Monday, October 23, 2017

Washington insiders say tax reform likely to pass, see ‘rebalancing’ of derivatives regulation

By Lene Powell, J.D.

Despite a chaotic legislative environment, tax reform has a good chance of passing, said a panel of government affairs experts at a derivatives industry conference sponsored by FIA. Regarding derivatives in particular, the panelists see a “rosy picture” in revisiting regulation, including possible revisions to the Supplemental Leverage Ratio in bank capital requirements and CFTC proposed rules on position limits and automated trading.

“Destruction and despair.” Looking at the Washington picture overall, John Feehery, partner at EFB Advocacy, sees “six D’s” at work:
  • Disruption. Donald Trump is the “most disruptive President in our history, more so than Andrew Jackson,” said Feehery. Trump had no political or military experience and came to the White House in an unconventional way, and has said things and done things that no President has said or done before.
  • Distraction. Trump is a “master of distraction.” Some is intentional, some is unintentional, and we never know which, said Feehery.
  • Dismantle. Apart from the Treasury Department, Trump has an “obvious agenda” to dismantle the regulatory state. In Feehery’s view, this is the best thing Trump has done.
  • Destroy. Trump wants to systematically destroy Obama’s legacy, in particular to undo previous executive orders. 
  • Despair. This has all led to a sense of despair in the Washington political establishment—on both sides of the aisle, Feehery observed. 
  • Dystopia. “There’s a sense that Washington is collapsing, that the world is going to end, that we’re going to have either a fascist democracy installed or it’s going to be some sort of keystone cops. And none of that is true,” said Feehery. “There are systematic efforts to make Washington work better after eight years of the Obama administration.”
Tax cuts. “I think the President is putting all his marbles into tax reform,” said Feehery. Although the President and the White House are “sending confusing messages,” Feehery doesn’t see any chance of broad-based support. Senate Majority Leader Mitch McConnell (R-Ky) has said it’s going to be a tax cut. Feehery thinks Republicans will get 50 or 51 votes, with Vice President Pence voting for it. Ultimately, when that becomes obvious, five to seven Democrats who live in red states will vote for it in the end.

“Republicans and President Trump are kind of like Thelma and Louise. If they don’t get tax reform done, they’re going to fly right off the cliff together,” said Feehery. “I think this is going to be a good Christmas present for the American people and for the taxpayers.”

Feehery said he thinks the bill is almost all drafted, and it’s now just a matter of fitting in the pieces. He thinks the tax cuts will focus on the middle class, corporations, and pass-throughs, not wealthy individuals, and that it will end up around 20 to 22 percent on corporate taxes.

Michael Stein, managing director and global head of government relations at Morgan Stanley agreed that there will likely be tax cuts. He thinks there will be a “healthy” corporate tax cut and could very well be an individual tax cut. Linda Rich, senior managing director of government relations at CME Group, also agreed that tax reform would likely pass by the end of Trump’s first year as President.

Other legislation that could be completed before March on Obamacare subsidies and broader immigration reform, said Feehery. He noted that on both of these issues, Trump has set up a “burning platform.”

CFTC priorities. Regarding nominations for the two empty CFTC commissioner slots, none thought there will be nominations this year, and that the Commission could remain at two Republicans to one Democrat for some time before it gets to 3-2. As to what Democratic nominee will be paired with the Republican nominee Dawn Stump, Walt Lukken, FIA president and a former CFTC commissioner, said no names have been proposed, but likely it will be someone in the gravitational pull of Senate Minority Leader Chuck Schumer (D-NY), since he’s the one who will submit the name.

The panelists agreed generally that there doesn’t seem any movement on the perennial question of whether the SEC and CFTC should or will merge, noting opposition from various sectors.

On overall regulatory trends, Jill Sommers, a senior advisor at Patomak Global Partners and former CFTC commissioner, sees a “rosy picture” for making financial regulations more rational and taking a look at certain regulations that simply don’t work. Alex Albert, vice president of government affairs at Intercontinental Exchange, similarly sees a positive environment for reviewing and revising derivatives regulations, with “good people” heading both the CFTC and SEC.

Stein thinks there might be some “low-hanging fruit” in the treatment of margin and cash in the bank capital ratios, in particular in the Supplemental Liquidity Ratio (SLR). He said the recent Treasury report on capital regulation has laid out a “terrific blueprint” with some “easy ideas,” but he thinks nothing will move quickly.

Rich thinks that CFTC Chairman J. Christopher Giancarlo’s continued press for deference and substituted compliance and engagement with European reform is helpful and “very, very significant,” given potential fallout from Brexit on the U.S. markets. CME Group was grateful for the opportunity to comment in Giancarlo’s “Project KISS,” a comprehensive regulatory review.

Position limits. According to Rich, CME fully supports a review of the position limits proposed rule and would want to see significant changes before it could become final, including making sure that the bona fide hedge exemption is functional for market participants and that the rules are the same for cash-settled and physically-settled markets. Albert agreed with the focus on position limits and said the exchanges are often not given credit that there have been position limits for many years.

“If you talk to some members of Congress, they think there’s this void there on position limits. But we’ve had them, and I think they function very well, so I think they should try to preserve the existing structure as much as possible,” said Albert.

Regarding the proposed rules, he said that end users have been clear that they don’t have enough flexibility with the hedge exemptions, and there have been questions about deliverable supply figures. Rich agreed that the existing rules work, but the proposed rules, as drafted, are much too prescriptive and are not workable.

Sommers went even further, saying, “I think [position limits] are the most colossal waste of the CFTC’s resources in the history of the CFTC.”

Lukken nodded, saying, “It’s a terrible tool for limiting speculation. It’s really built for preventing spot month manipulation, so it’s so misdirected. Yes, we can pass it. I think the thought is, just get it behind us so we can move on.”

Reg AT. Regarding proposed Regulation AT, Rich said that CME thinks it’s “so fundamentally flawed it doesn’t make sense.” CME thinks the registration requirements are particularly problematic. Lukken noted that Commissioner Brian Quintenz recently called the proposal “dead.”

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