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IFLR: What areas of reform do you see as falling short?
Ryan: It's important to note where regulators have got things right. Dodd-Frank created the Financial Stability Oversight Council (FSOC), a systemic risk regulator that SIFMA had called for since the beginning of the regulatory reform process, and the law also gave us a resolution authority for non-banks that effectively ends too big to fail. Those provisions of Dodd-Frank were absolutely essential in response to the financial crisis of 2008 and have been implemented well.
We do believe, however, that the FSOC should take a much stronger leadership role in ensuring coordination between regulators on a number of regulatory rulemakings. Regulators also need to ensure proper economic impact analyses are undertaken for each rule.
IFLR: Which regulations illustrate your point here?
Ryan: Take, for example, all of the new derivatives rules being written by the Commodity Futures Trading Commission (CFTC) and the Securities & Exchange Commission (SEC). There is a noticeable lack of appropriate timing, sequencing and coordination between the regulators which is creating uncertainty in the markets at best and market risk at the worst. We think the CFTC should take a step back and ensure all of their rulemakings work together, are sequenced appropriately and are coordinated with those written by the SEC.
IFLR: Besides the new derivatives rules, what's another area where coordination among regulators could be improved?
Ryan: The Volcker rule. Dodd-Frank explicitly mandates the FSOC to be the body that coordinates comprehensive regulatory responses. We think that carries an obligation to take charge and sort out the current unruly mess, set priorities and move forward. Coordination among US regulators is lacking, resulting in likely conflict among rules and friction and fragmentation across markets. This is compounded by problems with cross-border application where the US, EU and Asia are moving in different directions on reform. In fact, there has been an unprecedented outcry from a number of G20 finance ministers and regulators about some rulemaking's extraterritorial impacts, especially the Volcker rule and some of the derivatives reforms.
IFLR: Earlier you mentioned economic impact analyses. What are the tangible benefits of doing economic impact analyses, for regulators and for the public? What's a good example?
Ryan: Position limits. In December 2011, the International Swaps and Derivatives Association (ISDA) and Sifma filed a legal challenge to the CFTC's final rules that limit the positions that investors may own in certain commodities. The Associations believed that the position limits rule might adversely impact commodities markets and market participants, including end-users, by reducing liquidity and increasing price volatility. In addition, the Associations contend that the CFTC's decision-making process in enacting the rule was procedurally flawed. The CFTC adopted the rule without making findings as to the necessity and appropriateness of the position limits, as required by statute. Furthermore, the CFTC failed to conduct any meaningful cost-benefit analysis and lacked a reasoned basis for its rule.
Federal law requires the CFTC to evaluate the costs and benefits of a rule before promulgating it. The CFTC, however, concluded instead that it was only required to consider the costs and benefits in a general sense. This limited analysis is contrary to the CFTC's independent statutory obligation, and is similar to an error made repeatedly by the SEC in rules that were invalidated by the federal court.
In September 2012, the DC District Court ruled to vacate the rule and remanded it back to the CFTC.