February 29, 2024

DealBook: 4 Years After Lehman’s Demise, Regulators Debate Overhaul

Gary Gensler, chairman of the Commodity Futures Trading Commission, has imposed checks on derivatives trading.Andrew Harrer/Bloomberg NewsGary Gensler, chairman of the Commodity Futures Trading Commission, has imposed checks on derivatives trading.

Four years after Wall Street teetered on the brink of collapse, regulators are struggling to rein in foreign risk-taking that imperils American banks.

On Thursday, a member of the Commodity Futures Trading Commission, which regulates the $700 trillion derivatives business, outlined the risks that remain. In a speech to the International Swaps and Derivatives Association, a financial industry trade group, the commissioner, Mark Wetjen, highlighted “the very real danger that risks undertaken abroad can seriously impact the health of financial institutions, and the broader economy, here at home.”

Although the agency has imposed checks on derivatives trading in the United States, just how to crack down on foreign trading is still being debated.

In June, the agency took a first step, introducing a plan to oversee Wall Street banks that ship derivatives trading overseas. The agency’s draft proposal, stemming from the Dodd-Frank financial regulatory law, would apply new derivatives rules to American banks that have foreign units and foreign banks that conduct significant trading in the United States.

Mr. Wetjen, a Democratic commissioner at the C.F.T.C., highlighted the agency’s plan to rein in overseas derivatives trading. But in the speech, delivered on the eve of the four-year anniversary of Lehman Brothers‘ demise, he also sounded a note of skepticism on certain details.

Mark P. Wetjen of the Commodity Futures Trading Commission.Commodity Futures Trading CommissionMark P. Wetjen of the Commodity Futures Trading Commission.

“I continue to have concerns, however, about the clarity, scope, and workability of the proposals in certain areas,” he said.

Gary Gensler, the agency’s Democratic chairman and the architect of the plan, has cited the recent multibillion-dollar trading loss at JPMorgan Chase as a “stark reminder” of how overseas trading can reverberate in the United States.

But the plan is far from a done deal. The agency has spent weeks hashing out internal disputes, and a final decision is not expected until later this year.

Mr. Wetjen is playing a crucial role in the negotiations. A former aide to Harry Reid, the Senate majority leader, he is the newest member of the five-person commission leadership. Mr. Wetjen has sided with his fellow Democrats on every Dodd-Frank rule while positioning himself as a more independent voice from Mr. Gensler.

When the agency was readying the cross-border proposal in June, Mr. Wetjen pushed for more flexibility. He also suggested that the financial industry have additional time to comply.

He reiterated some concerns on Thursday, saying the agency may not have provided sufficient “clarity” about the timing and scope of the plan. “The commission must do better,” he said.

Mr. Wetjen, who has called for the agency to complete the plan as “interpretive guidance” rather than a formal rule-making, also advocated so-called substituted compliance. Under such a plan, banks based overseas can seek an exemption if they face similar rules from foreign regulators.

“In light of the commission’s limited resources, efficient regulation through deference to comparable regulation just makes sense,” he said.

Despite his concerns, Mr. Wetjen underscored his support for the the broader regulatory overhaul, noting that his speech came nearly four years to the day that firms like the American International Group nearly collapsed. Foreign derivatives contracts written by A.I.G., the giant insurance company, which received a $182 billion federal lifeline, brought American firms to their knees.

“Regulation will not prevent every risk from materializing at a financial firm in any given jurisdiction,” he said, while adding that “we must do what we can to prevent such risks from damaging our economy.”

Article source: http://dealbook.nytimes.com/2012/09/13/4-years-after-lehmans-demise-regulators-debate-overhaul/?partner=rss&emc=rss

DealBook: After Barclays Scandal, Regulators Say Rates Remain Flawed

Ben S. Bernanke, the chairman of the Federal Reserve, testified before the Senate Banking Committee on Tuesday.Stephen Crowley/The New York TimesBen S. Bernanke, the chairman of the Federal Reserve, testified before the Senate Banking Committee on Tuesday.

9:06 p.m. | Updated

Federal authorities cast further doubt on Tuesday about the integrity of a key interest rate that is the subject of a growing investigation into wrongdoing at big banks around the globe.

In Congressional testimony, the chairman of the Federal Reserve and the head of the Commodity Futures Trading Commission expressed concern that banks had manipulated interest rates for their own gain. They also indicated that flaws in the system — which were highlighted in a recent enforcement case against Barclays — persist.

“If these key benchmarks are not based on honest submissions, we all lose,”
Gary Gensler, head of the trading commission, which led the investigation into Barclays, said in testimony before the Senate Agriculture Committee.

