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Dodd-Frank Derivative Reform: Dead on Arrival

Posted by Larry Doyle on September 5, 2013 8:59 AM |

While many in Washington and elsewhere will look to collect political points for bringing reform to Wall Street, those watching closely knew all too well that the blueprints for this reform were always subject to massive change.

So has Dodd-Frank brought real reform to Wall Street? If you believe so, I would invite you to become a charter member of The Gullible Club.

Let’s dispense with the formalities. Wall Street ultimately answers to nobody but itself. As such, we can unload another truckload of dirt over the casket holding Dodd-Frank.

While many observers of the financial and political scenes are not inclined to draw attention to this service, fortunately those at Bloomberg view this funereal undertaking more seriously. I thank them as they recently pulled back the cloak on Dodd-Frank to reveal a Wall Street dagger protruding from its midst.

Let’s navigate and review the corpse embedded in the Bloomberg commentary, How The Bank Lobby Loosened U.S. Rein on Derivatives,

. . . the full force of the rules that the CFTC is writing under the authority of the 2010 Dodd-Frank financial regulatory law will apply to only a small share of the global market — possibly less than 20 percent, according to data compiled by Bloomberg.

Whole segments of the business have been carved out of the rules. Derivatives based on foreign-exchange rates are largely exempt. Some firms are modifying their products to escape new oversight. And after Gensler’s [head of the CFTC] compromise with Europe, American banks will be able to sell derivatives overseas without direct U.S. scrutiny.

Sound like a license to steal from those within the oligopoly known as Wall Street? You got it. How so? Little to no competition within this space.

“The banks are going to be fine,” said Sunil Hirani, chief executive officer of trueEX Group LLC, who helped pioneer electronic trading of derivatives. “They are going to make a ton of money.”

Jill E. Sommers, a Republican CFTC commissioner who stepped down in July, said the outcome leaves the big players in charge.

“Looking back, of course with 20-20 hindsight, I wish we would have done more to encourage competition,” she said. “The only people that can afford to stay in the business are the people who have already long established their footprint in the market.”

The Bloomberg review does paint the current head of the CFTC (former Goldman Sachs veteran deal maker) Gary Gensler in a positive light in his attempts to fight the good fight and bring a semblance of transparency to the derivatives market. Wall Street would have little interest in doing that and found a friend in the SEC to help in its bidding. ” Big banks and brokers favored the status quo.” That is, the ability to operate in the dark as much as possible. To make sure the industry would not cede this turf, the powerful banks unleashed a wave of lobbyists that would compare favorably to Sherman’s March to the Sea.

The Bloomberg article goes on to expose how our domestic banks and their foreign counterparts played themselves off against one another so as to neutralize the ability of a regulator such as the CFTC to properly monitor their activities. This sort of arbitrage is a standard play run all too often by those looking to impede transparency and rigorous oversight.

What is the ultimate outcome here? How will Wall Street change the game so as to continue to answer to nobody but itself?

As the CFTC retreats on foreign trading and other fronts, the market that’s left for it to oversee is shrinking. Firms are designing contracts so that they fall outside the swaps rules.

The phenomenon has become known as futurization. As far as financial engineering goes, it’s simple: take a swap and call it a future.

In the process, American consumers, investors, and taxpayers bear the real risk while the banks get to ring the register. Heads they win, tails we lose.

As was then, is now, and forever shall be.

Despite Gensler’s efforts, as I lay out in my upcoming book, our pols and regulators remain deeply In Bed with Wall Street.

Navigate accordingly.

Larry Doyle

Please pre-order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy, that will be published by Palgrave Macmillan on January 7, 2014.

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I have no business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved. 


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