Delays in implementing and funding the oversight of derivatives trading under the Dodd-Frank Act will hamper the ability of regulators to crack down on fraud and manipulation, warned a senior US regulator on Thursday.
“It is essential that there be oversight of the entire derivatives market, including swaps and futures,” said Gary Gensler, chairman of the Commodity Futures Trading Commission.
His remarks at the Sandler O’Neill global exchange conference in New York come at a critical time. The banking industry has pushed back hard against proposals for regulating the vast over-the-counter derivatives market under Dodd-Frank.
“There have been suggestions to delay implementation of the act or limit funding for the CFTC, despite its significantly expanded mission,” said Mr Gensler. “It is essential to have effective cops on the beat to police both the swaps and futures markets for fraud, manipulation and other abuses. And it is essential to complete the task of implementing the aggregate position limits regime, Congressionally mandated to guard against the burdens of excessive speculation.”
Major swap dealers, in particular, have complained about higher costs and the potential for their business to migrate to less onerous regimes under increased scrutiny of derivatives trading in the US.
“If the agency’s funding does not grow – or worse, gets cut – we would be unable to enforce new rules in the swaps market to promote transparency, lower risk and protect against another crisis,” said Mr Gensler.
He added: “It would hamper our ability to seek out fraud, manipulation and other abuses at a time when commodity prices are rising and volatile.”
In his remarks, the CFTC chairman referenced agency data from May 31 that showed upwards of 80 per cent of trading volume in key futures markets is day trading or based on price differences between various commodity delivery dates.
“This means that only about 20 per cent or less of the trading is done by traders who bring a longer-term perspective to the market on the price of the commodity,” said Mr Gensler.
“Though the CFTC is not a price-setting agency, recently volatile prices for basic commodities – agricultural and energy – are very real reminders of the need for common sense rules in the derivatives markets,” he said.
Both the CFTC and the Securities and Exchange Commission recently extended the public comment period for proposed rules that will reform OTC derivatives and are designed to increase the safety and transparency of such trading.
The agencies have also opened the door to slowing the introduction of new market rules under Dodd-Frank with implementation not likely until next year, rather than later in 2011 as originally planned.
“Until the CFTC completes its rule-writing process and implements and enforces those new rules, the public remains unprotected,” said Mr Gensler.