LONDON (Reuters) - Politics is brutal. Just how brutal became apparent Wednesday when Wall Street teamed up with Republican lawmakers in the House of Representatives to emasculate the Commodity Futures Trading Commission (CFTC) by slashing its budget while imposing new requirements for cost-benefit analysis and rule-writing.
The aim is to stop the agency implementing the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act by depriving it of resources needed to draft and oversee new regulations, while erecting tougher barriers to writing new rules.
The agriculture appropriations bill for fiscal 2013, approved by a House Appropriations subcommittee on June 6 along party lines, would cut the agency’s funding next year by $25 million (12 percent) compared with fiscal 2012. This is a massive $128 million (40 percent) less than the administration requested in its budget proposals.
The CFTC has seen its allocation cut more than any other agency funded in this appropriations bill. In total, the bill provides $19.4 billion of discretionary funding, just $365 million below last year’s level (a cut of 1.8 percent) and $1.7 billion less than the president requested (an overall reduction of 8 percent).
While popular agencies and programs, such as agriculture research, rural development and food inspection, suffered only small cuts, or had their requested budgets approved in full, the CFTC’s request has been savaged as legislators, lobbyists and conservative legal scholars mount a coordinated effort to block more regulation of commodity and swaps markets.
The appropriations bill provides a fascinating insight into the issues preoccupying Wall Street lobbyists and their congressional allies.
The bill provides total funding of $180,405,000 for the 12 months running from October 2012 to September 2013.
Of this total no more than $25,000 can be spent on expenses for consultations and other meetings hosted by the commission with foreign governmental and regulatory officials. For all the emphasis financial services firms pay to the importance of coordinating regulations between the United States, the EU and other regulators, the bill severely restricts the amount of money available for it.
More seriously, the bill earmarks $32 million for purchasing information technology. Commissioner Scott O’Malia, who leads the commission’s technology advisory committee, has pushed for more to be spent on upgrading the CFTC’s antiquated computer systems to cope with workload increases and improve market surveillance in a world of increasingly automated and high-frequency trading.
But the practical impact of reserving money for IT upgrades is that there is less money for everything else, including the professional staff needed to write rules, undertake market surveillance and take enforcement actions.
The subcommittee bill would also require the chairman of the commission to report to Congress within 30 days with “a schedule of implementation and sequencing of all rules, regulations, and orders .. including all Commission cost benefit analyses and studies relied upon in the formulation of any regulations” on selected topics.
The authors seem particularly concerned about CFTC rulemaking in three areas: swap dealers (Section 716 of Dodd-Frank), position limits (Section 737), and the registration of commodity trading advisors (Section 4m of the Commodity Exchange Act).
Position limits are already being challenged in federal court by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) on behalf of Goldman Sachs, JPMorgan, Barclays, Morgan Stanley and other commodity traders.
Part of the challenge centers on whether the commission must prove that limits are “necessary” to diminish, prevent or eliminate excessive speculation. The challengers argue that the commission has not conducted a proper quantitative analysis to justify its decision to impose limits under the law.
Commissioner O’Malia has blasted his colleagues for not conducting a proper quantitative cost-benefit studies before writing and imposing new regulations required by Dodd-Frank; his concerns are clearly shared by the bill’s authors.
On May 31, O’Malia spoke to an industry conference on the subject of “Smart regulatory reform and the perils of high-frequency regulation.”
“I have been very critical of the Commission’s cost-benefit analyses. The Commission previously minimized the role of performing complete cost-benefit analyses by turning the process into an administrative, check-the-box exercise,” O’Malia said.
“(T)here are three critical areas where the Commission can and must improve its cost-benefit analysis. First, the Commission should develop a realistic and status quo ante baseline. Second, the Commission should develop replicable quantitative analysis, which will allow it to make informed decisions about the market. Finally, the Commission should develop a range of policy alternatives for consideration.”
Outlining his approach for a more effective approach in future, O’Malia advocated “smart regulatory reform.”
“Smart regulatory reform consists of three key elements. First smart regulatory reform is based on facts that are uncovered through comprehensive research and robust and frequent discussions with industry. Second ... thorough economic analysis ... The Commission cannot ignore the importance of its cost-benefit analysis when prescribing regulations. Finally smart regulatory reform should provide market participants and others affected persons with legal certainty.”
O’Malia’s concerns about the quality of CFTC rulemaking echo those expressed by the industry.
Unfortunately, the appropriations bill will make sure that the CFTC does not have the resources to do any proper cost-benefit analysis.
The president’s request asked for an extra $103 million of funding in fiscal 2013, which would pay for the equivalent of 305 extra full-time employees, taking total staffing up to 1,015.
The biggest budget and staff increases would have been for data acquisition, analytics and surveillance (an extra 65 staff), examinations (72 staff), enforcement (50), economic and legal analysis (24) and rule-writing (41).
But all these proposed increases have been denied funding. It is hard to see how the commission can be expected to develop highly detailed estimates for the costs and benefits of all its rules when there are only 64 staff working on legal and economic analysis and another 10 working on international policy coordination.
These numbers will come under further pressure as a result of the proposed reduction in the commission’s budget and the decision to earmark a large chunk of funding for new computer systems. The commission is now supposed to oversee the vast OTC swaps market with fewer staff and less funding than it had when it was only charged with policing exchange-based futures.
At yesterday’s budget hearing, apparently without irony, the House appropriations subcommittee chairman faulted CFTC oversight of collapsed dealer MF Global, claiming “they were asleep on the job,” and saying the agency had been tardy in implementing Dodd-Frank and slow in developing electronic monitoring of markets.
Now the CFTC is meant to provide more vigorous oversight and better rules with fewer staff.
It is hard not to see the industry’s calls for smarter regulation and more cost-benefit analysis, while pushing lawmakers to cut the agency’s funding, as deeply cynical.
For all the high-sounding calls for a better and more thoughtful approach to crafting rules, in practice smarter regulation appears to mean no or ineffective regulation.
(John Kemp is a Reuters market analyst. The views expressed are his own)
Editing by Anthony Barker