CFTC's Chilton: Dodd-Frank Process Being 'Bastardized' By Banks' Threats

Bankers are ‘bastardizing’ the process of terms of the Dodd-Frank Wall Street Reform Act, by threatening to file lawsuits over whether costs and benefits of new rules have been adequately studied.

That’s expected to be the central charge in an early morning address Thursday at the TradeTech 2012 conference at the Javits Convention Center to be made by Commodity Futures Trading Commission member Bart Chilton. Chilton speaks at 8:15 a.m.

Chilton will assert that “some regulators live in constant fear and are virtually paralyzed by the threat” that they will face “spuriously” filed suits alleging that the costs and benefits of their rules weren’t adequately considered, according to an advance copy of the speech reviewed by Bloomberg. “It is a bastardization of the conduct and use of cost-benefit analyses in regulatory rulemaking,” Chilton is expected to say.

The CFTC is defending itself in federal court, Bloomberg said, against charges that the agency overstepped its authority under the Dodd-Frank Act and inadequately assessed the costs of new limits on speculation in oil, natural gas and other commodities. The lawsuit was filed by the International Swaps and Derivatives Association Inc. and the Securities Industry and Financial Markets Association.

According to the Davis Polk March 1 Dodd-Frank Progress Report, federal regulators have only finalized one-fourth of the 400 rules that are in progress, as a result of passage in July 2010 of the Dodd-Frank Act. The act is designed to preclude repeats of the kind of financial crises experienced in 2007 through 2009.

The CFTC has finalized 36 of the 64 rules on its plate, according to Davis Polk Wardell, a securities law firm with offices in New York and Washington, D.C.

The Securities and Exchange Commission has only finalized 18 of the 98 rules before it, according to the March 1 report.

Chilton’s comments come two days after SEC chairman Mary L. Schapiro told a Congressional committee that her agency had been flooded with comments on the key rule coming out of Dodd-Frank that affects the structure of the nation’s equity markets.

That flood involved the Volcker Rule, which largely precludes banks from carrying out purely profit-seeking trades with their own capital.

Schapiro told a House of Representatives panel that her staff had received 15,000 comments on the rule, with some of the filings running hundreds of pages. Comments were due in mid-February.

Given that workload, Schapiro acknowledged that the statutory July 21 deadline for implementing that rule will likely be missed.

Schapiro said getting the terms of the rule correct is more important than meeting the deadline.

“Our goal would be to take the time to get it right, not do it fast,” she said.

At TradeTech Wednesday, Oliver Sung, Head of Execution Consulting Global Execution Services, Bank of America Merrill Lynch, said, “a lot of people are concerned about impact on legitimate market making” by precluding banks from trading for their own accounts. Sung said the move would raise the cost of borrowing.

Richard Johnson, Head of Quantitative Electronic Services, Americas, Societe Generale, said taking banks’ own capital would reduce liquidity in securities. That in turn would widen the spread between bids and offers for a given trade. Which turn would drive overall costs in securities markets.

Finally, the result of implementing the Volcker Rule, Johnson said, could actually be to increase market risks, rather than lower them.

Banks are highly regulated, he said. But if proprietary trading moves outside banks, the traders are likely to go into hedge funds and shops that are less regulated.

Tom Steinert-Threlkeld writes for Securities Technology Monitor.