Wednesday, January 11, 2017

Outgoing CFTC chief warns against dismantling global market reforms

By Brad Rosen J.D.

In remarks before the London School of Economics, CFTC Chairman Timothy Massad proclaimed that repealing or dismantling the market reforms that emerged globally in the wake of the 2008 economic crisis would be a major mistake. Massad, who will be resigning from the commission effective inauguration day, January 20th, returned to some familiar themes. He pointed to the success of the Dodd Frank reforms and the resilience they provide to the financial system. He also underscored the central role international coordination and harmonization played in these reforms.

In his address, Massad reviewed some of the economic events and developments, and the dramatic changes in the regulation of derivatives that have occurred over the past eight years under President Obama. The chairman recalled the depths of the financial crisis which resulted in nine million Americans losing their jobs, five million losing their homes, and a loss of 13 trillion dollars in family wealth. He also reminded of the causes that lead to the meltdown—a housing bubble, excessive risk assumed by banks, mounting household and corporate debt, and a regulatory system plagued by gaps and deficiencies. Since the 2010, the chairman noted that 15.5 million jobs have been added in the U.S., the unemployment rate has been halved, housing prices have rebounded, and the Dow Jones index is nearing 20,000, compared to less than 8500 on inauguration day 2009.

Massad also recalled the 2009 agreement among the U.S., the UK and other G20 member nations which served as the basis for the Dodd Frank legislation in the U.S. These points of agreement leading to the reforms included standardized swaps cleared through central clearinghouses, margin required for uncleared contracts, swaps traded on regulated platforms, and contracts reported to trade repositories. According to Massad, the resulting reforms have worked as over 80 percent of swap transactions worldwide are being cleared today as compared to only 15 percent in 2007, and margin is being posted and collected for uncleared swaps.

Despite the accomplishments under Dodd Frank and related global reforms, Massad is well aware these reforms are at risk of being undone, observing, “the presidential election in the U.S. and the Brexit vote here in the UK have been interpreted as evidence of deep discontent with governmental policies and economic conditions, particularly by working class voters. To many commentators, these votes called into question assumed wisdom about the benefits of international trade and globalization.” He continued “[i]n the United States, there is talk of repealing many of the reforms taken in response to the crisis, as they have been said to hinder economic growth. And in the UK, the Brexit vote raises questions about the future of London as an international financial center.”

Massad also realizes there is much that can still be done to fine tune and improve upon the existing regulatory framework, and there is room for differing opinions on how to best implement the framework. In particular he suggested that the role of central clearing, issues surrounding market liquidity, and cybersecurity concerns continue to receive the attention and support of regulatory authorities. In concluding, Chairman Massad reflected, “[w]e are unlikely to predict what will cause the next financial crisis. But the measures we have implemented in response to the 2008 financial crisis have made the global financial system more resilient. The international cooperation in their implementation has been unprecedented.”

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