Waiting for US regulators to finalize their new rules is like trusting the New York subway system to live up to its official schedule of departures and arrivals. You can be certain that everything will be late and there will be little concern for the consequences. This was painfully clear when the regulators came to town for SIFMA’s 2011Annual Meeting. The regulators in attendance earlier this week were none other than Mary L. Schapiro, chairman of the US Securities and Exchange Commission (SEC), and Gary Gensler, chairman of the US Commodity Futures Trading Commission (CFTC). Overall, they offered vague assurances that there will be a steady stream of regulations throughout 2012, acknowledged that deadlines were missed, and ducked the few probing questions from ponderous celebrity interviewer Charlie Rose, the king of bromide-inducing questions.
Gensler did argue that the Dodd-Frank Act has some serious strengths when it comes to over-the-counter (OTC) reforms and that there would “a great deal more uncertainty if you don’t regulate.” He struggled, however, when asked whether Dodd-Frank, overall, went far enough and could only muster that it was “a good bill,” which he supported; not a ringing endorsement.
Veering off script, the CFTC chairman offered a peek into the great divide that exists between US regulators and China—a chasm greater than that between regulators and markets. He said he found his dialogues with the capitalist czars of communism to be refreshingly candid. He even ventured to suggest that they not wait 30 years to regulate the swaps markets as we did in the US. He said he got a polite reception from Chinese officials even though some of his message may have been lost in translation.
It’s a good thing that the head of a major regulatory agency acknowledges that inaction is detrimental to the economy. It would be better if he took this lesson and further applied it to the US.
As for the SEC, Rose asked Schapiro about the “speed and velocity” of the SEC’s rule-making. She did point out that Dodd-Frank spawned approximately 90 rules-making efforts, which were in addition to the SEC’s own reform agenda.
She also countered that the SEC has completed new regulations for hedge funds, moved much of the OTC overhaul through the process and is advancing new rules for credit rating agencies. Later, she recited the reforms inspired by the May 6, 2010 “Flash Crash,” including circuit breakers, the banning of naked access, clarity on when a trade is broken, the large trader reporting requirements, and stipulations for consolidated audit trails. She also hinted that dark pools and high frequency trading activities are in the sights of the SEC.
Schapiro also outlined proposed capital buffer reforms for money market funds, touched on some of the new technology in place, and declared that 2011 was “a record year for enforcement” with 735 enforcement actions.
So, essentially, the SEC is now awake. But is the taxpayers’ money well spent?
Schapiro would argue in the affirmative as she has been asking for more funding because the SEC lacks the personnel “to operationalize these rules.” Translated from bureaucracy-speak, that means the SEC will not have the staff to carry out its newly minted rules. “It’s a huge funding issue for us,” she says. Of course, the pending rules and their impacts might be a problem for those firms that have to live with them.
Her cry for more funding was a golden opportunity for Rose to ask: What, then, was the point of ambitiously rewriting the rules if you don’t have the staff to carry them out? Alas that question slipped past Rose. But Schapiro did acknowledge earlier that one way around this conundrum is for the SEC to carefully pick its battles—and leave some worthy ones on the table.
Incredibly, though, Schapiro concluded: “In every way, this is a different agency than three years ago.”
Can she really claim a complete transformation after decades of careerist staffers performed perfunctory duties before their turn at the revolving door? Is the influence of crony capitalists and their lapdog politicians that resulted in slaps on the wrists for the big boys really over?
A case in point is the widely reported questions posed by US District Judge Jed Rakoff, who has been asking the SEC why it failed to get Citigroup to reveal more as part of a recent $285 million settlement in a mortgage-bond case that Rakoff has yet to approve; Citi allegedly mislead clients to the tune of $1 billion via shaky mortgage securities. More importantly, Judge Rakoff asked why the SEC has avoided citing major firms for contempt after their repeated violations of regulations, even after these firms have avowed to never break the law again.
In response to another Rose question, Schapiro was asked about her reactions to the Occupy Wall Street protest. “I understand their frustration,” she said, adding that the protesters are airing a multi-threaded challenge to a system that isn’t working. The SEC, for its part, is trying to become a stronger cop on the beat with “the tools and the rules” to restore the system, she said.
I suddenly saw a connection among the rabid right-wing Wall Streeters, the ragged rabble rousers and those of us in between—we’re all waiting for the system to work again and we’re waiting for the regulators to pick up the pace and get it right.
Like the agony that is the MTA subway system, we may wait for a long time.
For further information about new CFTC/SEC regulation attend our 6th Annual OTC Derivative Operations & Processing conference on November 16th in NYC.
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