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November 23, 2011

2012 and barriers to implementing Dodd Frank

Being a non-American, as most people are, I did some poking around to understand the flow of power and the political process in the US next year. My driver being what might happen to the implementation of the Dodd Frank Act should the composition of the various bodies in the US change and swing towards the Republican party.

Election process

So, Nov 6th is the date on which:

  • The president is elected
  • All members of the House of Representatives are elected (equivalent to the UK House of Commons). Unlike the UK variable length term, capped at 5 years, the Representatives only get 2 years to get comfortable
  • A third of Senate seats are elected. So a Senator gets six years to make their mark, including being on the various Senate committees

CFTC Governance

From the CFTC website:

The Commission consists of five Commissioners appointed by the President, with the advice and consent of the Senate, to serve staggered five-year terms. The President designates one of the Commissioners to serve as Chairman. No more than three Commissioners at any one time may be from the same political party. CFTC link here and PDF here

Gary Gensler was appointed in 2009, so will automatically leave the job in 2014 (unless reappointed via the same nomination and approval process through Senate committees), more than enough time to continue to interpret the DFA somewhat to his own agenda. The recent ISDA post about applying the required cost benefit analysis may put resistance in the way of the moves to make trading electronic.

There are 4 other commissioners:

  • Jill Sommers, appointed 2009, Republican
  • Bart Chilton, appointed 2009, Democrat
  • Scott O’Malia, appointed in 2009, Republican
  • Mark Wetjen, appointed in 2011, Democrat
So a change of governance is unlikely, and can be discounted as a barrier to the continued rule making for the DFA – although Scott O’Malia has been critical of the rule making process itself, see here, and rightly asks for a timetable to be published which everyone can follow.
Update 1: The CFTC is split down party lines with 2 Republican Commissioners and 3 democrats (including Chairman Gensler), which biases any governance votes towards the Democrats who are pro-DFA.
Update 2: A story at the FT here on the Commission Chilton’s views on voice broking reflects the possible political outcome of the CFTC rules – if the three Democrats stand together, potentially they could push the rule making to retain voice broking as an allowed execution method, making the adoption of SEFs much less of an impact on the OTC market.

Possible barriers to implementing the DFA

  1. Control of Congress: One way DFA could be de-railed, is from a change in control of the House of Representatives, and Senate, (a swing to the Republicans) which would enable Congress to vote on and approve amendments to the DFA including this bill (the SEF clarification act) which aims to repeal some of the ideas the CFTC are pushing for. Countering that is a veto by the President on acts passed by Congress, nullifying their actions – but of course setting up a titanic battle of wills, where the President will need to barter compliance by Congress in areas he wants support, in return for the President conceding to Congress in return where they are strong willed.
  2. Budget for the CFTC: Congress approves the budget for the CFTC, which recently asked for a 20% increase to support the work on the DFA. President Obama recommended a 50% increase, but the Senate committee felt that zero increase was appropriate, in which case rule making will drag on for some time. There is still no published timetable from the CFTC for rule making, although there is one from the SEC here.
  3. Cost / Benefit analysis for rule making: “Section 15(a) of the Commodity Exchange Act requires the CFTC to consider the costs and benefits of its actions before issuing rules, regulations or orders. Section 15(a) requires the CFTC to evaluate the costs and benefits in light of the following five areas: (1) protection of market participants and the public; (2) efficiency, competitiveness and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations.”  According to ISDA and other commentators, this cost / benefit analysis has not been carried out in anything other than a perfunctory way, so ISDA did their own analysis here to get their own argument out in public, that the move to SEFs wasn’t justified. Whether the above requirement is a barrier to new rule making has yet to be seen.

Conclusion

All three areas above could impact the implementation of the DFA by the CFTC and/or the SEC during 2012. President Obama will effectively stop governing from mid 2012 to devote his time to potential re-election, meaning the practical process of government is suspended. Until the election result is known and the new members of Congress appointed, and committees reformed, there will be little in the way of resistance. That leaves just items 2 & 3 above, both of which could drag out the process well into 2012, leaving time for Congress to then push to amend or repeal the DFA just as it begins to bite.

All in all, quite an uncertain picture.


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