Regulating Derivatives Is Accepted After Crisis, Gensler Says

By Tina Seeley and Dawn Kopecki

Aug. 28 (Bloomberg) -- A consensus has emerged in Washington on the need to regulate the derivatives market, a reversal of the political climate in which restrictions were rejected in 2000, Commodity Futures Trading Commission Chairman Gary Gensler said.

“We should have banged the table harder and pushed harder” for regulation then, said Gensler, who worked at the Treasury Department during the Clinton administration.

The subsequent financial crisis has led to wide political support for regulations, Gensler said in an interview yesterday.

The financial industry recognizes “that there’s a consensus in Washington, both in the administration and on Capitol Hill that we have to bring the full over-the-counter derivatives marketplace under regulation,” Gensler said. That market has swelled to $592 trillion from $95 trillion in 2000, according to industry data.

Gensler, 51, said there was little support in Congress to enact regulatory changes in 2000, when a law was passed exempting most derivatives from regulation. Gensler worked at Treasury from 1997 until 2001, when President Bill Clinton left office.

“Those of us who were involved at the time, looking back, there’s no doubt that all of us should have done more to protect the American public, knowing what we know now,” Gensler said. “There was no regulatory structure at the time, nor was there support in political Washington to do that.”

Opaque financial products, including some derivatives, have contributed to almost $1.6 trillion in writedowns and losses at the world’s biggest banks, brokers and insurers since the start of 2007, according to data compiled by Bloomberg.

AIG as ‘Exhibit A’

Among the fallen companies are Lehman Brothers Holdings Inc., the investment bank that filed for bankruptcy, and insurer American International Group Inc., which has been surviving on government loans.

“All of us in this room put money into AIG -- we’re all taxpayers -- and $173 billion went into a very ineffectively regulated insurance company,” Gensler said. “It had no effective federal regulation. If that’s not exhibit A on why we have to cover this marketplace, I don’t know what is.”

Gensler, who spent 18 years working at Goldman Sachs Group Inc. before joining the Treasury, became CFTC chairman in May after being nominated by President Barack Obama.

The chairman was asked why he sent a letter to lawmakers on Aug. 17 seeking to strengthen some of the administration’s derivatives proposals. Treasury Secretary Timothy Geithner told regulatory chiefs in July to stop campaigning for changes in Obama’s revamp of financial industry rules, a person familiar with the matter has said.

The proposed legislation crafted by the administration is “strong and comprehensive,” Gensler said.

Proposed ‘Enhancements’

His agency “sent additional comments where we thought they would be appropriate for enhancements,” he said. “As an independent regulator, we are asked by Congress specifically to share assistance, whether it’s technical assistance or assistance where there should be enhancements.”

The administration is seeking to impose higher capital and margin requirements, move most derivatives to regulated exchanges and clearinghouses and impose supervision over all dealers.

“It’s interesting how aggressive the CFTC is being in asserting its view outside the administration,” said Craig Pirrong, a finance professor at the University of Houston, in an interview yesterday. “It’s sort of out of character for the CFTC of the past.”

Derivatives are financial contracts that can be used to hedge against changes in stocks, bonds, currencies, commodities, interest rates and weather.

Missing a Deadline

Gensler will hold joint meetings next week with Securities and Exchange Commission Chairman Mary Schapiro to discuss regulatory gaps between the two agencies. Gensler said the CFTC and SEC may not meet a presidential deadline of Sept. 30 to deliver a report to Congress on regulatory cooperation.

“It may be an interim report,” Gensler said. “That’s a very tight schedule.”

Gensler said the CFTC won’t need to revoke more “no- action” letters that the agency’s staff granted index investors from limitations on holdings in agriculture markets. On Aug. 19, the agency said it was revoking exemptions for two Deutsche Bank AG PowerShares commodity index funds and Gresham Investment Management LLC.

“Those are the only two so-to-speak no-action letters that I’m aware of,” Gensler said.

He rejected the idea that by limiting index fund holdings he might prevent smaller investors from participating in commodity markets. The commission is also considering whether to impose new federal limits on holdings in energy markets.

‘America Works’

“America works pretty well when there’s broad-based competition in financial markets,” Gensler said. “And even liquidity is promoted when there’s more market participants coming in that might have disparate views.”

The agency is preparing “shortly” to expand its reporting of large trader holdings, breaking out what hedge funds and swap dealers hold, he said. The agency will also release updated data showing the holdings of index investors, following up on a report issued last September that showed those holdings were declining as crude oil futures prices rose.

To contact the reporters on this story: Tina Seeley in Washington at tseeley@bloomberg.net; Dawn Kopecki in Washington at dkopecki@bloomberg.net.