The Most Important, Least Sexy, Debate in Financial Reform

Gary Gensler, chairman of the Commodity Futures Trading Commission (CFTC), listens at the Bloomberg Link Economic Summit in Washington on April 30 Photograph by Andrew Harrer/Bloomberg

If there were a sexiness spectrum for financial reform (I know, but bear with me), on one end you’d have the Consumer Financial Protection Bureau and its easy-to-grasp mission to watch out for the interests of Main Street. On the other end of the spectrum, you’d have derivatives regulation, the utterly confusing and hugely important task of monitoring the $700 trillion market.

Derivatives are the focus of the most contentious debate in financial reform right now, so I asked Mayra Rodriguez Valladares, managing principal of MRV Associates, to help explain. She teaches traders and regulators themselves about derivatives and says the controversy surrounds the question of “extraterritoriality,” or how far abroad U.S. regulators should be able to reach in overseeing global trades.

The most reform-minded, including Gary Gensler, chairman of the Commodity Futures Trading Commission, say that a U.S. bank could end up responsible for the costs if a trade turns bad at a foreign subsidiary. “This should be OK if something implodes in Ireland, London, or Japan, and the parent cleans up the mess,” Valladares says. “Let’s be big boys and girls; we’re capitalists, and that’s fine.” The trouble, she says, comes when really big, AIG-or-Lehman-size bets sour and threaten the stability of the bank and the financial system more broadly. Gensler says that risk is important enough that his staff should be able regulate and supervise the trades made at foreign subsidiaries.

Much of the financial industry, on the other hand, says regulators in other countries oversee those trades to some extent and that eventually a uniform standard, agreed on by other countries, should be the future. They say America has a “go-at-it-alone attitude,” Valladares explains, that will make foreign subsidiaries answer to too many different bosses.

(Valladares agrees with Gensler in this debate, saying it’s unlikely that countries will move uniformly to address the issue because their markets are quite different and that regulators in Europe are more concerned with staving off a recession that shaping new regulations.)

CFTC member Bart Chilton is pushing a compromise that would give the U.S. oversight over the global trading but phase the rules in to allow banks time to set up the infrastructure to comply.

The CFTC has said it hopes to settle the matter by mid-July, and there have been reports that Gensler’s time atop the CFTC may be limited. So the clock is ticking on one of the least sexy but most vital reforms around.

    Before it's here, it's on the Bloomberg Terminal.