Advocates fear sabotage of Wall St. rules

Advocates for tougher rules on Wall Street are crying foul about legislation that is rapidly moving through Congress, arguing it would unravel key protections put in place after the financial crisis.

ADVERTISEMENT
Legislation reauthorizing the Commodity Futures Trading Commission (CFTC) surged out of the House Agriculture Committee with strong backing from both parties, and could be considered on the House floor when lawmakers return from their two-week spring break.

Members of both parties hailed the bill as an all-too-rare bipartisan product that is worthy of serious consideration.

But advocates for cracking the whip on Wall Street say the measure would handcuff the derivatives regulator and make it significantly easier for the financial industry to operate in the shadows.

“This legislation under-funds, undercuts and undermines the critically important work the CFTC is doing,” said Dennis Kelleher, president and CEO of the reform group Better Markets. “It derails future reforms and rolls back past progress in bringing transparency, oversight and accountability to the dark, unregulated derivatives markets.”

Reform advocates are hoping to at least slow down the legislation, which is moving at light speed compared to other bills put forward in the election-year Congress.

On Tuesday, top lawmakers on the House Agriculture Committee introduced legislation that would reauthorize the CFTC, and make several changes to how it conducts its business. The committee approved that legislation on Wednesday with no drama, via a voice vote.

The legislation appears to be one of the rare bills that could become law in this Congress. Chairman Frank Lucas (R-Okla.) and Rep. Collin Peterson (D-Minn.), the ranking Democrat on the panel, both signed off on the product when it was unveiled to the committee. So did the top Republican and Democrat on the relevant Agriculture subcommittee.

Lawmakers on both sides hailed the legislation as an example of how Congress should function.

“Yet again, the Agriculture Committee has put aside Washington’s extreme partisan rhetoric in favor of bipartisan legislation,” said Peterson when the bill was unveiled. “While I don’t think this bill is perfect, no bill ever is. This is reasonable legislation that I hope my colleagues will support.”

The committee touts the legislation as adopting a “balanced approach” to new rules on derivatives that were ordered under the Dodd-Frank financial reform law, and as the culmination of years of work studying the regulator. A summary of the bill accuses the CFTC of adopting a narrow interpretation of the law, subjecting end-users like farmers and other businesses far from Wall Street to new regulatory requirements.

“Our efforts will increase certainty in the marketplace, improve customer protections, and provide a more balanced approach to regulations impacting job creators,” said Lucas before the bill was approved.

Reform groups highlight a number of provisions in the bill that they say would chain down the CFTC and make it easier for the industry to circumvent or directly challenge its rules.

For example, the legislation requires the CFTC to conduct a cost-benefit analysis when proposing any new rules. In a letter opposing the measure, the group Americans for Financial Reform said the CFTC already has to conduct some of this analysis, and that the bill would more than double the factors that they have to consider. The end result would allow the industry to “indefinitely delay” new rules or defeat them in court, the group warned.

The way the provision is written amounts to a “playbook for industry interests to tie up regulations they oppose in endless litigation,” the group wrote to lawmakers.

The bill would also make it significantly more difficult for the CFTC to impose its derivatives rules on foreign subsidiaries of American banks. The agency has argued it must enforce those rules abroad to prevent banks from simply housing their risky derivatives activity in foreign branches.

Advocates argue the House bill would force the CFTC to jump through hoops to impose its rules abroad. For example, the legislation would require the CFTC to explain specifically why certain foreign nations’ rules are not close enough to American regulations to merit a CFTC presence. But the CFTC would be able to begin to make that case until after its rules are enacted, a process Better Markets said could take years. And after that, the CFTC would be required to submit a report to Congress before such a decision is made effective.

Another provision that advocacy groups are wary of would pull power from the CFTC chairman and distribute it across the entire commission, which includes both Democratic and Republican members. Such a provision would “needlessly hinder” rulemaking for the regulator by requiring broader support for such actions, they say.

The financial industry appears supportive of the legislation.

The Futures Industry Association hailed the Agriculture Committee for its bipartisan work on the bill, but stopped short of an outright endorsement. Rather, it said the process was “far from complete,” and hoped the bipartisan good will would steer the measure to a “balanced outcome.”

And while this legislation is quickly moving in the House, the Senate has yet to produce its own CFTC bill.

Senate Agriculture Chairwoman Debbie Stabenow (D-Mich.) wants to draft her own bill. She announced in February she was working with the top Republican on the committee, Sen. Thad Cochran (R-Miss.) to produce legislation, but added that she wanted to make sure the CFTC had the tools to implement Dodd-Frank and monitor markets.

Reform groups do note that the House bill is not all bad. They back provisions aimed at better protecting and tracking customer funds, after billions of dollars were put at risk by the high-profile collapses of the financial firms MF Global and Peregrine Financial.

They also hail a provision that would direct the CFTC to conduct a study on high frequency trading. Reporter Michael Lewis has called the fairness of the practice into question, alleging it allows some traders to “rig” financial markets.

More in Finance

The perils of monetary activism

Read more »