the Senate to pass it this year in the lame duck session.
If they do that it will absolutely void the negative consequences of a bad rule. If we wait till next year the likelihood that legislation could come after a bad regulatory outcome and have to retroactive fix of a bad rule that is not ideal.
We have fairly unanimous support at least in the House and bi-partisan support in the Senate for a legislative fix but we haven’t quite been able to get enough support to get it over the goal line. I think the regulators are watching and waiting to see what happens there. Hopefully they understand that putting out a rule that does one thing and having legislation that comes behind undoing it is not ideal. Hopefully they will take enough time to complete their work as legislation can be passed in the interim to avoid that conflict
Q: With new members coming into the Senate and the House, are you starting from scratch?
Jess Sharp: We’re absolutely starting from scratch. We’ll have to get the bill re-introduced through a new committee and past the House floor and then through the Senate. Process-wise we’re starting from scratch, but this coalition has spent a lifetime educating members on the Financial Services and Banking and Agricultural Committees. There is not so much turnover that we will start 2013 in much of a hole.
Basically our priorities in 2013 will be to get the new members of those committees and to get the process started as quickly as possible. Obviously it would be ideal for us to get it done now and this year. If we have to restart the machine next year, I don’t think we’re (totally starting from scratch), because it is such a familiar and compromised issue with the committees.
Q: With (Senator-elect) Elizabeth Warren set to be joining the Banking Committee, how does the chamber plan to work with her?
Jess Sharp: She’s not the only new member of the committee. We’ll be reaching out to all the new members joining the committees on the issues that we work on and try to make the case before the Senate Banking committee and the Senate Agriculture Committee and the Financial Services Committee in the House and the Agriculture Committee in the House.
We’re ready to get started with that.
Q: With the Financial Stability Oversight Council taking interest in money-market funds, what is the chamber doing about the issue?
Alice Joe: Our position basically is that we supported the 22 changes (in the money-market fund reforms). We supported amendments that will strengthen money-market funds as an investment vehicle for our corporate treasurers and businesses to use the product as a cash management tool and as an efficient and cost effective means to short-term financing.
The proposal that Mary Schapiro put out would essentially destroy the product. Because of that we opposed them. Obviously those are the very same plans that FSOC included in their proposal. That is something we can’t support.
In terms of FSOC intervening, our position on that is they acted very prematurely. What they’re saying is: “We’re getting involved because the SEC has failed to give support to reforms to money market funds.”
What happened last August was the chairman (Schapiro) was withdrawing the vote because she couldn’t get the others to vote yes. That’s because she couldn’t pass the proposal without actually going through an in-depth analysis of the 2010 amendments.
Q: What is the next step for the chamber on money funds?
Alice Joe: We’re going to go through the comment process very robustly. On this FSOC proposed recommendation, the SEC has released their study. They’ve opened that for comments as well. We will be providing comments on this debate and we will be coming at it from an end user perspective (from an investor’s perspective).
A lot of our companies are commercial paper stewards so we will be coming at it from that perspective.
Q: How will Elisse Walter’s designation to chair the SEC affect its rulemaking for Dodd-Frank?
Alice Joe: I think there is going to be a lot of stalemate there. Any controversial rule will be split 2-2. I think she tries to be reasonable to incorporate changes, but for the most part she’s going to toe the party line.
Q: In terms of where we are with the Volcker rule, do you have any insights on when we might see the final rules?
Tom Quaadman: I don’t think we anticipate seeing anything on the Volcker rule until the first quarter of next year. I think what we’re seeing is the banking regulators being on one page, and the SEC being on a different page. And it’s unclear as to how the SEC will be able to move forward with a deadlocked commission.
Q: So what is the chamber doing about that?
Tom Quaadman: We’ve been doing this in a multi-faceted way. We’ve met with the regulatory agencies. We’ve brought members to go up and meet with them to educate them as to what the impact of the Volcker rule are on non-financial companies, particularly corporate treasurers.
The Volcker rule directly impacts the ability of a corporate treasurer to enter debt or equity markets to raise capital for a non-financial company. We’ve also been meeting with members on both sides of the aisle in the House and the Senate. We similarly educate them on those issues.
We’re in the process of sending out a letter to the U.S. Trade Representative asking them to perform an analysis of the Volcker rule to see if it violates any existing obligations under free-trade agreements.
So we try to ensure that the regulators basically understand the issues of the Volcker rule and help them to try and fix them.
Q: In 2012, there were several court challenges from trade groups including the Chamber of Commerce over Dodd-Frank rules. The issue of cost-benefit analysis was a recurring issue in many of those cases. Is cost-benefit analysis something you will be looking at in assessing your response to implementation of the Volcker rule.?
Tom Quaadman: It’s something we have already been looking at. About a year ago we filed a nine-page letter to all the regulators just on cost-benefit analysis. To give you an idea of where this is at, the Federal Reserve and the Federal Deposit Insurance Corporation were silent on any cost-benefit analysis. The Office of the Comptroller of the Currency said they thought the rule would cost less than $100 million and the SEC said they had no clue what the costs were. They are all talking about the same rule. And the SEC in particular, when they finalize a rule, they have to demonstrate that the rule will promote market efficiency, capital formation and competition. It is a legal requirement.
So part of the issue here is the regulators haven’t been able to estimate the costs and they haven’t provided anything to stakeholders to be able to comment on. So that is something we’ve been watching extremely closely since the rule has been proposed.
Q: Will cost-benefit analysis remain a theme if you feel it is absent in agency final rules?
Tom Quaadman: Yes. I mean you have agencies that are under a legal obligation to perform a cost benefit analysis and as with any other entity they have to follow the law. People have said various things about cost benefit analysis, but the reasons why the law exists is to ensure that the government does something that is beneficial and that’s what we’re trying to make sure it is something they adhere to the procedures that they are supposed to.
This article has been revised from the initially published version to include the following corrections:
(Corrects 10th paragraph, which begins with “Jess Sharp: We’ve had pretty good luck with the CFTC”, to change the word “waited” to “weighed in” and the word “letters” to “record”.)
(Corrects 12th paragraph, which begins with “So we know that there is some sort of regulatory risk”, to change the word “waiting” to “weighing in”.)
(Corrects 14th paragraph, which begins with “A legislative exemption from Congress”, to change the word “users” to “confusion”.)
(Corrects 46th paragraph, which begins with a question on cost benefit analysis, to change the word “Is” to “Will”.)
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