Incoming Financial Services Chairman Looks To Weaken Derivatives Reform, But CFTC Chairman Pushes Back

Rep. Spencer Bachus (R-AL), who will likely be the next chairman of the House Financial Services Committee due to the Republican victory last night, has signaled his intent to weaken a series of provisions in the Dodd-Frank financial reform law, including the Volcker rule and the resolution authority for dismantling failed banks. And he told the Wall Street Journal this morning that he also “plans to rewrite the derivatives provisions” in the law:

“That’s one of the job-killing provisions of Dodd-Frank that needs to be addressed,” the Alabama Republican said in an interview Wednesday morning, calling the provisions “overly expansive.” Mr. Bachus said the new derivatives rules, which will require most routine swaps to be traded on exchanges and routed through clearing houses, will redirect as much as $1 trillion from the U.S. economy, draining capital from the financial system that could be used for loans or job creation.

During the debate over Dodd-Frank, Bachus had an utterly incoherent position on derivatives reform, calling for transparent derivatives markets while opposing all reforms that would increase market transparency. Now, it seems, he’s ready to carry Wall Street’s water by dialing back the requirements designed to bring currently unregulated derivatives trading out of the dark.

This is troubling, as the derivatives title is one of the strongest parts of the Dodd-Frank bill, bringing much needed regulation to a portion of the financial system that suffered from a severe lack of oversight. Remember, it was AIG’s issuing of billion in credit default swaps that it couldn’t honor that led to its downfall; Lehman Brothers was also sunk by exposure to derivatives. The derivatives title of Dodd-Frank — authored by outgoing Sen. Blanche Lincoln (D-AR) — sets up exchanges so that derivatives must be traded publicly (like stocks) and employs clearinghouses to ensure that both parties in a derivatives trade have adequate collateral backing it up.


What House Republicans will likely aim to do — if their rhetoric during the financial reform debate is any indication — is try to grant wide exemptions to the exchange and clearing requirements, letting all sorts of activity that is purely speculative continue unabated.

But Commodity Futures Trading Commission Chairman Gary Gensler, who has been one of the staunchest supporters of strong derivatives reform, is pushing back, saying the election yesterday won’t interrupt the CFTC’s rule-writing effort. “Any regulatory agency is obliged to follow the statute and what Congress wrote, and that’s what we’ll do,” Gensler said.