(John Kemp is a Reuters market analyst. The views expressed are
By John Kemp
LONDON Nov 6 The U.S. Commodity Futures Trading
Commission (CFTC) is in for its biggest shake up since the
financial crisis as two of its most experienced members and
strongest proponents of tougher regulation prepare to step down.
Bart Chilton, the longest serving member who has been a
commissioner since 2007, revealed on Tuesday he had notified the
president of his intention to leave in the near future.
Chairman Gary Gensler, appointed in 2009, will step down at
the end of the year.
Both are Democrats and have been the strongest advocates of
enforcing position limits and other new regulations on
derivatives markets under the Dodd-Frank Act.
On the five-member panel, one slot is already open after
Republican Jill Sommers stepped down in July. The president
nominated Christopher Giancarlo, executive vice president at
derivatives broker GFI Group, to replace her, but he has not yet
been confirmed by the Senate.
The remaining commissioners are Republican Scott O'Malia, a
staunchly pro-industry critic of position limits and other
regulations, and Democrat Mark Wetjen, the newest member who has
served only since October 2011.
Gensler and Chilton have stayed long enough to complete most
of the rule-writing required by Dodd-Frank and to re-propose
position limits, after a federal district judge struck down
their first attempt. But they leave the commission at a crucial
stage when much of the implementation is still to be done.
Enforcing the new rules and defending position limits
against further court challenges will fall to their successors,
who will lack as much experience and may be less determined in
the face of industry opposition.
The confluence of three vacancies creates a crisis of
continuity within the commission - and an opportunity to reshape
its approach and priorities.
Commissioners must be nominated by the president and
confirmed by the Senate. Because of the CFTC's historic role
regulating grain and livestock futures, the leading role is
played by the Senate Agriculture Committee.
No more than three commissioners at any one time can come
from the same party. President Barack Obama must therefore
nominate one Republican and two Democrats for the open seats and
designate one of the new or existing commissioners to act as
All the nominations are likely to be considered by the
Senate as a package to reduce the threat of partisan deadlock.
In theory, the White House could use its nominations to
reaffirm its influence and set direction for the agency, which
is supposed to be independent. In practice, derivatives reform
has slipped down the agenda, and the White House is unlikely to
attach much importance to the nominations or expend significant
political capital on them.
For the banks and derivatives dealers, meanwhile, regulation
remains a priority. The industry can be expected to lobby the
White House and especially the Senate for more sympathetic, some
might say malleable, commissioners to replace Gensler and
Gensler has proved a surprisingly tenacious and combative
supporter of strong derivatives reform in the teeth of bitter
In an ironic twist, his confirmation was originally held up
in the Senate because of doubts among some Democrats about
whether he would be tough enough on the industry.
As a former partner of Goldman Sachs and a member of
the Clinton administration's Treasury team, which helped
deregulate financial services in the late 1990s, Gensler was
seen as a probable soft touch.
He has instead defied expectations and become something of a
bête noir for derivatives dealers.
The CFTC makes decisions by majority on new regulations and
enforcement. Chilton, who is even more liberal and strongly
disliked by industry insiders than Gensler, has provided the
most reliable vote in support of the chairman's reforms.
With both leaving the commission in the near future, the
CFTC is likely to adopt a different, less confrontational,
Of the remaining and new commissioners, Wetjen is the one to
watch. Wetjen is set to play a decisive role in shaping the
agency's new direction, whether or not he is nominated as its
new chairman, as some press reports have speculated.
With the departure of the others, Wetjen will vault from the
commission's most junior Democratic member to its most senior
He has already played a pivotal role by providing the
crucial, third for agency rulemaking over the past two years.
Wetjen was a senior adviser to Democratic Senate Majority
Leader Harry Reid during the passage of Dodd-Frank in 2010,
though his precise involvement in the law's fiercely contested
Title VII on derivatives remains unclear.
His profile has been far lower than those of either Gensler
or Chilton. His cautious regulatory approach has been something
of an enigma.
At times, Wetjen has seemed to be groping for a less
confrontational middle way between the pro- and anti-regulation
factions on the commission and a compromise between the
derivatives dealers and their critics.
Given his more important role, Wetjen's statement was the
most interesting aspect of Tuesday's rule-making open meeting,
at which the CFTC voted 3-1 to issue new proposals on position
Gensler's and Chilton's votes in favour, and O'Malia's
against, were all predictable.
But Wetjen issued a surprisingly strong endorsement of the
rationale behind the proposals, even if he questioned the
tactics of making new rules rather than appealing the court
judgement that struck down the previous rules.
In striking down the first rule, the federal district judge
said the CFTC must employ its own experience and expertise to
reconcile the apparently contradictory language in the law,
especially over whether the CFTC must impose limits by order of
Congress or has some discretion to impose them only if it finds
Wetjen gave an unambiguous answer: "Position limits are the
primary policy tools chosen by Congress to accomplish that
mission (combating excessive speculation that can cause price
"The commission's newest proposal is intended to be
responsive to (the) court's opinion and clear in at least one
respect: It concludes that section 4a of the Commodity Exchange
Act, considered as an integrated whole, may be reasonably
construed to require the commission to impose, at appropriate
thresholds, limits on the amount of positions in agricultural
and exempt-commodity markets."
He insisted, "The commission reached the conclusions in the
document before us only after due deliberation and consideration
of its experience and expertise in overseeing the
position-limits regime over many decades."
In case there was any doubt: "I find it implausible that
Congress would add many sections of new statutory text to simply
affirm authority that the commission already has. Such a
conclusion does not seem to comport with the obligatory language
used in the statutory amendments, and it does not comport with
my understanding of the statute's intent as informed by my
experience working as a Senate aide during consideration of
It was a calculated move to shut down at least one route for
future legal challenges. The court said the commission must use
its experience and expertise to reach a reasonable reading of
the statute; Wetjen's answer in effect is that we have done so
and, moreover, I should know what Congress intended because I
was working there when the law passed.
It is a deliberate attempt to shield the decision from
judicial review and put it within the protection of the Supreme
Court's ruling in "Chevron versus NRDC," decided in 1984, which
insisted the courts must give substantial deference to a
reasonable construction of a statute by a federal agency.
Position limits are the most emotive issue for the
derivatives industry, though in all likelihood not actually the
most significant part of the law in terms of the way banks,
dealers and investors conduct their business.
Wetjen's role is set to become more important in future. By
giving unambiguous support to the new rule, Wetjen sent a strong
signal that he would not shy away from a tough approach, even if
that angers some in the industry.
(editing by Jane Baird)