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Wall Street Lobbyists Besiege CFTC to Shape Derivatives Rules
2010-10-14 04:20:50.578 GMT
By Asjylyn Loder and Phil Mattingly
Oct. 14 (Bloomberg) -- When Peter Malyshev was a graduate
student with a part-time job at the Commodity Futures Trading
Commission in 2001, he'd walk into the red-brick building near
Washington's Dupont Circle and find the lobby almost deserted.
Now an attorney for Winston & Strawn LLP who represents
clients including Goldman Sachs Group Inc., Malyshev said he's
more likely these days to encounter a small regiment lining up
for visitor badges. Lawyers, bank executives and hedge fund
managers are seeking to influence the biggest rewrite of Wall
Street rules since the Great Depression.
The CFTC is no longer the "sleepy little agency" its
then-chairwoman, Mary Schapiro, branded it in the 1990s. With
power from Congress to oversee the previously unregulated $615
trillion market for over-the-counter derivatives, it has become
one of the hottest lobbying spots in town.
"These companies investing in these markets have to look
at the CFTC because now they have jurisdiction," said Malyshev,
44. The firms want to "make sure the rules are right," he
said.
The fight in Congress over how to increase transparency and
reduce risk in the swaps market nearly derailed the Dodd-Frank
regulatory bill and it took a contentious all-night session to
reach agreement on the outlines. Lawmakers left many specifics
to the CFTC and the Securities and Exchange Commission, with the
first drafts of some rules to be published by the end of 2010.
Since President Barack Obama signed the law July 21,
calling its passage a triumph over "the furious lobbying of an
array of powerful special interest groups," those same groups
have turned to regulators to try to blunt the impact on profits.
Avoiding Margin
Hedge funds have lobbied the CFTC to be excluded from
categories that entail increased scrutiny and higher capital
requirements. Airlines and manufacturers who use derivatives to
hedge their commodity costs, as well as the dealers who arrange
the hedges, want an exemption from having to post cash margin on
their trades. Wall Street banks have sought to avoid caps on the
number of derivatives a trader can hold.
"The number of people that have come in requesting to be
exempt from the law, or to have the law delayed has literally
shocked me," said Bart Chilton, 50, a Democrat who has served
as one the agency's five commissioners since 2007. "A lot of
folks are having problems coming to grips with the fact that
they do have a new law, and will have to change their business
models."
In one case, Chilton said, he found himself confronting the
same lobbyist representing three different companies in the
space of two weeks. With each meeting, the attorney argued that
his client was exempt from the law, or that implementation ought
to be put off, said Chilton, who declined to name the lawyer.
'Unprecedented'
"The volume and intensity of the lobbying is unprecedented
in my experience at the agency," Chilton said. "They all have
an ask. The types of loopholes that people are suggesting exist
are either non-existent or very farfetched."
After the Dodd-Frank bill passed, CFTC Chairman Gary
Gensler announced that the commission would post the names of
anyone who came to discuss the rules. According to the agency's
website, there were more than 230 meetings from July 26 through
Oct. 8. Among the firms were Cargill Inc., Vitol Group, JPMorgan
Chase & Co., Morgan Stanley, and Bloomberg LP, parent company of
Bloomberg News, which has a swaps trading platform, according to
testimony and documents the companies have provided to the CFTC.
In September alone, participants included 14 people from
Morgan Stanley, 18 from Goldman Sachs and about a dozen from the
Air Transport Association, the airline trade group.
Lobbying Began Early
The lobbying began before the legislation was passed as
firms anticipated new rules. As of early August, the commission
had met with 126 different companies this year, according to
lobbying records examined by the Washington-based Center for
Responsive Politics. That was the highest since the center began
tracking the records in 1998, 20 percent higher than in all of
2009 and 68 percent higher than in 2008.
Consumer advocates said they hoped the regulators would
fulfill the intent of lawmakers and not weaken oversight. "It
would send a message that the rulemaking process isn't for sale
to the highest bidder," said Barbara Roper, director of
investor protection at the Consumer Federation of America, who
has met with the CFTC to discuss business conduct standards.
Commissioner Scott O'Malia, 42, a Republican who was
appointed last year, said the agency invited the input. "People
have an interest in how the market turns out. They are
businesses, and we get that," he said. Still, he said, "If
anyone is coming in trying to change the statute through
rulemaking, they are fooling themselves."
'How Did You Get That Client?'
Not all participants are pleased to have their visits
posted on the Web. Malyshev said the publicity interferes with
attorney-client privilege. "People are calling me asking, 'Hey,
how did you get that client?'" said Malyshev, who according to
the CFTC site also represents Barclays Plc and MarkitServ, a
company that processes derivatives trades.
Derivatives are financial instruments based on the value of
another security or benchmark. Congress took aim at the industry
after soured trades on mortgage derivatives tipped the U.S.
economy into the deepest recession since the 1930s. The
legislation was named for its primary authors, Senate Banking
Committee Chairman Christopher Dodd, a Connecticut Democrat, and
House Financial Services Chairman Barney Frank, a Massachusetts
Democrat.
The law gives the CFTC jurisdiction over commodity,
interest rate and some credit default swaps, the largest share
of the derivatives markets. The financial stakes are high. U.S.
commercial banks held derivatives with a notional value of
$223.4 trillion in the second quarter, according to the Office
of the Comptroller of the Currency. Those banks reported trading
revenue of $6.6 billion in the quarter, a gain of 28 percent
from the same period a year earlier.
Morgan Stanley Visit
Morgan Stanley, which holds a notional $44 billion in its
commercial bank's derivatives portfolio, sent a team of four to
the commission on Oct. 4, according to the CFTC website. The
subject was how regulators should define broad terms in the law,
including "major swap participant." Companies put in that
category would face more regulatory scrutiny and higher capital
requirements.
Morgan Stanley met with three CFTC staff members and five
staff members from the SEC, arguing that the decision on whether
a firm is a major swap participant shouldn't turn on whether it
is highly leveraged, a standard that Congress wrote into the
law.
"No single leverage test is appropriate due to vast
differences in business models," the bank said, according to
the Sept. 20 comment letter filed with the SEC and CFTC and
posted online as materials used during the meeting.
Rulemaking Teams
Most of the rules must be completed by July, including
public comment periods that last 30 days or more plus the months
it will take the commission's staff to review comments from
industry. To manage the schedule, the commission has created 30
rulemaking teams, Gensler told the Senate Banking Committee on
Sept. 30.
Gensler has asked Congress to increase the agency's budget
by 69 percent next year to $286 million and predicts the
agency's budgeted staff of about 650 will need to grow to more
than 1,000 to meet its new demands.
Roper of the Consumer Federation, who celebrated the
enactment of the law, said she sees danger in the endgame.
"Every single provision in the bill is dependent on
regulators doing well, which is exactly what regulators did very
badly in the run-up to the crisis," she said. "There really is
a question as to whether we can do anything differently this
time."
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--With assistance from Christine Harper in New York. Editors:
Lawrence Roberts, Dan Stets
To contact the reporters on this story:
Asjylyn Loder in New York at +1-212-617-5771 or
aloder@bloomberg.net;
Phil Mattingly in Washington at +1-202-
654-4316 or pmattingly@bloomberg.net.
To contact the editors responsible for this story:
Dan Stets at +1-212-617-4403 or dstets@bloomberg.net;
Lawrence Roberts at +1-202-624-1985 or
lroberts13@bloomberg.net.
