CFTC Chair Massad Urges Incoming Administration Not To Repeal Post-Crisis Reforms

CFTC Chair Timothy Massad urged regulators to "address the causes" of the "discontent" that led to Brexit and the outcome of the U.S. presidential election, but "not [to] reverse the reforms made since the crisis." In a speech before the London School of Economics, he acknowledged that such reforms are "not perfect," but asked the next administration to "improve them, not repeal them."

Chair Massad claimed that during his tenure, global regulators have (i) implemented derivatives reforms by harmonizing collateral requirements for uncleared swaps, and (ii) strengthened capital and liquidity standards for banks. Despite "disagreements over the best path," he argued, "we are in a much better place today than eight years ago."

Chair Massad suggested that regulators try to facilitate international cooperation when implementing reforms. Chair Massad also explored various issues posed by Brexit, but focused on whether the European Union will (i) apply the same equivalence framework to the United Kingdom that it did to the United States and other countries, and (ii) require enhancements to the ongoing oversight of UK clearinghouses and exchanges.

Chair Massad exhorted future regulators to preserve past regulators' successes:

In particular, Chair Massad urged future regulators to examine the consequences of central clearing mandates in order to ensure clearinghouses' strength and resilience. He also highlighted market liquidity, automated trading and cybersecurity as possible interdependent areas for future regulatory reforms.

Commentary / Bob Zwirb

In his remarks, Chair Massad blamed two developments for "intensifying the damage" to the financial markets: (i) the lack of regulation of the over-the-counter swaps market before 2009, "in particular, credit default swaps," and (ii) insurance giant AIG's buildup of "excessive risk," which Chair Massad implied could have been prevented if regulatory reforms, particularly mandatory clearing, had been in place in 2008.

It should be noted, however, that not all observers agree with this analysis. Peter Wallison, who was a member of the Financial Crisis Inquiry Commission that studied the causes of the financial crisis, has challenged the notion that credit default swaps played any role in it. Peter Wallison, "Credit-Default Swaps Are Not to Blame," American Enterprise Institute (June 2009). Additionally, Mr. Wallison has urged the incoming administration to consider removing Dodd-Frank's mandatory clearing requirement because it "could make clearinghouses the sources of systemic risk." Peter Wallison, "What Dismantling Dodd-Frank Can Do," Wall St. J. (Nov. 16, 2016).

Similarly, the frequent use of AIG's example to justify comprehensive regulation has been challenged by economist Craig Pirrong, who wrote in 2009 that AIG was a "symptom, not primary cause," of the financial crisis; that AIG might have been the "particular channel through which the financial flood traveled," but the "underlying causes of the flood lie elsewhere." Craig Pirrong, "It's a Wonderful Life, AIG Edition," Streetwise Professor (March 28, 2009).

Commentary / Steven Lofchie

Chair Massad began his tenure with the difficult task of trying to fix the materially flawed rule set bequeathed to him by prior Chair Gary Gensler, yet he maintained that he was merely "fine tuning" the regulatory Rolls Royce that is Dodd-Frank. Given that contradictory set of goals, Chair Massad did as well as could be expected.

With a change in administrations comes the opportunity to revisit Dodd-Frank; to determine what works and what, by considerable heft, does not. Financial regulation needs a fresh center-forward position, not a strategist who is committed to the rear-guard defense of past mistakes.

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