The Dodd-Frank Act of 2010 has
been blamed for many things. Suffocating regulation is often
cited. A new bureaucracy and scores of new restrictions. The
CFTC, the SEC, the Fed and brand new agencies have been charged
with taming the swaps behemoth. In the "too-little-too-late
category," I offer another.
As so often happens when the US Congress gets involved (I am
neither a commie liberal nor a retro conservative, having held
my CFTC chairmanship as a political Independent, a rare breed
in the first Reagan Administration), Dodd-Frank succumbed to
the fiction that swaps are somehow "different" from futures
contracts. This is why its Chapter 7 meanders for hundreds of
pages on that false assumption and has borne a dual form of
regulation that no one seems to like very much.
Let's compare the structures of the two products.
Overwhelmingly, futures contracts track changes in asset prices
and result in a payment of price changes between the parties.
Futures contracts are often used to hedge against adverse price
movements that impact daily commercial activity. And they are
used by others to bet that those changes do or do not occur. In
virtually all cases, swaps perform the same functions.
The CFTC never said otherwise. In 1989, it issued a "policy
statement" that it would not regulate swaps as futures
contracts if restricted in certain ways. In 1993, it
reformulated the same position in formal regulations. Both
actions assumed that, otherwise, swaps were subject to the full
panoply of rules governing futures contracts, including the
general ban (with a few exceptions) against off-exchange
The Commodity Futures Modernisation Act of 2000, another
stumble by the Congress that was largely repealed by
Dodd-Frank, told the CFTC politely to "butt out" and so the
agency did until the Great Recession exposed its many flaws.
But Dodd-Frank created its own confusion.
Under Dodd-Frank, swaps continue to be viewed separately from
futures contracts. It defined "swaps" on a stand-alone basis.
It created new categories of registered entities, such as Swap
Execution Facilities, Major Swap Participants, Swap Dealers,
etc. It gave swaps tied to securities to the Securities and
Why? The only impediment to
treating swaps as futures appeared to be the CFTC's qualified
on-exchange mandate. A paragraph or two of new legislative
language could have corrected that (or, even easier, a
reversion to former CFTC policy).
Instead, at the urging of swap lobbyists (where are they if I
ever suffer an IRS audit?), Congress took the bait. The result
is hundreds of pages of legislative text and scores of new
regulations. Another example of our tax dollars at work.
I have nothing against swaps. They are a huge and valuable
tool. They should be allowed, ever privately, for the same
services that futures provide. But a large part of existing
futures regulation could have been adapted to monitor swaps,
leaving the CFTC's exemptive authority to deal with those that
least mimic futures contracts.
It is not about whether members of the Congress are underpaid
(a recent lament from some) but how they earn their keep.
Perhaps, after the next financial crisis, sensibility will