WASHINGTON The head of the U.S. futures regulator sought on Thursday to ease the fears of lawmakers and businesses about the costs and scope of regulations for the over-the-counter swaps market, while admitting the agency was falling behind in rolling out the new rules.
Gary Gensler said the Commodity Futures Trading Commission would respond to those concerns, which arose time and again during the first of what the top Republican on the House Agriculture Committee promised would be a "long series" of hearings to critique the regulator's work.
"We are absolutely listening to the public," Gensler told a packed hearing as the CFTC chairman was put on the hot seat in front of lawmakers increasingly worried about the scope of regulatory reforms.
The CFTC has proposed dozens of new regulations since October to implement its share of the Dodd-Frank bank reforms, which gives it oversight of the swaps market, worth about $600 trillion globally.
The agency will begin finalizing rules this spring, but will miss some July deadlines, Gensler said.
"Some of these rules will be put in place after July," Gensler said, noting the agency would take a "pause period" in February and March to consider public comments.
"We are human," said Gensler, who recently has begun contacting major players about how best to move forward on the second stage of finalizing the regulations.
The CFTC has come under fire from Republican and Democratic lawmakers, along with those affected by the new rules, for going too fast in the first stage of writing detailed regulations to implement the Dodd-Frank law.
The overflowing hearing was civil, but lawmakers put Gensler on notice they would scrutinize the outcome of the CFTC's work.
Gensler's attempt to address concerns was encouraging, but did not go far enough, said Frank Lucas, the new Republican chairman of the committee.
"At the end of the day, our goal is to ensure end users do not face significant new costs that will prevent them from hedging or otherwise divert cash to margin costs that could be put to work in the economy," Lucas told Reuters.
Under the Dodd-Frank law, most types of swaps have to be cleared, which requires counterparties to post margins to back the trades.
Businesses or "end users" that use the contracts to manage their risks don't have to clear trades, which they say would tie up too much capital and hike their operating expenses.
But, despite this exemption, many companies fear they'll be caught in the net of the regulation. "The way they write things maybe catches us," said Edward Gallagher of Dairy Farmers of America.
Gensler said the capital and margin rule was aimed at banks, not "end user" businesses.
"I believe we have the authority not to impose (margin on end users), and that's what my recommendation is to the staff and commission moving forward," Gensler said. "We are very sensitive to end users," he said.
But Lucas, the Agriculture Committee chairman, said businesses could be indirectly hurt by the added costs that banks will face from the CFTC's regulations.
"Mr. Gensler did not address whether the costs of end-user transactions may still increase substantially through margin requirements that may be imposed on their financial counterparties and passed on to them," Lucas told Reuters.
A Republican commissioner at the CFTC also warned that businesses still face the specter of higher costs.
"We need to be very sensitive if we're going to assess a capital charge on swap dealers for all their uncleared trades, that's going to have an impact on end users," said Scott O'Malia in an interview.
EXTRA COSTS COULD PUSH TRADE OVERSEAS
The head of the world's largest futures exchange operator said the CFTC needed to be cautious not to hike costs so much that trade would be pushed overseas, pointing to tie-up talks between Deutsche Boerse and NYSE Euronext.
"This is another way (trade) can go overseas, by mergers and acquisitions," said Terry Duffy, executive chairman of CME Group.
"Dodd-Frank was not an invitation to pile an irrational regulatory burden on exchanges, clearinghouses and other participants," he told lawmakers.
Collin Peterson, top Democrat on the committee, said there was "confusion and misinformation" about how the rules would affect end-user businesses, which he said would benefit from more transparent derivatives markets.
(Additional reporting by Charles Abbott; Editing by David Gregorio and Walter Bagley)