Tim Massad, Chairman of the CFTC, gave his first television interview since taking office to Bloomberg Television’s Peter Cook, discussing the outlook for the agency and financial regulations.
Chairman Massad said the CFTC is not contemplating “wholesale changes” to regulations, rather “we are in a phase where there will be fine-tuning…There are a number of areas where we’ll — where we’ll make some tweaks to make sure thing work well.”
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He suggested the CFTC budget needs to be increased: “I don’t think we have the resources to do the job that the American public expects and deserves…In terms of our budget, I want to work with Congress to increase it however we can. Fees are one possibility.”
Massad Says CFTC Focused on Fine Tuning Financial Rules
PETER COOK: I am joined by Chairman Massad. Welcome. Congratulations on the new job.
CFTC’s TIM MASSAD: Thank you, Peter. It’s good to be here. It’s good to see you again.
COOK: I want to ask you first of all about how you’re going to approach this job perhaps differently than Gary Gensler. He was known for ruffling some feathers here on Washington, on Wall Street, even oversees among foreign regulators. Do you see part of your job as striking a different tone than Gary Gensler?
CFTC’s TIM MASSAD: It’s not really a question of striking a different tone. It’s more a question of it’s a different time and place. I think Gary did an amazing job, and really the agency did so much and we’re ahead of where all the other G20 nation are in terms of regulating this market, and that’s a credit to him as well as the staff of the agency. We have a terrific, hard-working staff. Now we’re in a different place, a different time.
There are slightly different challenges. Now our challenges are things like as we see how these new rules affect the marketplace, we’re going to need to fine-tune them in some respects. We’ve got a lot of work to do with respect to our international counterparts, our international regulators to make sure the global framework is harmonious. So it’s different challenges and I’ll act accordingly in light of those.
COOK: For anyone out there at a financial firm to think there might be a kinder, gentler CFTC under Tim Massad, what’s your message to them?
CFTC’s TIM MASSAD: Well I think you’ve got a very pragmatic and practical CFTC. We’ve got a great commission. We’ve got four commissioners, all of whom bring very valuable experience to the table and all of whom I think are very committed to trying to get these rules right. And I think we all recognize the importance of these markets to a wide variety of businesses. These are market that most Americans don’t touch and they don’t know anything about. They seem very esoteric, and yet the affect fundamentally the prices we all pay for food, for transportation, for really all the goods we buy. They affect so many businesses. And I think you’ve got a commission that’s very aware of that.
COOK: Have you looked so far — and a lot of the rules were put in place under Gensler. Now as you said, you’re looking to see how they’re implemented. Are they working effectively? Have you been able to look at any of the rules put in place by Dodd-Frank that you can tell automatically we need to visit this, we need to tweak this somehow?
CFTC’s TIM MASSAD: I would say it this way. I think first of all the agency did a great job getting all these rules because they — they faced significant deadlines by Congress. Now we are in a phase where there will be fine-tuning. It’s not wholesale changes, but we are talking about —
COOK: Can you give us an example?
CFTC’s TIM MASSAD: Sure. We’re probably — we have a rule on utilities special entities, kind of smaller companies where we need to make sure they still have full access to the market. We have a proposed rule out there. We’ll probably finalize that very soon. We have the margin rules. We’ll come up with a reproposed rule on margin for uncleared swaps where we’ll make a few changes to what was proposed before.
There are a number of areas where we’ll — where we’ll make some tweaks to make sure thing work well. And again with respect to end users, to make sure that the rules don’t impose undue burdens on commercial companies, not — we’re not talking here about so much the financial companies but the commercial companies that use these markets. We want to make sure these rules work so that they can still get the benefit of these markets.
COOK: There’s been a big focus on cross-border rules and some of your — the foreign regulators have said, listen, the CFTC may be going too far in certain areas. I want to ask you if you see already — your take on that, but more importantly, your — the agency has already said that it’s looking at the issue of whether banks are trying to skirt these rules in some way, this deguarantee issue, basically trying to change the terms of swap agreements so they don’t fall under CFTC jurisdiction. Are banks already cheating?
CFTC’s TIM MASSAD: Well it’s not so much — let me — let me pass on whether it’s cheating. Let’s — let’s talk about it this way. The financial industry is very good at morphing, at structuring things around regulation. What we’re doing is looking at this practice of deguaranteeing. And it — even if it’s well within the rules, it may still mean that activity abroad poses a risk to the US banking corporations which own these swap dealers. And that’s why as we do this investigation we are consulting with our counterparts at the Fed and the FDIC and the OCC, as well as the SEC, because I think it will raise — potentially raise issues for them. We want to make sure —
COOK: There may be a London loophole that needs to be closed?
