That catastrophe was caused, in part,
by a massive financial world operating largely out of sight of
market regulators. Dodd-Frank sought to shove open the door
into this tangled garden by increasing the transparency and
competitiveness of swaps and other private dealings that, until
then, had been concentrated in the hands of a few
would enable buyers and sellers to find the best price, while
clearing houses would absorb credit risk.
How are we doing?
Set aside, if you can, the current attempt in the Congress to
suffocate the SEC and CFTC by depriving them of the financial
oxygen they need to carry out Dodd-Frank. While it is true
that, in a democracy, we get
exactly the legislators we
deserve, that spectacle truly pushes the limit.
Instead, take a
closer look at Dodd-Frank, after all the debate and lobbying
have subsided. The statute does a marvellous imitation of the
bride left at the altar.
An exemption from
exchange trading and clearing has been bestowed on commercial
firms using swaps for hedging. Does that not amount to most of
the swap participants? And since most of their counterparties
are swap dealers, the exemption appears to help them
One argument for
the exemption is that commercial hedgers need bespoke swaps
that may not be exactly replicated by instruments standardised
for exchange trading and clearing. But through years of effort
by the International Swaps and Derivatives Association, the
vast majority of swap terms have become standardised already.
Might it be possible to use a listed instrument to cover, say,
85% of the risk and a side letter for the outlier terms? This
could take Dodd-Frank toward its goal without imposing a
convincingly, commercial hedgers, including Fortune 500 firms,
have persuaded Congress that it would be too costly for them to
pay initial margin – typically about 5% of a
contract’s value, and satisfiable with high grade
bonds that earn interest while on deposit. This may surprise
the family farmer who has lived within that system for 150
Another hole will
appear in the Dodd-Frank donut if the Treasury Department
exercises its authority to exempt foreign currency transactions
from Dodd-Frank. This outcome could allow the
trillion-dollar-a-day forex business to remain beyond the reach
True, most of
this activity is between giant banks but, before we relax, who
are we referring to when we speak of "too big to fail"
institutions, if not them?
And there is a
booming retail FX business that keeps the CFTC’s
enforcement staff up at night, due to the flim-flam of some
Both the SEC and
CFTC are working round the clock to draft rules for
implementing Dodd-Frank, having been given a single year to
"reform" the vast over-the-counter derivatives
with its gaping exemptions, aided and abetted by Herculean
lobbyists, has thrown the switch on the tracks and the original
plan of Dodd-Frank has headed off in a different