WASHINGTON Gary Gensler, chief regulator of U.S. derivatives markets, is working to break up the Wall Street club where he cut his professional teeth, but concedes it will take some time.
As part of the Commodity Futures Trading Commission's job to implement 2010's Dodd-Frank financial reforms, Gensler said that the agency he leads is trying to bring more competition to the highly profitable derivatives market.
"I think Congress' intent was to open it up. We'll see how successful. You'll get to judge that in a few years," Gensler said on Wednesday at the Reuters Future Face of Finance Summit.
The roughly $600-trillion global over-the-counter derivatives market is dominated by Wall Street giants including JPMorgan Chase, Goldman Sachs, Citigroup, Bank of America and Morgan Stanley.
Gensler spent 18 years at Goldman Sachs, making partner at age 30, before joining the Treasury Department and becoming CFTC chairman in 2009. Critics have raised questions over the years about the revolving door between Goldman Sachs and the corridors of regulatory power in Washington.
"I had a number of experiences that I draw upon. That's part of who I am. I'm proud of that background. I've learned from it, but I've also learned a lot in the 13 years since" leaving Wall Street, Gensler said.
As the CFTC works to implement scores of new rules mandated by Congress in the Dodd-Frank law, Gensler has had to face down aggressive lobbying by Wall Street firms intent on preserving the substantial profits they realize from derivatives.
TAKING RISK OFF TAXPAYERS' BACKS
He said it is "a perverse outcome" of the government's bailouts of Wall Street during the 2007-2009 crisis that many Americans today feel that Wall Street's dominance of the financial system is still strong despite reforms.
To address that perception and reduce the risks posed to the system by a market that previously was unpoliced, he said, "In terms of derivatives, the best we can do is to ensure that as many swaps as possible come into clearinghouses."
One of the central goals of Dodd-Frank is to redirect much of the OTC derivatives market through exchanges, electronic trading platforms and central clearinghouses that stand behind dealings in derivative contracts.
"What that means to the American public is it's less likely that the taxpayers stand behind that transaction," he said.
"Instead the clearinghouse stands behind it, and I think that's what Congress recognized. Moving as much of this into clearinghouses lowers interconnectedness, but also says a clearinghouse stands there, not the taxpayer."
"I also think transparency helps," he said, looking back to the widespread uncertainty during the crisis of the value of toxic assets on the books of giants such as American International Group.
"The law now says that they have to be valued daily and valuations have to be shared between the counter-parties and if they run a clearinghouse, the clearinghouse has to share it with the public. So in the lane we swim in, it's transparency, it's clearinghouses, it's the regulation of the dealers."
DISCUSSING FOREX WITH TREASURY
Dodd-Frank gives the Treasury secretary the power to determine whether foreign exchange swaps and forwards are covered or exempt from the rules.
Gensler had urged lawmakers to keep the exemption as narrow as possible. He said he has been talking with Treasury officials as they craft their decision, but declined to make his opinion public. "They know my advice," he said.
Congress gave the CFTC a July deadline to finalize its "mosaic" of more than 40 regulations, but won't begin that process this month, Gensler said. The agency still needs to unveil two key rules defining swaps and outlining capital and margin requirements for swaps dealers and major players.
Meanwhile, Gensler has been negotiating with lawmakers for more money for the agency.
The CFTC's budget has been held static at $169 million this year, about 50 percent less than what the agency had hoped for. The Obama administration proposed an 80 percent hike to $308 million for 2012.
The agency faces an uphill battle getting more money from Congress with House Republicans questioning the need for more market regulation.
"It's important to fund the agency so there is an effective cop on the beat," Gensler said.
(Reporting by Christopher Doering, Roberta Rampton, Kevin Drawbaugh, Rachelle Younglai and Ann Saphir; Editing by Tim Dobbyn)