Under Siege at the CFTC

When Peter Y. 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 a lawyer at Winston & Strawn, with Goldman Sachs (GS) among his clients, Malyshev says he's more likely these days to encounter a small regiment of people lining up to get into meetings where they hope to influence the biggest rewrite of Wall Street rules since the 1930s. At times the line of lawyers, bank executives, and hedge fund managers stretches out the door of the small waiting room in the commission's black marble lobby.

The CFTC is no longer the "sleepy little agency" its then-chairwoman, Mary L. 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. Companies want to "make sure the rules are right," says Malyshev.

The fight over how to increase transparency and reduce the risk of derivatives nearly derailed the financial overhaul bill. Derivatives are instruments that companies use to hedge risks, including fluctuations in interest rates and commodity prices; they are also used for speculation. It took a contentious all-night session of lawmakers to reach an agreement. Even then, Congress left many specifics to the CFTC and the Securities and Exchange Commission, with the first drafts of many rules to be published by yearend.

Since President Barack Obama signed the law on 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 law's effect on their profits. Hedge funds have lobbied to be excluded from increased scrutiny and higher capital requirements. Airlines and manufacturers that use derivatives to hedge their commodity costs—and the dealers who arrange the hedges—want to be exempt from a rule requiring cash collateral for trades. Wall Street banks have sought to avoid caps on the number of derivatives they can hold in their accounts. "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," says Bart Chilton, a Democrat who is one of the agency's five commissioners. "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."

Chilton says he found himself confronting the same lobbyist representing three different companies in the space of two weeks. In each meeting, the attorney argued that his client was exempt from the law or that implementation ought to be put off, says Chilton. "The volume and intensity of the lobbying is unprecedented in my experience at the agency."

After the bill passed, CFTC Chairman Gary Gensler announced that the commission would post the names of anyone who came in to discuss the rules, which rankled. Malyshev, 44, who says the publicity can interfere with attorney-client privilege. "People are calling me asking, 'Hey, how did you get that client?' " says Malyshev, who according to the CFTC site also represents Barclays (BCS) and MarkitServ, which processes derivatives trades.

The law gives the CFTC jurisdiction over commodities, interest rates, and some credit default swaps. According to the Office of the Comptroller of the Currency, U.S. commercial banks reported derivatives trading revenue of $6.6 billion in the second quarter, a gain of 28 percent from the same period a year earlier.

The bottom line: Congress gave regulators wide discretion to regulate derivatives, causing the CFTC to be besieged by lobbyists.

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