CFTC’s TIM MASSAD: Well it’s not so much a London loophole. I think the way to think about it is this. We have global financial corporations that are active all over the world, but we’re regulating this market through nation states. No nation can regulate all the activity that occurs around the world. That’s why we need a harmonious global framework and that’s why we’re committed to building that. But we will also work with our counterparts in the banking regulatory agencies where we think that, look, there’s risk that maybe is beyond the reach of our authority but could affect the parent banking corporation. That may be something that they can address.
COOK: Enforcement front, something you inherited, the LIBOR situation. The settlements there the CFTC has done. What’s your sense about where the LIBOR investigation at the CFTC stands? Are we going to see more settlements, more action by your agency?
CFTC’s TIM MASSAD: Well we did one just a few weeks ago and we’re still looking at this. There was a lot of bad behavior in this area. So we’ll continue to look at that. And we’re also very involved in the efforts to reform LIBOR so that it is more transaction based, and also to look at are there alternatives.
COOK: Do you have a preferred alternative at this point?
CFTC’s TIM MASSAD: I don’t, but I think we’ll — we’ll work with the Fed on this issue of working with the industry, engaging with the industry to see if there are ways to develop alternatives that are less susceptible to manipulation, as well as again to reform the way LIBOR is set so that it is less susceptible to manipulation.
COOK: In the meantime, what’s your message to markets? Should they have confidence in any of these benchmarks out there? There have been questions raised about foreign currency benchmarks as well.
CFTC’s TIM MASSAD: Well I think people understand what the issues are. I think there’s been good disclosure about those issues, so I think the market appreciates that.
COOK: Let me ask you about your budget because you’re going to testify up on Capitol Hill next week. Questions about whether the CFTC has the resources it needs to carry out its much larger mission now. Is it time to talk seriously about changing how the budget is put together at the CFTC? Should we be looking at fees on institutions you regulate?
CFTC’s TIM MASSAD: I would say at this point I think we need to increase the budget. I don’t think we have the resources to do the job that the American public expects and deserves. And I think it’s a good investment for our country. Our financial markets are the best in the world. They’re the most creative, the most dynamic, the most innovative.
We want to keep them that way. I think good, effective regulation is a part of that. In terms of our budget, I want to work with Congress to increase it however we can. Fees are one possibility. They’ve been proposed by presidents — by President Obama as well as a lot of presidents ever since Ronald Reagan. So that’s an option, but I’m happy to work with Congress on whatever approach they favor as to getting us the resources that I think we need.
COOK: If you don’t get what the president asks for in his budget, and it doesn’t look like you’re going to, what’s going to be the impact on the agency?
CFTC’s TIM MASSAD: First of all, I appreciate that these are tight times for al the government. So I understand that. And what I say to everyone in the agency is, look, we’re going to remember the Teddy Roosevelt adage. We’re going to do what we can with the — with what we have where we are. We’re not just going to complain about needing more resources. We’re going to still do everything we can with what we have, and I’ve encouraged people. Let’s be creative. We’ve come out of an intensive rule-writing phase. Now we’re going to be more focused on compliance and enforcement, fine-tuning the rules still to see that they work well. So how can we leverage the resources we have best? How can we allocate the resources to deal with the most important risks in the markets we regulate?
COOK: Big issue for energy markets at the CFTC the last couple of years, this issue of position limits. You all have proposed position limit rules to try and deal with the issue of excessive speculation. Got challenged in court, brought back to the agency. Now you’re looking again at these rules. What’s your own view on the need for position limits and can you all craft a rule that’s going to withstand legal challenge?
CFTC’s TIM MASSAD: Yes. Congress has directed us to do position limits. And there’s no problem in crafting a rule that will withstand legal challenge. What’s important is to get the rule right so that it works to address the concerns that Congress has, but also makes sure that, again, the companies that use these markets day in and day out to hedge risk, to hedge price risk and exposure, can still use them effectively. That’s why we’re going to be very focused on what’s called bona fide hedging exemptions. We’ve gotten a lot of input about that. We want to make sure that people can still act in these markets appropriately while we at the same time address the concern about excessive speculation and manipulation.
COOK: I’ll ask you one final hot topic in Washington and on Wall Street these days, high-frequency trading. What’s Tim Massad’s view on the merits of high-frequency trading as it affects the markets that you overseas, and what are the risks out there? What’s the CFTC going to do in this front?
CFTC’s TIM MASSAD: We’re looking into this. We put out a concept release and we’re getting a lot of input on that. I’m also in dialogue with our counterparts at the SEC. Mary Jo White and I talk about this. I think a couple things to remember. First of all, our market structure is different than the equity markets. It’s not nearly as complex. We don’t have as many trading venues. That makes it a little bit easier, but we still have issues. We have a lot of automated trading, so we’re going to be looking at that. And also because the — our markets and the equity markets interact, that’s very important. So it’s an issue that we’re focused on.
COOK: All right. Tim Massad, we appreciate you joining us here on Bloomberg.