WSJ Article: Gensler Says Derivatives-Dealer Oversight ‘Critical’ to Obama Plan
By KARA SCANNELL and SARAH N. LYNCH
WASHINGTON– Commodity Futures Trading Commission Chairman Gary Gensler said the most "critical" change needed in derivatives oversight is to start regulating dealers involved in derivatives transactions.
In an interview with The Wall Street Journal Thursday, Mr. Gensler, who supports the administration’s broad plan to revamp financial regulation, said "only through the dealer can we get the whole panoply" of information about derivatives contracts.
"I believe that is the critical piece," he said. The lack of regulation of dealers is "one of the great lessons" of the financial crisis.
The administrations’ plan for regulating the over-the-counter derivatives market calls for a two-pronged approach: increased oversight of the dealers, such as major banks Goldman Sachs Group, Bank of America and Morgan Stanley, and oversight of the swaps themselves.
Standardized derivatives contracts would be processed through clearing houses and traded on exchanges or electronic trading platforms. Customized contracts would be reported to a central repository.
"Central clearing will further lower risk," Mr. Gensler said. Dealers would for the first time be held to strict capital and margin requirements as well as business conduct standards.
Mr. Gensler said he believes customized contracts should have higher capital requirements than standardized ones because they are "less liquid and less transparent."
That increased cost could move more of the market toward standardized contracts and onto exchanges or electronic trading venues, addressing a concern from investor groups that this portion of the market would remain in the shadows.
Some corporations and financial institutions worry that higher capital costs would make it more expensive to reduce risks or hedge against oil prices or interest rates.
Mr. Gensler also said there is an "emerging consensus" among regulators that the proposed systemic risk regulator should "take the lead" in setting capital standards.
The CFTC and Securities and Exchange Commission, which are expected to have shared oversight of derivatives, would be best suited to oversee "market functions" and business conduct, he said. That involves oversight of the exchanges, dealers, record-keeping and other back office requirements, as well as anti-fraud and manipulation rules.
Mr. Gensler said clearing houses should have good corporate governance and be open to other participants, not just dealers, which could include hedge funds, if they meet risk standards. ICE Trust, the only operable U.S. clearinghouse for credit-default swaps, is only offering membership at this point to big Wall Street banks.
The SEC and CFTC have a September deadline to report to the administration on how they plan to harmonize rules between the two agencies. Past legislation allowed derivatives oversight to fall through the cracks, a contributors to the crisis.
Mr. Gensler said he and the SEC are "at the starting point" in that effort. He said sometimes the most challenging area is where the two agencies overlap.
The administration’s plan also calls for most hedge fund advisers to register with the SEC. Many advisers are registered with the CFTC and it’s unclear how Congress will tackle the issue. With respect to hedge-fund oversight, Mr. Gensler said, "We still want to make sure we’re able to enforce our statute."
He also said the CFTC has seen an increase in Ponzi schemes. In February, Stephen J. Obie, the acting head of enforcement, said the agency is bracing itself for an uptick in alleged Ponzi scheme cases.
For the year ended Sept. 30, the CFTC filed 13 Ponzi cases. With three months to go in the current fiscal year, the agency is already at 25 cases