Wall Street Lobbyists Besiege CFTC to Shape Derivatives Rules

Wall Street Lobbyists Besiege CFTC to Shape Derivatives Rule
The Commodity Futures Trading Commission's seal hangs outside the headquarters in Washington, D.C. Photographer: Andrew Harrer/Bloomberg

When Peter Malyshev was a graduate student with a part-time job at the Commodity Futures Trading Commission in 2001, he’d walk into the red-brick building near Washington’s Dupont Circle and find the lobby almost deserted.

Now an attorney for Winston & Strawn LLP who represents clients including Goldman Sachs Group Inc., Malyshev said he’s more likely these days to encounter a small regiment lining up for visitor badges. Lawyers, bank executives and hedge fund managers are seeking to influence the biggest rewrite of Wall Street rules since the Great Depression.

The CFTC is no longer the “sleepy little agency” its then-chairwoman, Mary Schapiro, branded it in the 1990s. With power from Congress to oversee the previously unregulated $615 trillion market for over-the-counter derivatives, it has become one of the hottest lobbying spots in town.

“These companies investing in these markets have to look at the CFTC because now they have jurisdiction,” said Malyshev, 44. The firms want to “make sure the rules are right,” he said.

The fight in Congress over how to increase transparency and reduce risk in the swaps market nearly derailed the Dodd-Frank regulatory bill and it took a contentious all-night session to reach agreement on the outlines. Lawmakers left many specifics to the CFTC and the Securities and Exchange Commission, with the first drafts of some rules to be published by the end of 2010.

Since President Barack Obama signed the law July 21, calling its passage a triumph over “the furious lobbying of an array of powerful special interest groups,” those same groups have turned to regulators to try to blunt the impact on profits.

Avoiding Margin

Hedge funds have lobbied the CFTC to be excluded from categories that entail increased scrutiny and higher capital requirements. Airlines and manufacturers who use derivatives to hedge their commodity costs, as well as the dealers who arrange the hedges, want an exemption from having to post cash margin on their trades. Wall Street banks have sought to avoid caps on the number of derivatives a trader can hold.

“The number of people that have come in requesting to be exempt from the law, or to have the law delayed has literally shocked me,” said Bart Chilton, 50, a Democrat who has served as one the agency’s five commissioners since 2007. “A lot of folks are having problems coming to grips with the fact that they do have a new law, and will have to change their business models.”

In one case, Chilton said, he found himself confronting the same lobbyist representing three different companies in the space of two weeks. With each meeting, the attorney argued that his client was exempt from the law, or that implementation ought to be put off, said Chilton, who declined to name the lawyer.


“The volume and intensity of the lobbying is unprecedented in my experience at the agency,” Chilton said. “They all have an ask. The types of loopholes that people are suggesting exist are either non-existent or very farfetched.”

After the Dodd-Frank bill passed, CFTC Chairman Gary Gensler announced that the commission would post the names of anyone who came to discuss the rules. According to the agency’s website, there were more than 230 meetings from July 26 through Oct. 8. Among the firms were Cargill Inc., Vitol Group, JPMorgan Chase & Co., Morgan Stanley, and Bloomberg LP, parent company of Bloomberg News, which has a swaps trading platform, according to testimony and documents the companies have provided to the CFTC.

In September alone, participants included 14 people from Morgan Stanley, 18 from Goldman Sachs and about a dozen from the Air Transport Association, the airline trade group.

Lobbying Began Early

The lobbying began before the legislation was passed as firms anticipated new rules. As of early August, the commission had met with 126 different companies this year, according to lobbying records examined by the Washington-based Center for Responsive Politics. That was the highest since the center began tracking the records in 1998, 20 percent higher than in all of 2009 and 68 percent higher than in 2008.

Consumer advocates said they hoped the regulators would fulfill the intent of lawmakers and not weaken oversight. “It would send a message that the rulemaking process isn’t for sale to the highest bidder,” said Barbara Roper, director of investor protection at the Consumer Federation of America, who has met with the CFTC to discuss business conduct standards.

Commissioner Scott O’Malia, 42, a Republican who was appointed last year, said the agency invited the input. “People have an interest in how the market turns out. They are businesses, and we get that,” he said. Still, he said, “If anyone is coming in trying to change the statute through rulemaking, they are fooling themselves.”

‘How Did You Get That Client?’

Not all participants are pleased to have their visits posted on the Web. Malyshev said the publicity interferes with attorney-client privilege. “People are calling me asking, ‘Hey, how did you get that client?’” said Malyshev, who according to the CFTC site also represents Barclays Plc and MarkitServ, a company that processes derivatives trades.

Derivatives are financial instruments based on the value of another security or benchmark. Congress took aim at the industry after soured trades on mortgage derivatives tipped the U.S. economy into the deepest recession since the 1930s. The legislation was named for its primary authors, Senate Banking Committee Chairman Christopher Dodd, a Connecticut Democrat, and House Financial Services Chairman Barney Frank, a Massachusetts Democrat.

The law gives the CFTC jurisdiction over commodity, interest rate and some credit default swaps, the largest share of the derivatives markets. The financial stakes are high. U.S. commercial banks held derivatives with a notional value of $223.4 trillion in the second quarter, according to the Office of the Comptroller of the Currency. Those banks reported trading revenue of $6.6 billion in the quarter, a gain of 28 percent from the same period a year earlier.

Morgan Stanley Visit

Morgan Stanley, which holds a notional $44 billion in its commercial bank’s derivatives portfolio, sent a team of four to the commission on Oct. 4, according to the CFTC website. The subject was how regulators should define broad terms in the law, including “major swap participant.” Companies put in that category would face more regulatory scrutiny and higher capital requirements.

Morgan Stanley met with three CFTC staff members and five staff members from the SEC, arguing that the decision on whether a firm is a major swap participant shouldn’t turn on whether it is highly leveraged, a standard that Congress wrote into the law.

“No single leverage test is appropriate due to vast differences in business models,” the bank said, according to the Sept. 20 comment letter filed with the SEC and CFTC and posted online as materials used during the meeting.

Rulemaking Teams

Most of the rules must be completed by July, including public comment periods that last 30 days or more plus the months it will take the commission’s staff to review comments from industry. To manage the schedule, the commission has created 30 rulemaking teams, Gensler told the Senate Banking Committee on Sept. 30.

Gensler has asked Congress to increase the agency’s budget by 69 percent next year to $286 million and predicts the agency’s budgeted staff of about 650 will need to grow to more than 1,000 to meet its new demands.

Roper of the Consumer Federation, who celebrated the enactment of the law, said she sees danger in the endgame.

“Every single provision in the bill is dependent on regulators doing well, which is exactly what regulators did very badly in the run-up to the crisis,” she said. “There really is a question as to whether we can do anything differently this time.”

Lawrence Roberts at lroberts13@bloomberg.net.

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