Chairman Frank Lucas today released the following statement on Scott O'Malia's last day as Commissioner of the Commodity Futures Trading Commission (CFTC). Last month, O’Malia announced he would resign to pursue other opportunities.
Remarks by Chairman Frank D. Lucas to the U.S. Chamber of Commerce Center for Capital Markets Competitiveness
"From Rhetoric to Reason: Bringing Balance to Financial Regulations"
Tamara Hinton, 202.225.0184
~As prepared for delivery~
Good morning, and thank you for having me here today. Thank you for that kind introduction. I’m really pleased to be at this event, because I think it can serve as the start of a much needed change in how we discuss Dodd-Frank and financial reform in this country.
I was reading a Wall Street Journal article last month—many of you have probably seen it—and I was struck by the opening paragraph. Here it is: “What is 20 times taller than the Statue of Liberty, 15 times longer than ‘Moby Dick’ and would take the average reader more than a month to read, even if you hunkered down with it for 40 hours a week?”
I bet you can guess the answer. It’s the paper trail from rulemaking under the Dodd-Frank Act. Even though regulators are behind schedule, rushing to meet arbitrary deadlines, they have still produced more than 35 hundred pages in the Federal Register.
If you spread those pages out, you could cover a half acre of ground. Now, imagining that end-to-end, those pages stretch 20 times higher than the Statue of Liberty is a somewhat abstract concept for me. But back in Oklahoma, on a half acre of ground, I could grow about 20 bushels of wheat. That’s not much, but at least it’s a more productive use of a half acre.
I’m concerned that some of the 35 hundred pages of rulemaking we’ve seen so far are in fact counterproductive.
I’d like to be clear from the very start: I am not here to tell you that we need to repeal Dodd-Frank. But I am here to tell you that we need to make some changes.
Anyone who wants to paint a picture of Dodd-Frank in stark black and white terms is either not admitting the complexity of this issue, or is one of the bill’s namesakes.
In fact—that’s not even true. Senator Dodd gave a speech earlier this year and joked to the audience, “I did not want the bill named after me. My children are going to have to change their name.”
He went on to admit that Dodd-Frank was what he called, “our best effort” given tight time constraints and a great deal of uncertainty in the market.
If Chris Dodd can acknowledge that regulations under Dodd-Frank could use some tweaking, I would hope that the Obama Administration and current Members of Congress can do the same.
The truth is that financial reform is not a black-and-white, support-or-repeal issue. I think that kind of rhetoric does more harm than good. We are trying to implement a regulatory system that will bring stability to the market place, eliminate bad actors, and promote innovative investments. That requires honest engagement, rational discussion, and good-faith arguments.
I think we can all agree that we need a framework in place to regulate our financial system and protect our economy from another severe shock.
Washington needs a third side to the discussion of financial reform. We need the common sense to say: yes, we support reform, but no, we don’t want those regulations to become too restrictive.
We need balance.
My constituents in Oklahoma understand this. The farmers and ranchers that talk to the Agriculture Committee understand this. I’m willing to bet most Americans understand this.
It seems that the only people who don’t understand this are the politicians and regulators here in Washington.
Inside the Beltway, there’s a general unwillingness to consider that the regulators in charge of writing those pages and pages of rules may not have it quite right. But instead of looking at how we can improve these rules and regulations to truly support and protect our economy, the Administration is retreating behind a smokescreen of rhetoric, framing this debate in black and white terms.
It’s a symptom of a larger problem within the debate about Dodd-Frank—any efforts to urge regulators to consider the economic costs of the new regulations is cast as an attack on Dodd-Frank, aimed at its repeal.
Enough already. It’s time for an honest debate about how these regulations are reshaping the derivatives markets, and affecting the way businesses across the country can manage risk.
Unemployment has stagnated at more than 9%. The monthly jobs report shows little growth. Americans are not looking for rhetoric—they’re looking for jobs. We owe it to them to take an honest look at how these regulations are affecting jobs.
And they most certainly are affecting jobs. Contrary to public perception, many of the regulations being written right now are not focused on large financial giants or on preventing organizations from being “too big to fail.” Many of the rules coming out will regulate non-financial businesses, large and small, that had no role in the financial crisis.
Here’s a brain-teaser for you: how are a farming co-op and Goldman Sachs alike?
The answer? According to the CFTC they require the same degree of regulation.
Only a Washington bureaucrat who has never stepped on a farm could come up with that answer.
But many end-users—and even community and farm credit banks that played no part in the financial crisis—could be subject to significant new regulations that were designed for the largest financial institutions – the “swap dealers”; not for a family farm cooperative that helps farmers hedge against a drop in commodity prices come harvest time.
The Agriculture Committee helped create legislation that would slow down the pace of rulemaking so that regulators had time to consider some of these regulations. I believe that if we’re not operating at breakneck speed, we might be able to recognize that a regulation that is appropriate for a large institution might crush a small one.
Critics called this legislation an effort to weaken Dodd-Frank. That’s just foolish. I don’t think many Americans would support the federal government rushing dozens of regulations through when unemployment continues to cripple the economy.
