House Reauthorization Bill Would Undermine Rather than Support CFTC

Americans for Financial Reform issued this statement on the House approval of HR 4413, “The Customer Protection and End User Relief Act”:

The Commodity Futures Trading Commission (CFTC) has a huge role to play in protecting consumers and the economy against fraud, price manipulation, and reckless speculation. Originally created to oversee the commodity futures markets, the CFTC now also bears most of the responsibility for regulating over-the-counter derivatives or “swaps,” the complex financial instruments that helped bring on the financial and economic meltdown of 2008.

Unfortunately, HR 4413 would seriously interfere with the agency’s ability to fulfill its mission and defend our economic security. It would do this by saddling the Commission with onerous new “cost benefit” analysis and procedural requirements, creating fresh grounds for delay and legal challenge, and tilting the playing field still further in the direction of narrow industry special interests. (These problems remain, despite the approval of a cosmetic amendment that attempts to alter the standard of judicial review for CFTC cost-benefit analysis.)

HR 4413 would also dangerously undermine the new transparency and safety rules put in place for the derivatives markets by sharply restricting the CFTC’s ability to oversee derivatives transactions conducted through foreign subsidiaries of U.S. banks, even when such transactions have the clear potential to do grievous damage to the U.S. economy. We need look no further than the recent examples of the credit default swaps sold by AIG’s London-based financial products division, or JP Morgan’s ”London Whale” trades, to see how foreign derivatives activities can threaten the U.S. economy.

The legislation also fails to address a key existing threat to the CFTC’s work: totally inadequate funding. Alone among financial regulators, the CFTC is wholly dependent on the appropriations process, and therefore uniquely vulnerable to political pressure. In the wake of the financial crisis, Congress passed the Dodd-Frank Act, which vastly expanded the CFTC’s mission. Since that time, however, many lawmakers have paid far too much attention to the pleas of influential companies seeking to avoid the rules, and the agency has been chronically under-funded. What it now needs, more than anything, is a budget commensurate with its responsibilities. To get there, the CFTC needs what other financial regulatory agencies already have: some form of self-funding, such as a tiny fee on the markets it regulates.

While it is bad news that this legislation passed the House, it is important to note that a solid majority of House Democrats voted against it, while the Obama administration issued a strong statement of opposition. The misguided provisions of HR 4413 are unlikely to be taken up by the Senate.

The House CFTC reauthorization bill does contain a number of ideas that deserve debate on their own merits, including customer protection proposals aimed at preventing the kind of end-user losses seen in the MF Global case. But it is counter-productive to put such provisions into legislation that ignores the key issue of adequate funding and seems designed, at heart, more to undermine than to assist the CFTC in performing its critical functions.