Commodity Futures Trading Commission member Bart Chilton told insittutional investors Wednesday that opponents of changes wrought by the Dodd-Frank Wall Street Reform Act are trying to block implementation of resulting rules by starving regulators of funding.
"Opponents of reform could not stop the Dodd-Frank Act from becoming law,'' commissioner Bart Chilton said at the Institutional Investor TraderForum in New York. "Therefore, now they have another idea—a double secret strategy. They seek to deny resources to regulators—starving us on the vine if you will—and thereby denying us the ability to enforce the new law and oversee these markets.
The Dodd-Frank Wall Street Reform Act, for instance, calls for the creation of exchanges and "swap execution facilities" that will trade in standardized forms of credit default swaps. These swaps will be centrally cleared, with a central counterparty in effect guaranteeing that both sides of a transaction have the financial ability to carry out the swap -- and financially withstand the results.
The execution of hundreds of billions of dollars of swaps that lifted the risk of banking firms from the possibility that there might be defaults on financial instruments based on mortgages was a central development in the runup to the 2008 credit crisis. Fulfilling the demands on the swapping of the risk led to the bailout of American International Group, an insurer still in the hands of the U.S. government.
Chilton said that opponents of reform "have not been successful in getting the agency to grant cavalier exemptions or cater to their every desire" and that "they are smart enough to know that Congress will not pass a wholesale reversal of the new financial reform law" even though Rep. Michele Bachmann, R-Minn., has proposed that.
"Therefore, now they have another idea—a double secret strategy. They seek to deny resources to regulators—starving us on the vine if you will—and thereby denying us the ability to enforce the new law and oversee these markets,'' he said. "And, they think it just might work."
If the opponents succeed in putting a stranglehold on Congressional funding of regulators, the regulators instead are likely to be forced to impose fees on users of capital markets, to implement the reofrms.
" I have opposed user fees in financial markets, because markets are a public good and therefore the government has a responsibility to ensure they are efficient and effective. Use of public tax dollars for this purpose is appropriate,'' Chilton said. "If we are faced, however, with the draconian option of no funding to implement the reform bill, putting us directly back where we were in 2007 and 2008 when the economic mess began to show its ugly head, then perhaps some type of user fee is the least onerous remedy.
"Not having necessary and important market oversight certainly is not the way to go,'' he said.
Approximately a billion-and-a-half contracts are traded on regulated commodity exchanges in the U. S. every six months, he noted. If market participants are charged even a third-of-a-cent transaction fee on those trades, "this could provide the funds to do our jobs,'' he said.
User fees should not just be placed on futures contracts, he said. They should also be placed on swaps transactions, he said, which is the "new area of regulation" where the commission's workload is increasing.
"If we don't receive the needed funding this year, I hope we use our existing authority to impose sort type of reasonable fee, and or seek approvals for additional fees and request from Congress additional authority to impose supplementary fees,'' he said.
Last week, the Securities and Exchange Commission and commissioner Elisse Walter said the federally funded regulator did not have the resources to take on the responsibility of overseeing a single standard of fiduciary responsibility by brokers and investment advisers.
This week, CFTC commissioner Michael V. Dunn said that the CFTC lacked the resources to implement Dodd-Frank. And commissioner Scott O'Malia said budget cutbacks would mean the CFTC would cut back its spending on technology to such a degree that it could not store data, after October, on what is going on in the markets it surveills.
Already the number of examinations carried out by the SEC on broker operations has fallen dramatically, in the two years since the credit crisis.