Thankfully, the CFTC has recognized that the July 16th deadline was simply unworkable, and just last week finalized an extension of the effective dates to provide legal certainty to market participants.
But the pace of regulations and the broad scope of entities they will affect are not the only things that concern me. The Office of the Comptroller of the Currency, or O-C-C for short, released a report on how the prudential regulators’ proposed capital and margin rule would impact banks regulated by the O-C-C.
There are 74 regulated banks with more than $100 million in swaps. Given the value of these swaps, O-C-C estimates that the margin requirement would total more than $2 trillion. That’s trillion, with a T.
So the margin requirements would require us to take $2 trillion away from job-creating investments.
Ladies and gentlemen, with unemployment over 9%, we can’t afford to remove that much liquidity from our economy.
In addition to these broad concerns that I have with the regulations coming out, there are some more specific areas that I think deserve greater attention. I’d like to talk to you about five of those areas today.
First, the CFTC has proposed very broad definitions, but very narrow interpretations of the exemptions Congress authorized. The end-user exemption from clearing and margin was a critical and bipartisan piece of the derivatives title.
But the CFTC has substantially narrowed the exemption. For example, as I’ve noted, the swap dealer definition is so broad, it will sweep many energy and agricultural companies into bank-like regulation.
Another proposed rule will subject many non-financial end-users to a margin requirement for the first time.
Congress never intended for end-users to be subject to margin because it needlessly ties up cash that should be at work in our economy. We were clear about that, and we need the regulators to recognize Congressional intent and hold up their end of the deal.
It’s also possible that capital requirements will make trading over-the-counter cost-prohibitive, which will make the end-user exemption meaningless.
Beyond end-users, my second concern is with how these rules will affect the retirement security of millions of Americans. At exactly the time we should be promoting stability in the nation’s pension system, these rules will prevent pension plans from hedging their risks and protecting funds from market volatility.
I think we can agree that tighter standards for pension plans are important. But we don’t need regulations that go so far as to make it illegal or entirely cost-prohibitive to trade with a plan.
Yet that would be the outcome of the CFTC’s proposal—leaving the plans, and therefore their beneficiaries, exposed to new risks.
My third concern is with rules that would make it harder for the banks in our communities to provide swaps in connection with the credit they extend to small and mid-size businesses.
Now, if you’re a wheat farmer back in Oklahoma and you need a new combine to harvest your crops, you’ll probably turn to your local bank for a loan. If you use swaps to hedge against a drop in wheat prices next season, you’re far more likely to be able to continue paying the bank for that combine if wheat prices bottom out.
So it makes sense for these community banks to provide both credit and swaps to their customers. Unfortunately, doing so might become too costly under the new Dodd-Frank regulations, because even the smallest banks providing these services could be defined as swap dealers.
That would make small banks subject to the same regulations as financial giants. Not only would that limit the amount of credit available to small business owners, but it would also shift more transactions to the very largest financial institutions—an outcome that is clearly contrary to the goals of Dodd-Frank.
The fourth item that concerns me is the balance between liquidity and transparency in derivatives markets. CFTC’s proposals on real-time reporting and the rules for swap execution facilities may severely reduce liquidity in the name of transparency.
It shouldn’t be an either-or situation—with sufficient time to write the regulations, metrics for block trades, and flexibility in the creation of Swap Execution Facility platforms, we can have both open and liquid markets.
My fifth concern—and the final one I’ll address today—is whether these regulations will put us at a disadvantage globally. America’s long-term economic growth is dependent on our competitiveness in international markets.
Dodd-Frank was clear about its own scope—it does not apply to derivatives activities outside of the U.S. We need to uphold recognized principles of international law, and limit the scope of the new rules to activities within our borders.
I believe these are critical issues that need to be addressed. And I believe we can do so without framing the policy in black and white terms.
In the coming weeks, you’ll see some legislation coming out of the Agriculture Committee that makes improvements to the Dodd-Frank regulations. They are designed to ensure that regulators don’t keep rushing forward without regard for America’s farmers, ranchers, and Main Street businesses. And they help ensure that these regulations don’t damage our competitiveness or limit economic growth when we can least afford it.
I think we’ve made a bit of history at the Agriculture Committee. Few of us would have predicted that our derivatives jurisdiction would have brought the interests of everyone from farmers, to mutual funds, to municipal governments and European policymakers before our Committee.
But the diversity of economic interests in Title VII is exactly the reason why it is so important that we not regulate away opportunities for growth in multiple sectors.
I’m glad that my committee has been able to stand up for such a wide range of interests. And I’m glad that we are the ones standing between a steamroller of regulations and America’s economy and jobs.
In the coming weeks, I’ll be asking my colleagues on both sides of Capitol Hill, and on both sides of the aisle, to stand with me on this issue. I hope you’ll join us.
If there are enough of us speaking sense, perhaps we’ll be able to drown out the useless rhetoric that has come to define this debate.
Thank you for your time. I’m happy to take some questions now.