The rules in question pertain to the complex, risky financial products known as derivatives. Dodd-Frank empowered the CFTC to write new rules for derivatives, which were largely unregulated previously and helped cause the financial crisis and ensuing recession. Gary Gensler, head of the Commodity Futures Trading Commission (CFTC), initially sought to require foreign firms to comply with all U.S. rules on derivatives. But European trade groups and regulators bristled at his initial proposal and found support for their objections from within Gensler’s own body. CFTC commissioner Mark Wetjen joined the panel’s two Republicans to block the initial proposal, setting the stage for the current compromise effort.
As the Financial Times noted last month, “Gensler has warned that the CFTC’s painstakingly constructed regulatory framework could become a hollow shell” without an effective cross-border rule. Wall Street firms could simply offshore their derivatives operations and duck reform, with the U.S. economy and taxpayers still at risk of fallout from the casino-like derivatives market.
The last time Wetjen’s opposition forced Gensler into a compromise, the resulting rule was so watered down as to approach meaninglessness. But this time, Gensler is negotiating with European regulators rather than his own group. In this way, he’s attempting to box in opponents of strict derivatives regulation within his own commission by striking a deal with European authorities that weakens the rules without gutting them.
Derivatives, where traders can make endless layers of on-paper bets only distantly tied to actual assets in the real world, were at the epicenter of the financial collapse. The market for derivatives currently has a total value of around $630 trillion. That’s less than half its size from 2010, but it’s still seven times the size of the planet’s total economic output. It will remain a threat to global economic stability unless the CFTC is able to erect a regulatory structure strong enough to curb the most destructive tendencies of derivatives trading before Chairman Gensler steps down later this year.