In separate testimony before the Senate Banking Committee,
Ben S. Bernanke, the Federal Reserve chairman, said he lacked “full confidence” in the accuracy of the rate-setting process.

The Fed faces questions itself over whether it should have reined in the rate-manipulation scheme, which took place from at least 2005 to 2010.

Documents released last week show that the New York Fed was well aware of potential problems at Barclays in 2008. At a hearing in London on Tuesday, British authorities said the New York Fed never told them Barclays was breaking the law.

Gary Gensler, the head of the Commodity Futures Trading Commission, testified before the Senate Agriculture Committee on Tuesday.Mark Wilson/Getty ImagesGary Gensler, the head of the Commodity Futures Trading Commission, testified before the Senate Agriculture Committee on Tuesday.
Mervyn A. King, governor of the Bank of England, addressed a parliamentary committee on Tuesday.ReutersMervyn A. King, governor of the Bank of England, addressed a parliamentary committee on Tuesday.

The scrutiny intensified on Tuesday as Representative Randy Neugebauer, chairman of the House subcommittee investigating the Libor scandal, announced plans to seek additional documents from the New York Fed about JPMorgan Chase, Citigroup and Bank of America, the three American banks involved in setting interest rates.

The concerns center on the London interbank offered rate, or Libor, an essential benchmark that affects the cost of borrowing for consumers and corporations. Trillions of dollars in mortgages and other financial products are tied to Libor, which is set daily based on reports from a panel of large banks.

Several government agencies, including authorities in the United States, Canada, Britain and Japan, are examining whether the banks made bogus reports.

Last month, Barclays agreed to settle with the Commodity Futures Trading Commission, the Justice Department and the Financial Services Authority of Britain for $450 million. The British bank was accused of reporting false rates that both bolstered its profits and projected an overly rosy image of its health during the financial crisis.

“The conduct occurred regularly and was pervasive,” Mr. Gensler said on Tuesday.

The actions also happened in plain view of regulators.

In 2008, Barclays informed the New York Fed that it was submitting artificially low rates. The concerns were passed on to
Timothy F. Geithner, then the chief executive of the regulatory body.

But the New York Fed did not tell other authorities in the United States or Europe about the specific problems at Barclays. Instead, it proposed changes to the rate-setting process. At the time, Mr. Geithner recommended in an e-mail that British officials “strengthen governance and establish a credible reporting procedure” and “eliminate incentive to misreport,” according to documents released last week.

“At no stage did he or anyone else at the New York Fed raise any concerns with the bank that they had seen any wrongdoing,” Mervyn A. King, governor of the Bank of England, told a British parliamentary committee on Tuesday, referring to Mr. Geithner.

Mr. King said his discussion with Mr. Geithner did not represent a warning sign about potential illegal activity.

“There was no suggestion of fraudulent behavior,” the British central bank official told Parliament. His colleague Paul Tucker, who also received the e-mail from Mr. Geithner, echoed his statements, saying in testimony that the recommendations “didn’t set off alarm bells.”

Rather, the British central bank passed along the proposed changes to the British Bankers’ Association, a trade group that oversees the rate.

In his testimony on Tuesday, Mr. King said that some of the New York Fed’s recommendations were included in a Libor review conducted by the trade group.

The British Bankers’ Association also sought feedback from the CME Group, the Chicago-based exchange, according to documents provided to The New York Times. In a July 2008 letter, the exchange argued that the plan “must have teeth” and “credibility.”

In late 2008, the British Bankers’ Association adopted changes to the Libor process. But neither the regulators nor the trade group put a stop to Barclays’ illegal activities, which continued through 2009.

On Tuesday, Mr. Bernanke issued a broad defense of the Fed’s actions in 2008 after it learned that banks were misrepresenting interest rates.

“Isn’t there a responsibility to alert the customers?” Senator
Jeff Merkley, Democrat of Oregon and a member of the Banking Committee, asked Mr. Bernanke. “If you had it to do over again, would you also be alerting the customers?”

Mr. Bernanke said it was hardly a secret that Libor was losing credibility. During the financial crisis, the media and the markets were swirling with speculation about problems with the rate-setting process. At the time, the Fed was primarily focused on saving Wall Street from collapse.

“The responsibility of the New York Fed was to make sure that the appropriate authorities had the information, which they did,” Mr. Bernanke said.

The Barclays case was the first to stem from the broader global investigation, which involves more than 10 other banks, including UBS and the Royal Bank of Scotland. While much scrutiny has focused on European banks, authorities are also investigating big Wall Street companies like Citigroup and JPMorgan.

