Waiting for Giancarlo

CFTC no-action relief to be codified, but big changes on de minimis and position limits still distant

Ever since his announcement of Project Kiss (Keep it Simple, Stupid) early last year, each public appearance by Christopher Giancarlo has been greeted with hushed expectation from the industry. Next month’s keynote speech at the Futures Industry Association conference in Boca Raton is no exception. But, so far, little action has followed the rhetoric. Will this time be any different?

Earlier this month, Giancarlo’s chief of staff at the Commodity Futures Trading Commission, Michael Gill – in providing what he called a “guidepost” to the agency’s efforts on Kiss – said proposals are still at the staff stage. None of them will be implemented straight away; most will go through a proper period of notice and comment.

Nevertheless, Gill provided a detailed indication of where the CFTC is headed. Changes mentioned included: clarifying the procedure for foreign clearing houses based in jurisdictions with comparable supervision to apply for an exemption from CFTC registration; codifying no-action letters issued on the clearing requirement for small counterparties and inter-affiliate swaps; and formalising no-action relief on when a firm must apply for an exemption from aggregating commodity position limits across its various subsidiaries, which operate independently.  

At a Senate agriculture committee hearing last week, however, ranking Democrat member Debbie Stabenow expressed concern that Giancarlo was too busy focusing on what he calls Reg 2.0, when he has not finished what she called “Reg 1.0”.

Market participants may be inclined to agree. In particular, they are waiting for the final version of the overall position limits rule, and a decision on what to do about the swap-dealer de minimis threshold for registration with the CFTC. The de minimis threshold was due to tighten from $8 billion notional activity to just $3 billion in January 2019, but the CFTC decided last year to postpone the change, fearing a hit on market liquidity.

I do think it is something that does require a full commission. For position limits to be a lasting rule-making, it should be considered by a commission of five, as intended

Christopher Giancarlo, Commodity Futures Trading Commission

In his testimony to the Senate, Giancarlo reiterated the derivatives industry will not see much action on those topics until later this year. On the de minimis threshold, he said staff had collected the relevant data and commissioners would make a decision by the end of 2018.

On position limits, the chairman said he would need to have a full commission before he can finalise anything. Legal sources close to the CFTC say staff are working on a limited rule set for position limits, which will be expanded when the full commission is on board.

Christopher Giancarlo

“As you know, that is a complicated rule-making. But I do think it is something that does require a full commission. For position limits to be a lasting rule-making, it should be considered by a commission of five, as intended. We won’t stop working on it, but I hope a final rule can be voted on by five commissioners and not by three,” Giancarlo said.

This feels like a subtle hint to Democrats. Commissioners can only be nominated in pairs: one Republican and one Democrat. The Senate confirmed Democrat Russ Behnam and Republican Brian Quintenz last year, but did not vote on a third – Republican Dawn Stump – because it would have left the commission unbalanced with only one Democrat.

Perhaps Giancarlo’s testimony had the desired effect. Within days, reports began circulating that former CFTC general counsel Dan Berkovitz, now at law firm WilmerHale, could be proposed as the additional Democrat commissioner. This would help to unblock the pipeline of major rule reform, but not in time for Boca.

Budget bites

And it still will not address Giancarlo’s other concern: the depth of the CFTC’s budgetary constraints. CFTC funding has long been a stand-in for party political attitudes towards the Dodd-Frank Act, which bestowed on the agency the mandate to regulate derivatives other than securities-based swaps.

While the Democrats argued the most significant regulator of these instruments should receive appropriate funding, Republicans argued Dodd-Frank is typically heavy handed big-government interventionism and blocked the requests. 

Thus the CFTC has been operating on a budget of $250 million a year for the last four years; a level set by Congress despite requests by the Obama administration for $315 million. Giancarlo asked last year for an increase of $31.5 million (to $281. 5 million) in the 2018 fiscal year, but this was denied by Republican lawmakers.

However, last week, the White House revived the idea of funding the increase Giancarlo wants with end-user fees. This would mirror the model of the Securities and Exchange Commission, which says it largely offsets its expenses with small fees on securities transactions.

With regard to the CFTC, this idea has little support anywhere, especially not from Giancarlo. But observers say it could at least be a signal that the administration recognises the agency does need more funding. After the hype of last year, the reality of the new-look CFTC is that the wheels are turning, but still rather more slowly than its tough-talking chairman may want.