Massad: Taking the reins on derivative reforms
The Senate Agriculture Committee met Tuesday to approve the nomination of Tim Massad as chairman of the Commodity Futures Trading Commission, even as the agency fumbles over the definition of a “swap.”
When Massad testified at Senate hearings last month, he stated flatly that speculation can affect prices. Then, he hedged. “There are many, many factors that affect prices,” Massad added, “and sometimes it’s difficult to measure what the impact is of any particular factor.”
While he pledged to pass limits on the number of contracts that commodities speculators can hold, this hazy testimony reflects how little is really known about how the new CFTC chairman, if confirmed, will shape the derivatives market.
Massad’s hedging also reveals how difficult it is to pass reform. Of course, any official following in former Chairman Gary Gensler’s footsteps would seem restrained and even-keeled. Gensler seemed to delight in ramming through rules that made bankers cringe.
When compared to Gensler, Massad seems even more tepid. As a partner in the corporate finance group of Cravath, Swaine and Moore, Massad’s appointment has also raised questions about his ability to impose tough regulations. Other revolving-door public servants have also been suspected of continued private-sector loyalty.
Massad’s background is not uncommon for a top regulator. His Cravath clients in Hong Kong and London had benefited from the splintered global regulatory structure. The question is: Can Massad carry out the CFTC reforms before bankers start fighting back against the numerous Gensler era rules — many of which are still being clarified?
Massad is no stranger to imposing government reforms, however. In 2008, he advised Elizabeth Warren’s Congressional Oversight Panel that monitored the bank bailout. He served as the Treasury official overseeing the complex, and controversial, Troubled Assets Relief Program.
A big part of his new job will involve cleaning up the complex, and controversial, rules controlling derivatives that Gensler set up. Essentially, Massad will be completing what his predecessor started.
Or will he? Massad is certainly not known as a crusader. True, he did work briefly for Ralph Nader and the AFL-CIO, but he has spent most of his career at a blue-chip law firm. He was accused of lacking transparency for understating AIG’s losses as TARP chief and of being a handmaiden to the “Too Big To Fail” framework.
Still, one benefit of revolving-door candidates is that they know the system. Though he speaks the language of bankers, he also understands the financial system’s defects.
The labyrinthine Dodd-Frank legislation makes the risk-transferring derivatives — which Warren Buffett called “financial weapons of mass destruction” — a focal point of economic reform. Derivatives, more than any other financial instrument, triggered the 2008 economic crisis, and ultimately required Washington to bail out struggling banks and institutions, including a $182 billion bailout of insurer AIG.
In the wake of the economic collapse, Gensler had pushed through more rules than any other regulator. Since the landmark financial reform legislation was passed in July 2010, the CFTC enacted 68 new rules, according to Commissioner Scott O’Malia, 36 of them related to Dodd-Frank.
Critics say Gensler instilled another layer of policy-making. The commission issued at least 170 no-action letters and other correspondence that explained, changed, expanded or narrowed these initial rules. More than virtually any other regulatory chief, Gensler irked the banking lobby with the speed at which he passed changes. All these new rules, some big banks insisted, left traders perplexed over what was or wasn’t allowed.
Part of the problem in enforcing the new rules is the commission’s lack of funding. The agency’s budget is not large enough to properly monitor market irregularities, acting CFTC head Mark Wetjen said in his recent testimony before a House appropriations panel. He warned that the commission was in danger of scaling back enforcement efforts and couldn’t complete its key safeguard examinations of futures brokerages.
The CFTC’s proposed budget is $280 million, which would be a 30 percent increase over last year. But it’s far less than the $315 million the White House wanted.
Even with its funding limits, the agency has actually made a bigger dent implementing Dodd-Frank rules than other agencies, including the Securities and Exchange Commission.
Commodities dealers have also fiercely opposed the proposed innovative funding structure, which imposes user fees on the industry to fund the CFTC’s bigger budget. But this funding source still needs Congress to greenlight it.
In essence, Massad’s job would be to address the headaches he inherited from Gensler — but with a smaller budget. One of Dodd-Frank’s mandates is to gain greater control over non-U.S. derivatives. There is still much confusion over which swaps involving non-U.S. entities fall under CFTC authority.
For example, there seems to be no clear definition of a domestic swap as opposed to a foreign swap. It can be hard to finalize a transaction if you’re not sure which rules apply.
For months, dealers thought that Dodd-Frank applied even if a swap dealer registered in Frankfurt made a trade with someone not in the United States. It still might be subject to Dodd-Frank’s restrictions if, for example, there is a New York desk involved at any point during the transaction.
“There’s still a question of when Dodd-Frank starts and stops,” said Joel Telpner, a New York-based partner at Jones Day.
The CFTC quelled some of the anger over these overlapping regulatory regimes when it issued a clarification in February that permits cross-border swaps on European platforms that are not registered with the U.S. authorities.
Massad also faces likely turf wars. Critics accused the CFTC of ramming rules through without knowing exactly what they meant. But at least it acted. The Securities and Exchange Commission has been slow to finalize its new derivatives scheme. The Volcker Rule’s 891-plus page preamble to the 71-page rule is a mystery, too.
There is also now confusion over what types of market-making or hedging of derivatives are allowed. Last month, the CFTC delayed the limits placed on derivatives in Europe that were supposed to be effective March 24. European officials, meanwhile, have been miffed that the agency has been so aggressive in applying U.S. rules to overseas trades.
There are still pending swap push-out provisions that require financial institutions to create separate affiliate entities, so that banks are not both the seller and buyer in a deal.
Position limits that have dogged the agency since the 1920s are already taking center stage. Pending contracts involving speculated commodities like sugar and copper also have global reach that will affect how the global financial system is structured.
These reforms don’t go far enough. The system is ailing, as even some regulators recently have noted. Money laundering, tax dodging and “too big to fail” institutions are defects, but so are the short-term, speculative financial products that sellers and buyers often do not understand.
Massad’s grasp of nebulous markets, however, isn’t the issue. His ability to tenaciously steer meaningful financial reform is.
PHOTO (TOP): President Barack Obama watches as outgoing Commodity Futures Trading Commission Chairman Gary Gensler (L) reaches across to shake hands with Tim Massad, after Obama nominated Massad to succeed Gensler, at the White House in Washington, November 12, 2013. REUTERS/Kevin Lamarque
PHOTO (INSERT 1): Gary Gensler, chairman of the Commodity Futures Trading Commission, listens during an interview with Reuters in London, October 2, 2012. REUTERS/Simon Newman
PHOTO (INSERT 2): Senator Chris Dodd (R), chairman of the Senate Banking Committee, speaks to the media alongside Representative Barney Frank, chairman of the House Financial Services Committee, after a meeting with President Barack Obama on financial reform at the White House in Washington, March 24, 2010. REUTERS/Jason Reed