The Commodity Futures Trading Commission (CFTC) has been tasked, along with the Securities and Exchange Commission (SEC), with setting new rules governing the transparent trading of derivatives for the first time.
On July 26, 2010, five days after President Barack Obama signed the most sweeping reform of the financial sector into law, the CFTC was already meeting with industry groups to hash out new rules for the trading of the complex financial instruments known as over-the-counter derivatives.
Disclosures made available under the CFTC’s new policy of disclosing contacts made by outside organizations regarding the implementation of the Dodd-Frank financial reform bill show that the CFTC has held 192 meetings or discussions with outside groups since the bill was signed. The large proportion of these groups are those who will be most affected by new rules governing the trading of over-the-counter derivatives including major derivatives traders, clearinghouses and the industry groups that represent them. (View the database of contacts by clicking here or scroll to the bottom of this post.)
The market in derivatives, particularly those known as over-the-counter derivatives, is murky at best and the best source of information for the new regulators may be the very industry they are seeking to reign in. Two of the biggest banks to emerge from the 2008 financial meltdown were tied as the most frequent visitors to CFTC meetings as of October 6, 2010.
Morgan Stanley representatives attended sixteen meetings, according to the disclosures. Morgan Stanley recently decided to move parts of its derivatives trading desk from the outside broker-dealer where it is currently housed to the larger umbrella of the bank itself. The bank is also viewed as the bank least hurt by any new regulation of derivatives trading.
The other bank which is expected to feel little pain from new regulation is Goldman Sachs. Goldman representatives also attended sixteen different meetings with the CFTC. Among all bank holding companies, Goldman Sachs is the most dependent upon trading for revenue with estimates that $11.3 billion to $15.8 billion of their 2009 revenue—$45.2 billion—came from derivatives trading alone. Goldman’s representatives were often accompanied by Peter Malyshev, a former CTFC staffer-turned-lobbyist.
Prior to the passage of new rules in the Dodd-Frank financial reform bill, derivatives trading relied on a self-regulatory set of trading rules that were established and maintained by the National Futures Association (NFA). Organization representatives are currently in talks with the CFTC—with whom they have met ten times—as to whether the government regulator will cede regulation of electronic trading systems, known as Swap Execution Facilities (SEF), to the NFA.
The CFTC must also determine what defines an SEF and which organizations will be required to register as one. It is highly likely that the major banks, including Morgan Stanley and Goldman Sachs, along with other major companies will become SEFs. In competition with the large banks in the SEF market will be the clearinghouse that has held the banks as clients in the derivatives trading world.
Intercontinental Exchange (ICE) announced that it would seek to become a registered SEF putting it in direct competition with the banks that it has serviced for clearing millions of dollars worth in trades. ICE has met with CFTC officials on ten different occasions. These ten meetings have, unlike meetings held by Morgan Stanley, Goldman Sachs and the National Futures Association, been meetings solely reserved for ICE employees and lobbyists and did not include representatives meeting for other purposes.
Another major issue of discussion meetings with outside groups is which entities will be required to registered as swap dealers. CFTC Chairman Gary Gensler recently stated, “Initial estimates are that there could in excess of 200 entities that will seek to register as swap dealers.”
Many business groups are concerned over the possible regulation of the trading of derivatives by end-users. “End users” are usually companies that are purchasing derivatives contracts to hedge against risks in their market place. This could include an airline hedging against oil price spikes or a large farm hedging against volatility due to weather or energy prices.
Business groups have pushed for an exemption from regulation for these types of derivatives traders. The U.S. Chamber of Commerce, the Business Roundtable and the National Association of Manufacturers have aligned to form the Coalition for Derivatives End Users to advocate for a broad end-user exemption. Coalition members have met with the commission three times according to disclosures.
During debate over the Dodd-Frank bill in Congress Gensler stated his opposition to an end-user exemption, “we should ensure that every transaction between Wall Street banks and their financial customers, such as hedge funds, insurance companies or leasing companies, be subject to a clearing requirement.”
While most of the meetings held by the CFTC were with industry representatives staffers also met a few times with consumer and labor groups. This included meeting with representatives from Americans for Financial Reform, the American Federation of State, County & Municipality Employees, the Teamsters, SEIU, AFL-CIO, Public Citizen and the Consumer Federation of America. The CFTC held five meetings with these groups – accounting for less the 3 percent of the meetings held by the commission.