CFTC Vacancies Threaten Reform Momentum

Only two commissioners are expected to stay into 2014, leaving the CFTC evenly split on party lines and raising questions about whether it will be able to pass new rules.

The top U.S. derivatives regulator may dwindle to just two voting commissioners and struggle to approve new rules unless the White House and Senate can overcome political hurdles to fill the vacancies by the end of the year.

The Commodity Futures Trading Commission (CFTC), which is designed to have five members who regulate trading by banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co., could instead have only one Democrat and one Republican early next year. The split would probably delay votes on contentious Dodd-Frank Act regulations.

The possible gridlock comes as the agency tries to flex its powers under the 2010 Dodd-Frank Act, which gave the commission oversight of the $633 trillion swaps market after largely unregulated trades helped fuel the credit crisis.

A two-member commission “creates some hurdles in terms of bringing new significant rule changes or significant reviews,” said Sharon Brown-Hruska, who served at the CFTC from 2002 to 2006 and was present when the agency had only two members. More routine daily business could still proceed, said Brown-Hruska, a visiting professor at Tulane University in New Orleans.

President Barack Obama’s administration has for more than a year been considering nominees to succeed Chairman Gary Gensler, whose term expires at the end of the year, and now has a slate of nominees in mind, according to people briefed on the deliberations. Still, even if the White House officially nominates replacements soon, it could take months for Senate confirmation.

Amy Brundage, a White House spokeswoman, declined to comment on the CFTC openings.

Gensler is expected to leave by the beginning of next year, while Bart Chilton, a Democratic commissioner, said this week that he will also leave this year. A third spot has been vacant since July when Jill E. Sommers, a Republican, stepped down from the agency.

Chilton, who sought limits on speculation in oil, natural gas, and other commodities and curbs on high-frequency trading, said he probably wouldn’t be present for another meeting on Dodd-Frank rules. The agency is planning a Dec. 12 meeting on rules including limits on proprietary trading at Wall Street banks, according to two people with knowledge of the schedule.

“I anticipate being gone by the end of the year if not sooner,” Chilton said in a telephone interview yesterday. Gensler said on Nov. 6 that he was trying to persuade Chilton to stay at the agency longer.

 

Possible Nominees

Timothy Massad, a Treasury Department official responsible for overseeing the rescue of banks and automakers, is under consideration to succeed Gensler, a person familiar with the matter said in October.

Meanwhile, Sharon Y. Bowen, a securities lawyer at Latham & Watkins LLP in New York, is being considered to replace Chilton, four people in the financial industry said this week. Bowen is also the acting chairman of the Securities Investor Protection Corp., created by Congress to restore funds to investors who lost money in bankrupt or financially troubled brokerage firms.

Their possible nominations and the pending nomination of J. Christopher Giancarlo, an executive at New York-based inter-dealer broker GFI Group Inc., to replace Sommers could face hurdles in the Senate, which has split along party lines. A three-month bipartisan truce over nominees broke down on Oct. 31 when Republicans opposed two of Obama’s candidates, including Representative Mel Watt to head the Federal Housing Finance Agency.

Action on any possible nominee could also slip into next year because the Senate is planning to be out of session from Nov. 22 to Dec. 9 and committees typically take several weeks to review nominees’ paperwork and to schedule confirmation hearings and votes. A single senator can also hold up a vote on a confirmation.

“I believe the president should quickly nominate experienced, independent candidates who have the knowledge necessary to oversee derivatives markets, even as they continue to evolve,” Senator Dianne Feinstein, a California Democrat, said yesterday. She said she was disappointed that neither Chilton nor Gensler was reappointed.

 

Split Commission

A split along party lines at the commission could slow final votes on rules including limits on speculation. The CFTC this week released a second proposal for limits on traders’ positions in commodity markets after a federal judge last year said the agency’s first attempt failed to demonstrate why they were necessary.

The two CFTC members who would stay after the end of the year split on the proposal, with Democrat Mark Wetjen supporting its publication and Republican Scott O’Malia opposing it.

“As a matter of pragmatism, it just seems like the amount of policy making you can do with a two-person commission as opposed to a fuller one is going to be diminished,” Wetjen said in an interview.

Work on other Dodd-Frank regulations may also slow, even as the agency has completed most rules to have swaps reported to regulators, guaranteed at clearinghouses, and executed on new trading systems.

Adding to the to the agency’s woes is a looming funding crisis; the agency is planning furloughs for workers, and Congress has shown no sign of increase its annual budget.

The CFTC is drafting new regulations for collateral requirements for swaps that aren’t guaranteed at the clearinghouses. Also under consideration are decisions on which types of swaps must be traded on new exchanges and whether additional swaps must be guaranteed at the clearinghouses owned by CME Group Inc., LCH.Clearnet Group Ltd., and Intercontinental Exchange Inc.

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