Dodd-Frank Doubt: CFTC’s power to control cross-border derivatives and HFT under fire

US government department issues bill exposing bipartisan congressional legislation which curbs the scope of CFTC’s powers

Assumption that the US authorities had completed their implementation of the Dodd-Frank Wall Street Reform Act’s rulings on OTC derivatives once it had been finalized was widespread and in keeping with America’s highly methodical regulatory structure as last year drew to a close with final rulings in place for companies engaging in both domestic and cross-border electronic trading and provision of OTC products.

Yesterday, however, it became apparent that there may be limitations as to the actal power wielded by the US Commodity Futures Trading Commission (CFTC) with regard to imposing rules on derivatives traded overseas and on firms that use swaps to hedge business risks due to congressional legislation.

According to a report by Bloomberg, a 48-page bill which has been co-sponsored by Democratic Representatives Collin Peterson of Minnesota and David Scott of Georgia, and Republican Representative K. Michael Conaway of Texas, was issued yesterday by the House of Agriculture Committee, which has jurisdiction over the CFTC in rule making, election of commissioners and general governance, which would also force the agency to assess the costs of its Dodd-Frank Act regulations and conduct a new study of high-speed trading. The legislation is typically enacted once every five years.

The legislation is the first step in a broad congressional effort to review commodity laws since the CFTC implemented more than 60 regulations to increase oversight of swaps traded by firms including Goldman Sachs Group Inc., JPMorgan Chase & Co. and BP Plc.

Therefore, as with many other regions worldwide, high frequency trading (HFT) has now become the subject of congress-level discussion within the United States, the region which has a long standing predilection for the use of algorithms and high speed trading among the institutional trading desks of Chicago and New York.

Indeed, last week the CFTC held a round table in Washington which included panel discussions to go through several end-user related issues on swaps and forwards.

“There are provisions in this bill that would effectively unwind a good deal of the work the CFTC has already done and make it much harder for them to regulate the derivatives markets,” Marcus Stanley, policy director for Americans for Financial Reform, a coalition including the AFL-CIO labor federation, said in a phone interview with Bloomberg.

The measure would require the CFTC to release formal rules setting the reach of its regulations on derivatives traded overseas. The agency wouldn’t be allowed to set policy through guidance documents as it did in July and November” he continued.

Whilst other regions continue to pledge their commitment to cooperating in pursuit of a global regulatory structure for OTC derivatives, the cat is now most certainly among the pigeons within the very department from which this initiative originated.

For more on the global Forex industry see the LeapRate-Dow Jones Forex Industry Report.


Read Also: