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February 11, 2016

Financial Reform Newsletter: February 11, 2016


The CFTC must act now on SEFS to protect taxpayers from another derivatives-driven financial crash and more taxpayer bailouts: Unregulated and non-transparent derivatives were at the core of causing and spreading the financial crash of 2008. They were a primary reason the financial system almost collapsed, which is what caused the need for massive taxpayer bailouts. That’s why Warren Buffet called them “financial weapons of mass destruction.”

That’s also why reforming the derivatives – mostly swaps – markets was a key pillar of financial reform. In fact, they were so central that an entire chapter of the Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 was devoted to derivatives. The goals were systemic stability, transparency, oversight, accountability, and a level playing field that enables fair and genuine competition.  A primary means of achieving those goals was to get the maximum amount of swap trading conducted on exchange-like venues called “swap execution facilities” or SEFs.

Unfortunately, many of those reforms have been killed, weakened, or evaded by Wall Street’s biggest derivatives dealers who are protecting billions in profits and bonuses. Worse, the CFTC’s inaction seems to condone some of the worst practices of the biggest dealers, particularly their efforts to kills SEFs, transparency and competition. Better Markets released a Policy Brief this week that details those actions and what the CFTC must do to stop derivatives reforms from being undermined, if not defeated. You can read the Policy Brief here

Better Markets applauds CFTC for international agreement on clearing: In the years before the 2008 financial crash, Wall Street’s biggest financial firms moved many of their activities overseas to avoid U.S. rules that were intended to protect U.S. taxpayers from their highest risk activities. These irresponsible actions were encouraged by foreign countries and regulators trying to get Wall Street’s businesses, revenues, jobs and taxes by enticing U.S. firms with “light touch” to “no touch” regulation. The big Wall Street firms then played foreign regulators against U.S. regulators to “compete” for the least regulation, resulting in a global race to the regulatory bottom.

The Dodd Frank financial reform law of 2010 was specifically written to stop this evasion from happening again by ensuring that foreign rules are at least as strong as the U.S. rules. That was the only way to protect U.S. taxpayers, workers, homeowners and savers from another devastating financial crash. However, this requires regulators like the CFTC to stand up to enormous pressure from foreign countries, regulators and industry, who still want Wall Street’s business, and from Wall Street’s biggest banks and their foreign lobbyists, who still want the weakest global rules possible.

The CFTC has stood steadfast for more than a year, insisting that Europe recognize U.S. clearing rules, and the agreement announced today does that. The CFTC and Chairman Massad should be applauded for ensuring that U.S. law properly protects threats to the U.S. wherever they may arise. This is not improperly imposing requirements on foreign participants. This is just common sense protection of the U.S. financial system and U.S. taxpayers.


President Obama’s budget request funds the SEC and CFTC cops on the Wall Street beat: The CFTC and SEC are the cops on the Wall Street beat. They are the front line defense protecting America’s workers, families, taxpayers, and communities from financial predators and another financial crash.

That’s why it’s so important that President Obama’s Fiscal Year 2017 budget request released this week calls for $1.8 billion for the SEC and $330 million for the CFTC. This budget would also double the funding for these Wall Street watchdogs from their FY2015 levels by FY2021.

We applaud President Obama for his proposal. These agencies have been chronically underfunded despite the President’s repeated calls for increased funding. For example, the omnibus spending bill recently passed by Congress irresponsibly flat funded the CFTC at a mere $250 million when they are legally required to police a $400 trillion derivatives market.

Grossly underfunding these agencies has allowed some on Wall Street to return to their high-risk pre-crash ways of doing business, endangering our financial stability and undermining the mission of financial reform. That’s why we’ve called for full and independent funding of these agencies to give them the resources they need to do their jobs protecting the public. Congress should enact the President’s request without delay because the American people will not be protected from reckless, irresponsible, and, at times, criminal behavior in the financial industry until the SEC and CFTC are fully funded.  


CFTC Commissioner Sharon Bowen at George Washington Law School on “The Role of the CFTC in the Market”: Last week, the George Washington University Law School’s Center for Law, Economics & Finance (C-Leaf) held its annual Manual F. Cohen Lecture titled, “The Role of the CFTC in the Market.” The event featured two panels of national experts that discussed the CFTC’s role in the regulation of corporate governance matters, and the key concerns surrounding systemic risk.

The symposium began with a keynote address by Commissioner Sharon Bowen focusing on the CFTC and its future. Commissioner Bowen addressed whether Wall Street’s high risk activities have been reformed and whether consumers are better protected in the derivatives markets.

First, she addressed the issue of whether consumers are better protected today, ultimately concluded that they are, but not as much as they expected to be after the passage of the Dodd-Frank Wall Street reform law. Commissioner Bowen discussed the world leaders G-20 meeting at the 2009 Pittsburgh Summit and their agreement on ways to improve the derivatives markets and avoid another financial crash: requiring clearing and execution of standardized swaps; reporting of all swaps; and higher capital for uncleared swaps. She noted that while clearing and reporting of all swaps has been a success, the execution of swaps and the recently finalized margin rules relating to uncleared swaps need to be re-addressed to better protect consumers.

Commissioner Bowen also highlighted what still needs to be done to reform Wall Street.  In particular, she said that “We need to address two areas – enforcement and conduct rules,” specifically pertaining to higher enforcement penalties, privilege protection when cooperating with other agencies, and more financial resources. 



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