One year after the passage of Dodd-Frank, I invited some experts and those on the front lines to weigh in on what’s happened so far and what’s to come on financial regulation. I caught up with Wallace Turbeville, a derivatives specialist for Better Markets, Inc. Formerly a vice president of Goldman, Sachs & Co., he contributed the chapter on clearinghouses (pdf) for the Roosevelt Institute’s The Future of Financial Reform conference on the implementation of Dodd-Frank.
Better Markets’ goal is to promote the public interest in the domestic and global capital and commodity markets, with an initial primary focus on the processes to implement Dodd-Frank. You can see the more than 50 comment letters it's submitted to the Dodd-Frank process at its webpage.
Mike Konczal: You have written extensively on clearinghouses. How goes the battle to expand and regulate clearinghouses and exchanges?
Turbeville: There is no doubt that the use of clearinghouses and exchanges is set to massively increase. The timing is important and details about rules of the road for these entities work need to be decided as quickly as possible. Open and fair access is critical to make Dodd-Frank work. There are some important rules relating to this subject that are yet to be finalized. Risk management and transparency will be improved; but it is yet to be decided whether excessive market power will be curbed.
MK: There’s been a social democratic level of solidarity among financial firms fighting regulations over the past three years. Derivatives strike me as a place where some firms could really cross paths with others, and demand stronger regulations to balance the playing field. Is anything like that dynamic happening?
WT: The financial sector is by no means monolithic on all points. A number of mid-market firms (buy-side, dealers and others) are seriously concerned about open access to trading infrastructure and clearing. Just this week, the CFTC proposed rules that address some of those concerns by requiring more documentation and information for clearing of swaps, rejecting an industry plan that would continue to keep the market closed. . This development is important since the concentration of market power is even greater now than in 2008. But the power of the largest players cannot be denied and they are tremendously effective in making themselves heard, just take a look at the CFTC website and see how many meetings they have had with staff and regulators:
MK: Describe the atmosphere of rule-writing and drafting regulatory rules. It’s a difficult process for outsiders to understand.
WT: The regulators are genuinely committed to an open process. In addition to written comments, a series of roundtables have been useful to broaden discussion of the practical implications of the rule-writing process. The reality is that the vast majority of input is from the industry because of resources and sheer numbers. One need only look at the published list of meetings at the CFTC and SEC, which only disclose subject matter, not substance. But the drafters are open to input and Better Markets and other non-industry groups and we have already made an important impact on the few final rules adopted to date by the CFTC. We continue to hope that quantity of input by powerful interests does not overcome the public’s interest to ensure we will not suffer another crisis.
MK: What, from your point of view, are the battles you think are going to go well, and which are the ones you are most worried about losing?
WT: For most issues, the outcomes are uncertain until the final rules are rolled out. Position limit rules to curtail excessive speculation in commodity markets are an important concern. Congress mandated them in Dodd-Frank against strong opposition from big banks that sell commodity as an alternative investment, but instead create incredible volatility to these markets and don’t deliver stellar returns for investors. Regulators are still combing through market data on that issue.
Another major issue is the process of how and who collects transaction data, especially the ability that regulators will have to analyze the data to monitor and understand markets given that the agencies are severely underfunded. It may well end up tightly controlled by industry-dominated players. In terms of rules relating to risk measurement, reporting, and management the regulators have done some excellent work and, while not perfect, the regulations promise to provide much better systems to control risks.
MK: High-level, but others have been worried about the relative power of the financial sector in the country. People worry about “financializaton” from the point of view of entrepreneurship, relative focus and power of economic sectors, a focus at the top instead of the bottom, short-term-ism, etc.
WT: These issues are at the heart of financial reform. The implementation of Dodd-Frank promises to provide some pushback. However, it will take years to determine how effective it will be. The continued focus on these issues by academics and others who are able to analyze the markets will be critically important because it will help enforcement of the final rules. This will be a process which does not end with the adoption of the final rules.
MK: A decade from now, how will Dodd-Frank have changed the political economy of the country? Is it way too early to tell, or is it just not relevant to how Dodd-Frank is working?
WT: Dodd-Frank will have made an positive impact, but it is very difficult to speculate on precise effects. Much will depend on the ability of the regulatory structure, both in the United States and internationally, to adapt. Technological development means that the markets will constantly change and that asymmetries can be exploited and grow. (High-frequency trading is not an isolated phenomenon, but part of a much broader process and is a major concern going forward.) Additionally, absent a major event, international financial markets and economies will become even more interconnected. We need to ensure that reform does not end with Dodd-Frank but continues because we know the other side is constantly looking for loopholes to exploit.