Hordes of big-firm lawyers and their clients have been beating a path to the Commodity Futures Trading Commission, all eager to influence the tiny agency as it tackles a breathtaking array of new rules, including the first ever regulation of the $615 trillion market for over-the-counter derivatives.
In the past three months, lawyers from 22 major law firms have met at least 72 times with CFTC commissioners and staff to discuss implementation of the Dodd-Frank Wall Street Reform and Consumer Protection Act, according to agency records. Signed into law on July 21, Dodd-Frank is the biggest overhaul of the financial services industry since the New Deal.
The CFTC alone or in conjunction with other agencies was given a year — in some cases, 180 days — to write groundbreaking rules in 30 areas, ranging from the definition of a swap dealer to position limits including large-trader reporting to internal business-conduct standards.
For the CFTC’s 600 employees, it’s a tall order. As Commissioner Scott O’Malia put it in an Oct. 14 speech, “I’ve given up on rolling up my sleeves and have just about torn them off,” he said. “I know I am not alone in feeling that we are all a little out of our element. The lights are on and our vision is slightly blurred.” O’Malia spoke at an at an energy and commodities conference in Houston sponsored by McDermott Will & Emery.
“These are not simple issues,” agreed Geoffrey Aronow, a Washington partner at Bingham McCutchen who served as director of enforcement at the CFTC from 1995 to 1999. “Add in a relatively short period of time and not a huge staff, and there’s a concern that issues that are in fact important could end up getting short shrift because of lack of time or attention available. Some of these issues might then be sorted out in court over time, but it could create problems in the interim.”
Problems could also become opportunities for lawyers now looking to shape the nitty-gritty details of the regulations.
“There’s great interest among swap-market participants across various industries in how the CFTC proceeds in the rulemaking process,” said Michael Loesch, senior counsel to Fulbright & Jaworski and a former chief of staff and chief operating officer at the CFTC. “How they implement their new authority will be very important.”
Commissioner Michael Dunn made it clear that CFTC wants — and needs — help from stakeholders for what he described as “a Herculean task.”
“If we are to get it right, it is imperative that we have a firm understanding of how the regulations created will impact the markets we regulate and those who use them,” he said at an Oct. 1 meeting. “It is the role of the public to help us understand that impact.”
But as the CFTC’s log of external meetings makes clear, “the public” in this case most often means industry lawyers and lobbyists.
To date, the lawyer who has visited most often is Winston & Strawn of counsel Peter Malyshev, who has met 15 times with CFTC personnel on behalf of clients Barclays Capital Inc., MarkitSERV Ltd. and The Goldman Sachs Group Inc. Malyshev previously worked part-time as a lawyer at the CFTC’s Division of Economic Analysis, where he focused on exempt energy derivatives markets. He did not return a call seeking comment.
The log shows that, during the meetings, Malyshev discussed nascent rules in 11 different areas, but most often talked about a new regime for real-time reporting of swaps trades. During a Sept. 28 meeting with 10 CFTC staff members, for example, Malyshev and MarkitSERV (which provides post-trade processing for derivative transactions) gave a presentation focused on how much swaps data must be reported, what exactly is meant by “real time” reporting, and how data will be consolidated and disseminated.
Representatives from Goldman Sachs have appeared with and without Malyshev, and have discussed all 30 rulemaking areas. According to the log, Malyshev made his most recent appearance with seven senior executives from Goldman Sachs on Sept. 28 to discuss swap-execution facilities with 15 CFTC staff members.
The Goldman group urged the CFTC to take into account the relevant market, its liquidity characteristics and the needs of market participants, according to materials presented at the meeting.
Another frequent visitor is Sullivan & Cromwell partner Kenneth Raisler, who has met with CFTC officials a dozen times. Raisler, who was general counsel of the CFTC from 1983 to 1987, has appeared on behalf of clients Bank of America, BT Pension, BNP Paribas Commodity, PIMCO, Allianz of America and Merrill Lynch, according to CFTC records.
Raisler declined to comment on his work on behalf of clients, but said the CFTC “has welcomed and invited input from stakeholders. There’s so much to do, everyone needs to work together.” He put the scope of the agency’s undertaking in context. In January, for example, pre-Dodd-Frank, the CFTC proposed a controversial rulemaking to restore position limits for four energy futures contracts. Position limits are designed to protect against excessive speculation.
That rulemaking triggered 8,000 comments, but it pales in comparison to the current assignment: set position limits for 30 commodities in the metals, energy and agricultural markets.
“The agency has been re-invented by Dodd-Frank,” Raisler said. “There’s more going on there now than ever before.”Several Patton Boggs lawyers have also been making the rounds of the CFTC, with a combined total of eight visits. James Christian represents the London Stock Exchange, which is interested in rules dealing with governance and possible limits on ownership and control, while Micah Green represents the Depository Trust & Clearing Corp. and bond insurer Assured Guaranty Ltd.
Delta Airlines has retained Paul Architzel of Alston & Bird, who spent 20 years as chief counsel of the CFTC’s Division of Market Oversight. Position limits are a key issue for airlines, which are hurt by volatile oil prices and support aggregate position limits on all speculative traders across all markets. George Baker of Washington-based Williams & Jensen and client Bloomberg L.P. have had three CFTC meetings, discussing topics such as pretrade price transparency and nondiscriminatory access to clearing entities.
Some questions before the CFTC of overarching interest to the financial services industry deal with fundamental definitions, such as what is a swap dealer.
“Chairman [Gary] Gensler has hinted that the CFTC might declare that every ‘primary member’ of [the International Swaps and Derivatives Association] — all 209 of them — fit this category; after all, they represented themselves as being in the swap business for purposes other than hedging when they joined ISDA,” said Skadden, Arps, Slate, Meagher & Flom of counsel Philip McBride Johnson, an CFTC chairman from 1981 to 1983.
“Or, consider the humble floor-trader — already registered with the CFTC as such — who might be in this category if he makes markets in swaps listed on his exchange,” he said. “If so, massive new duties including large capital requirements and having to hire a compliance officer would apply.”
Overall, according to an analysis by the Sunlight Foundation, only 3% of CFTC meetings have been with consumer or labor groups. Still, Barbara Roper, director of investor protection for the Consumer Federation of America, credits the agency with trying to be inclusive. “The legislation had hardly been signed when the CFTC reached out to me,” she said. On Sept. 23, she met with Gensler and staff to discuss issues including business-conduct standards. “They were very receptive and very engaged. It wasn’t a situation where you just go in and say your piece and everyone nods and you leave.”
Roper also acknowledged that the issues are “highly technical — it’s not something that lends itself to man-on-the-street input,” she said. “But it’s always this way. There are a zillion different industry lobbyists for every one lone consumer-investment advocate.”
Because the scale of rulemakings is so broad, some also worry that key enforcement issues may get lost in the shuffle. For example, Dodd-Frank gives the agency new authority to go after fraudulent and manipulative behavior, lowering the standard of misconduct from intentional to recklessness. “Historically, the only way to distinguish between proper and improper behavior was whether the intent behind the conduct was to affect prices,” said Aronow of Bingham. “It’s not clear what it means to be reckless in that regard in markets where participants often know that their trades can have some impact on price.”
He also pointed to a new whistleblower provision, which gives those who report wrongdoing a cash reward if the government recovers more than $1 million. “There’s an enormous incentive for employees to go to the agency rather than use internal mechanisms to fix problems,” he said. “The implementing rules will have enormous consequences, but they’re not even close to the center of the spotlight.”
Jenna Greene can be contacted at firstname.lastname@example.org.