The U.S. Commodity Futures Trading Commission (CFTC) plans tointensify oversight of swaps clearinghouses to ensure they don'tthreaten the financial system they are meant to help secure.

CFTC Chairman Timothy Massad said in a Sept. 5 interview thathis agency will bolster examinations of clearinghouses, whichprocess trillions of dollars in transactions and are potentiallyvulnerable to market shocks or cyber attacks. The agency is workingwith the Federal Reserve on the effort, he said.

New rules requiring banks and other firms to use clearinghousesowned by LCH, Clearnet Group Ltd., CME Group Inc., andIntercontinental Exchange Inc. have been “a great thing” and havehelped regulators “monitor and mitigate risks, but it doesn'teliminate risk,” according to Massad.

“We've got to be very focused on the health ofclearinghouses,” he said.

Regulators imposed new rules over the $710 trillion global swapsmarket after largely unregulated trades helped fuel the 2008 creditcrisis. Most swaps now must be guaranteed at central clearinghousesand traded on exchanges or other platforms.

After being sworn in as chairman of the primary U.S. derivativesregulator in June, Massad has mostly kept a low profile whilegetting up to speed on the new job. The former Treasury officialsaid other priorities on his agenda include negotiations withEuropean regulators over harmonizing rules, getting more fundingfor the CFTC, and improving the agency's ability to receive andanalyze data about the swaps market.

Massad and his fellow commissioners are facing challenges asthey work to turn the once-sleepy agency that monitored futurestrades into a regulator that polices major swaps dealers such asGoldman Sachs Group Inc. and JPMorgan Chase & Co., as well astrading platforms run by CME Group and ICE.

The safety of clearinghouses is a major concern, said Massad,who said he has been working closely with Fed Governor JeromePowell on the issue.

The Fed and the CFTC will focus on clearinghouses' capitallevels, as well as contingency plans for market disruptions andcyber attacks. Regulatory examinations are in the works, Massadsaid.

While the CFTC was given new duties and powers overswaps—derivatives contracts that were mostly unregulated before the2008 financial crisis—it has been hamstrung by a low budget andsmall staff. Low employee morale has caused workers there toattempt to join the National Treasury Employees Union; voting isset to begin at the end of this month.

Completed Rules

Unlike most of the other financial regulatory agencies inWashington, the CFTC has completed most of the rules it wasrequired to write under the 2010 Dodd-Frank Act. Still, Wall Streetis pushing to undo some of the reforms put in place by Massad'spredecessor Gary Gensler, whose tenure was marked by clashes withthe largest banks and European authorities.

While Massad praised Gensler, the new chairman said his rolewill be different and requires reviewing rules to see what needstweaking or improved coordination. He said he has been trying tobuild relationships with members of Congress, internationaloverseers, and fellow Washington regulators.

Massad indicated he was willing to consider changes to theoverseas reach of CFTC rules. That could help resolve disputes withWall Street that last year prompted a lawsuit against the CFTC'sentire policy for regulating swaps traded overseas.

The lawsuit followed CFTC guidance in November that sought toforestall banks' moves to avoid Dodd-Frank by arranging trades inthe U.S. but booking them in overseas units. The agency's staffadvisories said traders based in the U.S. who arrange, negotiate,or execute a deal—even on behalf of an overseas affiliate—mustcomply with the law. U.S. banks say the policy puts them at adisadvantage to foreign rivals.

“There are a lot of issues for us to sort out,” Massad said. “Ithink conduct in the U.S. has traditionally been a basis forjurisdiction in a lot of areas, but I also appreciate these issueshave competitive angles to them.”

The CFTC is also reviewing trading practices at Wall Street'sbiggest banks to escape Dodd-Frank restrictions on overseastransactions. The agency sent letters in July to JPMorgan, GoldmanSachs, Bank of America Corp., Citigroup Inc. and Morgan Stanleyseeking further information about the practice of removingparent-company guarantees for overseas trades.

'Structuring Things'

“The financial industry is very good at morphing, at structuringthings around regulation,” Massad said. “Even if it's well withinthe rules, it may still mean that activity abroad poses a risk tothe U.S. banking corporations which own these swap dealers.”

Massad said he is working with the bank regulators to respond tothe risks that may be “beyond the reach of our authority but couldaffect the parent banking corporation,” he said. “That may besomething that they can address.”

On the CFTC budget, Massad said he has been talking withlawmakers in the House and Senate in an effort to increase theagency's funding. It now operates on a roughly $200 million annualbudget—about one-seventh of the money given to the Securities andExchange Commission (SEC).

“People are stretched,” he said.

Congressional Republicans, in particular, have been loath togive the CFTC a boost because they want to tamp down newregulations that they say will stifle the financial industry.Massad said part of his message to them is that “more money doesn'tmean more rules.” Instead, he said, smart regulation is “a goodinvestment” in keeping markets fair and functioning properly.

To compensate for the budget woes, Massad said he is asking theNational Futures Association, an industry-funded self-regulator, tohandle more inspections and other work.

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