Without a new tax on the securities industry, there won’t be reform of same.
The drumbeat has started. The question is who is listening? And who is prepared to act on the completely unsurprising message that is being sent …
The quick summary is this:
- The Securities and Exchange Commission says it does not have the resources to implement and enforce all the features of the Dodd-Frank Wall Street Reform Act asks of it. Already, it looks like it’s trying to turn the implementation of a uniform fiduciary standard for brokers and advisers over to the Financial Industry Regulatory Authority, the brokers’ self-regulatory organization.
- The Commodity Futures Trading Commission says it does not have the resources to implement its responsibiities under the Dodd-Frank act. And this is the regulator that is supposed to oversee the biggest and boldest reform that is supposed to come out of the reform: The establishment of and oversight of exchanges and execution facilities along with central clearing for “standardized” credit default swaps.
It was, of course, the introduction of those quasi-insurance policies, where big banks and American International Group swapped the risk of default on credit-based derivative securities, that made financial markets comfortable they could handle mortgage-backed securities and other complex new instruments that Warren Buffett so long ago declared “financial weapons of mass destruction” that were “potentially lethal.”
Hmmm. The sage was right. Back in 2002.
But this is 2011, with budgeting going on for 2012.
Here’s how CFTC chairman Gary Gensler, he of Goldman Sachs heritage, described his agency’s resources in testimony before the House Committee on Agriculture, Subcommittee on General Farm Commodities and Risk Management:
Before I close, I will briefly address the resource needs of the CFTC. The futures marketplace that the CFTC oversees is approximately $40 trillion in notional amount. The swaps market that the Dodd-Frank Act tasks the CFTC with regulating has a far larger notional amount as well as more complexity. Based upon figures compiled by the Office of the Comptroller of the Currency, the largest 25 bank holding companies currently have $277 trillion notional amount of swaps.
The CFTC’s current funding is far less than what is required to properly fulfill our significantly expanded role. The CFTC requires additional resources to enhance its surveillance program, prevent market disruptions similar to those experienced on May 6 and implement the Dodd-Frank Act.
The President requested $261 million for the CFTC in his fiscal year 2011 budget. This included $216 million and 745 full-time employees for pre–Dodd-Frank authorities and $45 million to provide half of the staff estimated at that time needed to implement Dodd-Frank. The House of Representatives matched the President’s request in the continuing resolution it passed last week. We are currently operating under a continuing resolution that provides funding at an annualized level of $169 million. To fully implement the Dodd-Frank reforms, the Commission will require approximately 400 additional staff over the level needed to fulfill our pre-Dodd-Frank mission.
And his commission members this month are sending all kinds of signals that Dodd-Frank can’t be implemented unless some new source of funding is forthcoming.
Commission member Michael V. Dunn at a public meeting on proposed Dodd-Frank rules last Wednesday:
“We lack the staff and resources necessary to both implement Dodd-Frank and continue to fulfill our pre-Dodd-Frank duties under the Commodity Exchange Act . Without additional funding, the strain will only become worse in July, when much of Dodd-Frank goes into effect.’’
Commissioner Scott D. O'Malia at a Tabb Forum on Derivatives Reform a week ago, on the possible fallout:
"I have serious concerns about the cost of clearing … I believe everyone recognizes that the Dodd-Frank Act mandates the clearing of swaps, and that as a result, we are concentrating market risk in clearinghouses to mitigate risk in other parts of the financial system." He said regulators such as the CFTC will be challenged to implement the new rules in ways that do not make it “too costly to clear.”