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The CFTC’s Final Capital Rule for Swap Dealers May Give the Appearance of Progress Without Making the Derivatives Markets More Resilient

FOR IMMEDIATE RELEASE
Wednesday, July 22, 2020
Contact: Pamela Russell at 202-618-6433 or prussell@bettermarkets.com
 
 
Washington, D.C.  –  Joseph R. Cisewski, Senior Derivatives Consultant and Special Counsel for Better Markets, issued the following statement with respect to the Commodity Futures Trading Commission’s finalization of minimum capital requirements for swap dealers, and others:
 
“This afternoon, the CFTC implemented final regulations setting forth a new framework for minimum capital requirements on swap dealers, and others. Like misdirection leading to the prestige in a magic trick, the technical details and operation of the CFTC’s capital framework may hide a truth that will be obvious only to practitioners—namely, that the CFTC’s capital requirements may not require a significant number of swap dealers to maintain much, if any, additional capital. 
 
“In other words, it appears that the CFTC’s capital requirements in many cases merely codify the status quo, while pretending to institute reforms. Equally concerning, the CFTC has determined to implement this capital framework in a manner that unlawfully cuts the public out of the rulemaking process as we explained in our comment letter to the proposal.
 
“All of this is unfortunate because swap dealer capital requirements are among the most critical derivatives markets reforms required by the Dodd-Frank Act. In the lead-up to the 2008 financial crisis, many U.S. regulators permitted banks and less regulated financial institutions to remain dramatically undercapitalized and to structure legal entities and/or activities to avoid capital requirements. That regulatory failure contributed to the failure and near-failure of nearly every major investment bank and numerous systemically important banks. The result was trillions of dollars of U.S. taxpayer-funded bailouts, loans and emergency programs, which were essentially extorted from policymakers to prevent a meltdown of the U.S. financial system. 
 
“Adequate capital requirements on the largest derivatives dealers, in particular, would have done much to prevent the 2008 financial crisis from developing as it did. They would have, at the very least, limited the contagion and panic that ensued in the darkest months of 2008 as we emphasized when the CFTC proposed its capital framework in March.
 
“The CFTC’s new capital framework undoubtedly will be sold as a meaningful achievement calibrated to address these concerns. From statements in today’s open meeting, we have to assume that is untrue. The CFTC staff essentially confirmed, in fact, that the new capital framework is likely to have a limited effect on capital levels already maintained by a number of swap dealers. In other words, the final rule may set forth capital requirements that too often do not require much at all.
 
“The CFTC’s capital regulations are coming in the midst of an ongoing pandemic-caused economic crisis, which is the worst time to give the public false assurances as to the safety and soundness of derivatives dealers. Indeed, that is precisely the opposite of what the CFTC should be doing at this time, and it can lead only to further distress for working families.”
  
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Better Markets is a non-profit, non-partisan, and independent organization founded in the wake of the 2008 financial crisis to promote the public interest in the financial markets, support the financial reform of Wall Street and make our financial system work for all Americans again. Better Markets works with allies – including many in finance – to promote pro-market, pro-business and pro-growth policies that help build a stronger, safer financial system that protects and promotes Americans’ jobs, savings, retirements and more. To learn more, visit www.bettermarkets.com.

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