On December 16, 2015, a U.S. Government entity took a giant step that will have far-reaching effects on the global financial ecosystem.
Oh, yeah, and the Fed raised interest rates for the first time in 10 years.
While most eyes in the financial world were glued to the talking heads blathering about the rate hike, I was watching the CFTC as it approved two rulemakings – a proposed rule that would require exchanges, clearing houses, swap execution facilities and data repositories to conduct specific cybersecurity tests, and a final rule requiring swap dealers to exchange initial and variation margin with financial institutions. (For a look at a summary of the final margin rules, with links to Commissioner statements, related documents and other information, go to the page in MarketsReformWiki HERE.
The new cybersecurity testing rules, which sailed through by unanimous consent, cover five elements – vulnerability, penetration, controls, security incident response, and enterprise technology risk assessment. These rules are straightforward and, in this day and age, should really be considered industry best practices anyway.
The margin rules, however, were accompanied by fireworks. Under the rules, swaps traded between affiliated entities will not be required to post initial margin. This marks a change from the proposed rules as well as rules approved by the Federal Reserve, FDIC and other Prudential Regulators, and prompted Commissioner Sharon Bowen to vote against the rulemaking. In her dissent, Bowen, who sees this as a gaping loophole for banks to revert back to the days before the crisis, states:
“The large financial institutions that benefit from this exemption have tremendously complicated organizational structures, webs of hundreds, sometimes thousands, of affiliates spread across the globe. These complicated structures allow these banks to shift risk across the globe through different legal entities in their quest to earn higher returns on capital.”
Chairman Timothy Massad and Commissioner Chris Giancarlo, the other two sitting members, see the protections built into the rule, such as margin segregation, prohibition of rehypothecation, and the exchange of variation margin between affiliates, as adequate protections.
Massad, who replaced Gary Gensler in 2014, has proven to be more pragmatic than his predecessor. Gensler, the chief architect of the original rule sets to implement the [[Dodd-Frank Act]], took a much stricter approach. He specifically singled out inter-affiliate swap margin as a necessary piece of the new structure.
This rule could set up an interesting showdown. Gensler, you see, is down but far from out. As finance director for Hillary Clinton, the presumptive Democratic nominee for the 2016 Presidential race, he could very well be named as Secretary of the Treasury under Clinton should she win.
In fact, Clinton’s recent New York Times opinion piece, How I’d Rein In Wall Street, Dec. 7, looked to have Gensler’s fingerprints all over it. The opening paragraphs, for example, were a verbatim copy of nearly every speech he gave while chairman.
With the CFTC down two commissioners – the last two to leave the commission, Scott O’Malia and Mark Wetjen, have yet to be replaced – the CFTC could have an entirely different makeup after the election, with a number of Massad’s pragmatic rollbacks “unrolled.”
In the words of the late movie star tough guy Charles Bronson, “Dis ain’t ovah.”