In November 2012, at the third instalment of SEFCON, Bart Chilton, then a commissioner at the Commodity Futures Trading Commission, spent much of his keynote address making a series of slightly off-color jokes about the dong, the national currency of Vietnam. As the famously flamboyant, blond-mulletted Chilton strode from one side of the stage to the other and exhorted his listeners to “get your dong on”, a ripple of laughter spread across the crowd, whether born of appreciation or fear it was difficult to say.
SEFCON, held annually in New York, had been set up at the time of the 2010 passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act as a way to bring together anyone and everyone interested in the state of reform of the opaque, $470 trillion swaps market. Chilton’s performance that day — brash, self-assured, slightly offputting — was of a piece with the way the CFTC had gone about its mandate of translating Dodd-Frank’s sometimes inscrutable precepts about derivatives reform into regulatory practice. Under chairman Gary Gensler, who began his term in mid-2009, the CFTC established itself as the toughest of the major regulatory agencies charged with bringing Dodd-Frank’s vision of postcrisis market reform to life. It got its rules written faster than any other agency, and it was not afraid to make enemies in the process.
Fast forward to this year and both Gensler and Chilton, the Starsky and Hutch of postcrisis financial reform, are gone. (So is former commissioner Scott O’Malia, but unlike his colleagues he’s walked right through the Washington-Wall Street revolving door and into a job as CEO of the International Swaps and Derivatives Association.) The old CFTC has passed into history with them, and a new CFTC has taken its place. On Wednesday, at SEFCON V, the swaps industry got its first chance to size up new chairman Timothy Massad, who took the helm of the CFTC in July, in person. And from the performance he delivered, it seems derivatives traders will be far happier under the new regime than they were with the old.
His responsibility, as he explained it on Wednesday, is to both “meet the congressional mandate of bringing this market out of the shadows, and build the conditions that will allow the market to thrive. Markets thrive when private actors find it beneficial to trade.” This was more than just even-handed regulator boilerplate; whereas Gensler used to regularly invoke agency responsibilities under Dodd-Frank, he would rarely make the additional point — at length, as Massad did on Wednesday — that regulations must also meet the pleasure of market participants.
The shift in tone between the old regime and the new is subtle, but significant. On several discrete issues — such as the requirement that records of swap trades be searchable, or how to deal with so-called package trades, transactions involving two or more swaps — Massad stressed that the CFTC will need to relax a previously unyielding approach so as to not cause “unnecessary disruption or cost” to the market. On the matter of the cross-border application of CFTC-authored swaps rules, Gensler used to enjoy pointing out that swaps traded out of the London arm of American International Group were part of the chain of events that led to the insurer’s 2008 bailout by the U.S. government; this, he said, was why foreign market participants should be made to follow CFTC rules when trading swaps with a U.S. counterparty. On Wednesday Massad signaled a retreat from that all-or-nothing approach. Instead, as he had during a November 5 speech to the Futures Industry Association, he emphasized that although global harmonization of swaps rules is in everyone’s interest, there will inevitably be differences between regimes. It was like watching a blazing regulatory universalism collapse into the footnotes of a cramped and hedging relativism.
Massad, 58, a former corporate lawyer, served as the head of the Troubled Asset Relief Program from 2010. By that stage, of course, TARP had already made the bulk of its purchases and Massad’s main responsibility was to wind the program down. With the CFTC having already written the bulk of the rules it was charged with producing under Dodd-Frank, Massad’s task in his new job is a similar type of clean-up operation. If Gensler was a trouble-maker, exciting the fury of Wall Street with his pronouncements on everything from position limits to cross-border actionability, Massad in his early presentations to the industry seems determined to play the pacifier.
What explains the change in tone? Partly it’s a natural consequence of the order of things. With the CFTC first to the rule-writing punch among global regulators, attention now turns to the task of fine-tuning those rules, a less glamorous exercise than that handed to Massad’s predecessor but one no less important to the ultimate success of the recast derivatives market. Massad’s argument about balance, of course, is a fair one: It has always been part of the remit of Dodd-Frank regulators to protect consumers from the market’s worse instincts and simultaneously promote the efficient operation of those markets. But there’s a more important reason why the CFTC may be embracing the input of the industry in a more sincere fashion than it did in the immediate postcrisis years. Swap execution facilities (SEFs), the transparent electronic trading venues brought to life by CFTC rules, went live earlier this year and volumes have so far been disappointing. The CFTC needs to get the market enthusiastic about trading on SEFs; a more conciliatory tone might help.
Massad bore another message on Wednesday, and the stridency with which he conveyed it may go some of the way toward explaining the emollience of his tone on rule relaxation. “All of our activities are stretched,” he said, adding that the Public Company Accounting Oversight Board, the body charged with regulating auditors of public companies, has a bigger budget than the CFTC. As the agency faces a still-long backlog of urgent tasks, including the processing of SEF registration applications and the adjustment of key rules, Massad’s plea to the industry was simple: “Please be patient with us.”
The Obama administration requested $315 million in 2014 funding for the CFTC; Congress approved $215 million. For 2015, a request of $280 million has been submitted. Lawmakers are yet to vote on the matter. But with Congress now dominated by Republicans, a political class largely hostile to Dodd-Frank and the agencies empowered to make rules under it, Massad’s more market-friendly approach may have a cannier motivation: If Wall Street can be convinced that the CFTC wants to work with, rather than against, it, market participants might be more inclined to lobby for a more expansive budgetary allocation.
Put all that together, and even though a return to the days of Vietnamese dong jokes appears unlikely, there may be more steel to the CFTC’s soft new stance under Timothy Massad than many think.
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Follow Aaron Timms on Twitter at @aarontimms.
