During the past five years, when the financial world has not been gripped by budgetary battles in the US Congress or economic turmoil in the eurozone, it has increasingly been fixated on the actions of regulators.
The importance of regulators has risen sharply since the global financial crisis. This is especially true in the case of the US Commodity Futures Trading Commission (CFTC), a once-sleepy agency whose founding mission consisted largely of regulating futures on agricultural commodities. In the wake of the worst financial meltdown since the Great Depression, as well as some adept lobbying by former chairman Gary Gensler, the CFTC now finds itself endowed with sweeping powers over over-the-counter derivatives.
But so far, those powers have not been wielded in a particularly careful way. In its rush to regulate OTC derivatives under the terms of the US Dodd-Frank Act, the CFTC has typically brushed aside the concerns of market participants, even when they are well justified. Caught in a bind by its attachment to unworkable rules, it has been forced to frantically offer firms last-minute exemptions – an approach described as "maddening" by one of its own commissioners.
Now, the CFTC is under new management. On June 5, Timothy Massad – a former US Treasury official and partner at law firm Cravath, Swaine & Moore – was sworn in as chairman. His style and experience differ from those of Gensler, a former under secretary of the Treasury and senior executive at Goldman Sachs, who appeared to revel in his role as a Wall Street poacher-turned-gamekeeper.
In regulating OTC derivatives, Massad emphasises the need to respond to the concerns of commercial end-users that depend on the market to hedge their risk. During Gensler's tenure, the worries of such firms were an afterthought at best.
These words have been backed up with action. On September 17, for example, the CFTC voted to adjust an earlier Dodd-Frank rule that discouraged derivatives dealers from entering into hedging deals with US public utilities. Massad says the agency will also clarify its rules on whether contracts with embedded volumetric optionality count as derivatives – an ambiguity that has proven a headache for energy companies. Meanwhile, industry observers hold out hope the agency might yet revise its controversial proposal for position limits on commodity derivatives.
Gensler... appeared to revel in his role as a Wall Street poacher-turned-gamekeeper
With Massad at the helm, will the CFTC adopt a more deliberate and pragmatic approach to regulation? It's too early to tell, but the agency's change of tone is certainly welcome. Looking back over the Gensler years, it's difficult to see how things could get much worse.