Mr. Gensler on Tuesday said his agency “has and will continue vigorously to use our enforcement and regulatory authorities to protect the public, promote market integrity, and ensure that these benchmarks and other indices are free of manipulative conduct and false information.”

Banks, Mr. Gensler said, “must not attempt to influence” Libor. “It’s just wrong and against the law.”

But the problems may remain, say regulators. On Tuesday, Mr. Bernanke said the benchmark still lacked credibility.

“It’s clear beyond these disclosures that the Libor system is structurally flawed,” he told lawmakers.  

Binyamin Appelbaum contibuted reporting.

Article source: http://dealbook.nytimes.com/2012/07/17/after-barclays-scandal-regulators-say-rates-remain-flawed/?partner=rss&emc=rss

DealBook: Wall St. Groups Sue Regulator to Challenge New Trading Rule

Gary Gensler, chairman of the Commodity Futures Trading Commission, testifying at a Senate Agriculture Committee hearing.Joshua Roberts/Bloomberg NewsGary Gensler, chairman of the Commodity Futures Trading Commission, testifying at a Senate Agriculture Committee hearing.

9:06 p.m. | Updated

Wall Street sought to deliver another blow to the financial regulatory overhaul on Friday, as two industry trade groups sued a federal regulator over a new rule restricting speculative trading.

The Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association filed a lawsuit challenging the Commodity Futures Trading Commission’s so-called position limits rule.

The agency adopted the rule in October to cap the number of contracts a trader can hold on 28 commodities. The vote was an important step in the Obama administration’s effort to enforce the Dodd-Frank overhaul.

But in the complaint filed in federal court in the District of Columbia, Sifma and I.S.D.A. argue that the commission erred when it completed the rule, contending that it failed to evaluate the rule’s economic impact on Wall Street.

“The evidence is overwhelming that position limits are, at best, unnecessary and may, at worst, negatively impact commodity markets and users,” Conrad Voldstad, the I.S.D.A. chief executive, said in a statement. A joint statement by Mr. Voldstad and T. Timothy Ryan Jr., Sifma’s leader, called the rule “poorly crafted” and based on “an incorrect reading of the law.”

It is unclear what will be the next step in the legal battle. A spokesman for the commodities commission declined to comment though Congressional supporters of Dodd-Frank chided the industry groups for bringing the lawsuit. “The financial industry tried to water down Dodd-Frank before it was enacted, has been trying to chip away at it since it became law, and is continuing that effort with this lawsuit,” Carl Levin, Democrat of Michigan, said in a statement.

The lawsuit is the latest indication that Wall Street is shifting fronts in the battle over Dodd-Frank, moving from backroom lobbying to the courtroom. A federal appeals court in July struck down the Securities and Exchange Commission’s so-called proxy access rule, a Dodd-Frank policy that would have made it easier for shareholders to nominate company directors. The court ruled that the S.E.C.’s cost-benefit analysis on the rule was inadequate.

The decision incited fear among regulators, and even caused several agencies to re-examine their Dodd-Frank rules. The Commodity Futures Trading Commission, mindful of possible legal challenges, delayed voting on its position limits rule on multiple occasions. The agency also agreed to delay the enforcement of many new position limits for at least a year.

But Wall Street lobbyists say the rule did not improve with time. The I.S.D.A. and Sifma note that Dodd-Frank leaves it to regulators to enforce position limits only “as appropriate.” The groups pushed regulators to interpret the fine print to mean that in essence, no limits were appropriate.

Bart Chilton, a Democratic member of the agency who is the chief advocate of the position limits rule, aimed to rebut those claims earlier this year. Mr. Chilton, in a speech in September at a United Nations panel, argued that Wall Street was “trying to dance on the head of a legal pin.”

Still, the lawsuit filed Friday accused the agency of writing an inadequate cost-benefit analysis and not allowing the industry to adequately comment on the rule proposal. The commission was inundated with letters about the position limits plan — about 15,000 comments.

The rule’s supporters promote the rule as the nation’s best hope for protecting consumers from speculative commodities trading. Over the last few years, the financial industry has increased its speculation in the futures market. At the same time, the prices of the underlying commodities have fluctuated wildly, driving up energy costs and food prices. The rule would set limits on traders accumulating position in commodities, including energy products and metals, like oil and gold. Previously, the limits covered only nine agricultural commodities, including corn.

The decision to challenge the rule in the courts, while significant, is hardly surprising. Over the last year, several financial trade groups have issued thinly veiled threats of legal action. In March, the Futures Industry Association urged the commission to drop its position limits plan, saying it “may be legally infirm.”

When the commission voted on the rule in October, the agency was fiercely divided, with three Democratic commissioners voting for the crackdown and its two Republicans voting against it.

