Financial News: Dodd-Frank gives nod to regulatory turf wars

15 February 2011

The text of the Dodd-Frank Wall Street Reform and Consumer Protection Act contains some interesting locutions but none more so than the division of swap transactions into “security-based swaps” and “swaps.”

While the Securities and Exchange Commission will regulate security-based swaps, the Commodity Futures Trading Commission holds sway over swaps. This, in turn, leads to a bifurcation of responsibilities that at first glance seems at best counter-intuitive and at worst utterly nonsensical. For example, while credit-default swap index trades will be governed by the CFTC, single-name CDS trades fall within the SEC’s ambit of responsibility. Single-name CDS trades and CDS index trades have a lot in common, yet they are treated differently by two different regulatory bodies.

The Dodd-Frank Act is acutely aware of the competition and suspicion that exists between the CFTC and SEC, and as a result it eschews logical consistency in favour of political correctness. It has to be seen to be fair to both the CFTC and the SEC and give them an equal share of the regulatory pie. A lawyer familiar with these battles said: “Dodd-Frank bends over backwards to recognise internal turf wars.” US regulation of derivatives is governed by two powerful bodies, and this is not likely to change in the near future. The principles enshrined in Dodd-Frank recognise this structure, unwieldy and anachronistic though it may be.

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