Senators oppose futures regulation by the Fed

Senate Budget Committee Chairman Kent Conrad, D-N.D., Senate Agriculture Committee Chairwoman Blanche Lincoln, D-Ark., and House Agriculture Committee Chairman Collin Peterson, D-Minn., all are opposing the Federal Reserve Board becoming a regulator of the futures industry.

Conrad said at a Senate Agriculture Committee hearing Nov. 18 that he would oppose proposals to make the Fed a regulator of futures and derivatives markets.

“It is critically important to commodities that the regulator understand commodities,” Conrad told Commodity Futures Trading Commission Chairman Gary Gensler.

Lincoln added that she “echoed” Conrad’s position. If the proposal were to move forward, exchanges such as the Chicago Mercantile Exchange, the Kansas City Board of Trade and the Minneapolis Grain Exchange could be regulated by the Federal Reserve as well as the CFTC.

Although the Obama administration has proposed making the Fed an overall financial regulator for “systemic risk,” Gensler thanked Conrad for his statement backing up the independence of the CFTC as a regulator.

REGULATIONS IMPORTANCE

Conrad’s and Lincoln’s comments came at a hearing at which Lincoln signaled that she will write her own over-the-counter derivatives regulation bill to accompany Senate Banking Chairman Chris Dodd’s overall financial services regulation bill.

Lincoln said, “We’ve seen deregulation sweep over America in a way that has simply devastated our economy. Given this reality, “business as usual” is not acceptable — fundamental financial market oversight reform must pass.”

Lincoln added that she does not want to overreact or stifle innovation “but the word ‘innovation’ can’t be a code word for unacceptable practices.”

Lincoln announced that Treasury Secretary Tim Geithner will testify Dec. 2 before the committee, which has jurisdiction over the futures industry.

REFORM BILL

Gensler joined officials Nov. 17 from the Securities and Exchange Commission and the Farm Credit Administration officials and the House Agriculture Committee leaders to oppose provisions in the House financial services reform bill that would give the Federal Reserve Board powers to regulate exchanges and overpower their agencies.

The proposal could add a Fed layer to regulation of the Chicago Mercantile Exchange, the Kansas City Board of Trade and other exchanges.

The CFTC and SEC positions appear to put the heads of those commissions at odds with the Obama administration Treasury Department proposal on which the bill is based.

The bill is being considered in the House Financial Services Committee., but Peterson, a longtime critic of the Fed who has jurisdiction over the futures and farm credit institutions, held a hearing on the bill Nov. 18. Peterson said that if the Financial Services markup does not address impacts on the areas that come under the committee’s jurisdiction, “we may be back here.”

It’s unclear, however, whether the legislation will give the Fed powers over the exchanges.

According to a report in Congress Daily PM Nov. 17, House Financial Services Committee Chairman Barney Frank, D-Mass., on Nov. 6 modified the bill so that the Fed would have to consult with primary banking regulators such as the Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency on any corrective action in their areas of jurisdiction, and it would prohibit the central bank from imposing its views upon them. Frank said he would prepare a similar amendment for the SEC and CFTC as well after those two agencies raised similar concerns, Congress Daily reported.

But neither the officials from the agencies or members of the House Agriculture Committee mentioned Frank’s promise at the hearing.

SEC Commissioner Elisse Walter told the committee, “There is a need to establish a framework for macro-prudential oversight that looks across markets and avoids the silos that exist today,” but she added that focusing on a systemic risk regulator could weaken other protections, lead to overregulation and to regulators feeling compelled to change rules or pick winners and losers.

Walter, who said her testimony had been endorsed by Mary Schapiro, who chairs the SEC, but not vote on by the commission, said Congress should vest most new power in the financial regulatory council established under the bill to identify risky actors and activities, give it an independent chair and its own staff. Schapiro said the legislation should be clarified so that neither the Fed nor any other entity could lower or reduce capital and other requirements.

PROPOSALS

Gensler said the legislation could place the securities and futures exchanges under the Fed because stock exchanges are organized as holding companies and may meet a broad definition of a financial company. Gensler testified that Congress may want to “clarify” if they should be included in the Federal Reserve’s prudential supervisory authority over holding companies.

Gensler said the SEC and the CFTC are “the best places” to regulate the exchanges. Under questioning, Gensler also acknowledged that, under the bill, if the Fed were to disagree with the approach that the CFTC or SEC is taking with a particular problem, the Fed could override the agency and the agency would have no power of appeal in the courts.

Noting that the Fed has testified it never has been a primary regulator, Peterson said to Gensler, “So we are going to take somebody with no experience and put them in charge?”

Peterson added, “I won’t make you answer that.”

House Agriculture Committee ranking member Frank Lucas, R-Okla., who also sits on the financial services committee, said the bill “takes competent regulators and an effective regulatory scheme and subordinates them to a potential entity that hasn’t shown the ability to effective and efficiently use the power it has or demonstrate any particular expertise in this very specialized, nuanced market.”

Farm Credit Administration Chairman Leland Strom testified that that the financial services bill would come into direct conflict with the Farm Credit Act, but that Treasury Department officials had told him that it was not the Treasury Department’s intent to cover farm credit institutions under the bill. Strom said Treasury officials had agreed to develop clarifying language, but during questioning from Peterson, said he did not know whether the treasury had lined up anyone to introduce an amendment in the financial services markup.

At the Nov. 18 hearing, Gensler defended his proposal to move over-the-counter derivatives through exchanges and clearinghouses to reduce the interconnectedness of financial institutions.

Sen. Debbie Stabenow, D-Mich., noted that Ford Motor, which is an under-user of derivatives to mitigate risks such as interest rate changes, does not want to be subject to clearinghouse margin requirements because its capital is tied up and needed for other purposes.

But Gensler noted that all states “suffered greatly” when taxpayers had to spend $180 million to bail out the American International Group when it could not back up the insurancelike derivatives it had issued.

Senate Agriculture ranking member Saxby Chambliss, R-Ga., suggested that stiffer reporting requirements for the over-the-counter trades and the release of that information would provide sophisticated investors with enough information that they would not do business with firms that did not have proper backing.

But Gensler said regulators need authority to impose capital requirements and business credit standards because “the crisis showed many sophisticated investors made whopping mistakes.”

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