Financial industry groups’ lawsuit against the C.F.T.C.

Article source: http://feeds.nytimes.com/click.phdo?i=501480295d971a0e09ea3d55301a7f92

Still Writing, Regulators Delay Rules

The Securities and Exchange Commission said on Wednesday that market participants would not have to comply with many aspects of derivatives reform scheduled to take effect in mid-July. It declined to specify how long the delay would be in the equity derivatives it oversees.

The announcement follows a similar statement on Tuesday from the Commodity Futures Trading Commission, although that agency imposed a year-end deadline for many of the changes in the derivatives it oversees.

The idea of changing the deadline had been divisive at the commodities commission. The two Republicans on the five-commissioner board had wanted to create an extension without a deadline. The Democrats, however, wanted a specific date to keep some pressure on the group to complete the rule writing, according to three participants in the meeting.

The commissioners ultimately agreed unanimously on the extension, but the dispute illustrates the political divide that has been brewing in Washington for months as regulators work to roll out hundreds of rules required by the Dodd-Frank financial reform legislation of last summer.

Though the Dodd-Frank measure was passed with bipartisan support, it has come under fierce criticism from many Republicans as well as some Democrats with financial constituents, who have urged regulators to slow the rule writing. Republicans are also trying to shave financing from agencies like the Securities and Exchange Commission and the Commodity Futures Trading Commission, which now have a larger workload in writing and enforcing scores of new rules.

Gary Gensler, the Democratic chairman of the trading commission, testified in Congress on Wednesday about the agency’s limited resources. In an interview, he pointed out that the derivatives market is seven times the size of the futures market, which his agency has long overseen.

“This agency has been asked to take on a very expanded mission,” he said. The decision this week to push back the derivatives deadline, he added, “was not about delay. It was just giving the market the certainty while we’re completing the rules.”

Regulators have missed more than two dozen deadlines for new Dodd-Frank rules, which cover a swath of topics, be it consumer protections in mortgage lending, bank responsibilities for dealing with city governments, or future resolution powers for troubled financial institutions. The legislation was the government’s main response to the financial crisis, and it is supposed to rein in Wall Street and reduce the kind of risk that led to the market implosion three years ago.

Observers say that the two delays this week make sense: with regulators so behind schedule, putting some of the rules into effect could be problematic. Still, regulatory experts warned that delays could be dangerous.

“Sounds like common sense to me,” said James J. Angel, a professor at the McDonough School of Business at Georgetown. “The regulators have this tsunami of work dumped on them, and it’s important to get it right.”

Still, he said, it is unclear whether the banks calling for a slowdown have legitimate concerns.

“You don’t know whether they’re just whining because they’re trying to get a few more pennies or if this is really Armageddon to them,” he said.

At hearings, bank officials have urged regulators to move slowly, saying that the rules will be better if created with greater care and consideration. The industry also has warned against what its officials call the “big bang” approach, under which many rules would take effect at once.

One difficulty is that many rules are related, and some rules drive others. Nowhere is this more true than in the derivatives market, where financial insurance contracts are written to protect against many different risks.

For instance, the rules to impose position limits in some commodities derivatives, like oil contracts, may depend in part on how much money financial players hold in different investments. But the commodities commission has been unable to demand all the data on these holdings — and the banks have not been volunteering — until it has written certain other rules and passed the one-year mark on the law.

The law specified that some derivatives rules would go into effect next month, no matter the status of rule writing, and those are what both financial commissions voted to delay this week.

At the commodities commission, Democrats and Republicans agreed that the July deadline for many rules was untenable because its staffers had not even finished defining terms like “swaps dealer” — an entity that buys and sells a type of derivative.

Jill Sommers, one of the Republican commissioners at the commodities regulator, said in an interview that she absolutely wants the rules to go into effect. But the commission needs to take its time, she said. “We didn’t want a date,” Ms. Sommers said. “We’re trying to makes sure we don’t miss anything. I think we need to be very deliberate.”

One of her opponents in the meeting was Bart Chilton, a Democrat. He said in an e-mail on Wednesday that he worried that having no deadline would take away much needed urgency. “We should be putting the hammer down and making up for lost time,” he wrote. “That means doing what the agency has done: given us a time certain — the end of the year — in which to complete our work.”

The commission has three Democrats, but one, Michael Dunn, has his term expiring this summer. He can stay on beyond that date, but if he chooses to leave, a successor is sure to face fierce confirmation questions in the Senate, where lawmakers are heavily divided on the new rules.

Edward Wyatt contributed reporting.

Article source: http://feeds.nytimes.com/click.phdo?i=f0fff3f46b4ebc577589462f47c21007