CFTC in the Disarray

Chairman Gensler’s crusade on swap rules roiled the regulator | “No one is claiming that Gary is anything but hard-driving”

Matthew Philips, with Silla Brush

“No longer will the markets be opaque and dark, and we will have transparency,” Gensler says


During his six years as a federal regulator, Bart Chilton has become known as much for the amount of time he spends working from his home in Arkansas as for his shock of shoulder-length blond hair. Yet on the night of July 10, and again on July 11, Chilton slept on the couch in his office on the ninth floor of the Commodity Futures Trading Commission’s Washington headquarters as he and CFTC staff rushed to complete new rules governing the world’s $633 trillion swaps market ahead of a July 12 deadline.

The process had hit snags over previous weeks, including CFTC Chairman Gary Gensler’s clash with European regulators over applying the rules to U.S. financial operations based overseas. Finally, Gensler relented, agreeing to give the European affiliates of U.S. banks an exemption until Dec. 21 while negotiations with European regulators continue, and the path was cleared for approval.

The new swaps rules will help bring transparency to an area of the market many blame for almost destroying the global financial system in 2008. The task of writing them has transformed the CFTC. In his four years as chairman, Gensler, 55, has turned a sleepy, collegial regulator into the world’s most aggressive financial enforcer. At the same time, Gensler’s hard-edged style has managed to tick off just about everyone in his path, from banks and financial firms to lawmakers and lobbyists — and even some of his fellow commissioners.

His crusade to rein in swaps may cost him a second term as CFTC chair and raised questions about how effective the agency will be in the future. “Gary’s taken a lot of shots,” says Chilton, his most loyal ally on the commission. “Though I’m not sure he particularly cares.” Gensler declined to comment for this article.

When it was signed into law three years ago, the Dodd-Frank financial regulatory overhaul targeted over-the-counter swaps as a particular threat to the system. Swaps allow investors to hedge or speculate on changes in underlying assets such as interest rates, currencies, or the ability of a borrower to repay its debt. Often negotiated privately over the phone with no prices listed and no collateral requirements, swaps were at the heart of the $182 billion bailout of American International Group and the Lehman Brothers collapse in 2008. Swaps are also what got the London Whale trader Bruno Iksil in trouble, costing JPMorgan Chase $6.2 billion in 2012.

Many of those bad trades were booked overseas by affiliates of U.S. firms. That’s why Gensler was adamant about pushing through the cross-border rules. “We have to remind ourselves that the largest banks and institutions are global in nature, and when a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk comes crashing right back to our shores,” Gensler said at the hearing where the vote took place.

Under the new rules, in August most swaps will begin listing on exchanges such as CME Group and IntercontinentalExchange, as well as new firms that can apply to be certified as swap execution facilities (Bloomberg LP, the parent of Bloomberg Businessweek, has applied to form a SEF.) Parties that trade swaps listed on exchanges will have to post collateral, and prices will be publicly available.

Although the new rules are a triumph for the CFTC, the agency has paid a price. Two former CFTC commissioners, in addition to several former and current staff members, say agency employees are exhausted, burned out from 80-hour workweeks. A host of senior staffers has left in recent months, many for better-paying jobs at Washington law firms. Gensler’s negotiating tactics have sometimes alienated people rather than built consensus, according to two former CFTC commissioners, one of whom overlapped with Gensler. While he’s had to be forceful to push through rules over the objections of banks and lobbyists, he’s also irked allies. In June a handful of Senate Democrats urged Gensler to delay his cross-border rules. According to a former CFTC chairman, citing current staffers at the commission, Gensler was called to the Treasury Department in the days leading up to the July 12 hearing and urged to seek a compromise with foreign regulators and to better coordinate with the Securities and Exchange Commission.

“No one is claiming that Gary is anything but hard-driving and aggressive,” says Daniel Waldman, a former CFTC lawyer who worked under then-chairwoman Brooksley Born in the 1990s and now heads the derivatives practice at law firm Arnold & Porter. “But given what he’s been asked to do, isn’t that exactly the person you wanted in that position?” Gensler, a former partner at Goldman Sachs Group, has been particularly effective at negotiating with bankers and their lobbyists over tough swaps rules, say people who have been present at such meetings.

Gensler’s relationship with fellow commissioner Jill Sommers has been especially strained. Sommers, a longtime Republican commissioner, stepped down earlier this month. Before doing so, she said in a statement, “No one has ever accused Gary Gensler of being reasonable.”

Scott O’Malia is now the lone Republican on the CFTC. (Gensler, Chilton, and Mark Wetjen are Democrats.) He refers to the current swaps rules as “a mess” and says that Gensler’s push to put them in place quickly has created “indefinite loopholes” that will have to be resolved down the road. O’Malia, who voted against the rules, also says the commission may lack the technological sophistication to enforce them effectively. At a meeting a few months ago, he says, staff members told commissioners that, despite the reams of swaps trading data the CFTC is now collecting, its systems still couldn’t identify JPMorgan’s London Whale trades.

The agency will next focus on curbing speculation in commodities, as well as writing tougher customer protection rules in the wake of 2011’s MF Global bankruptcy. One question is whether the CFTC can recover from the strife of the derivatives battle. It’s also not clear who will lead it. Unless the White House renominates him, Gensler must leave his post by the end of the year. On July 8, Amanda Renteria, the former chief of staff for Senator Debbie Stabenow (D-Mich.), seen as a possible Gensler successor, withdrew her candidacy for a CFTC seat. Even if Gensler does end up leaving at the end of the year, he sounds proud of what he’s accomplished. “Through Dodd-Frank and the rules this agency has put in place,” he said at the July 12 hearing, “no longer will the markets be opaque and dark, and we will have transparency.”

The bottom line In pushing through rules to regulate the $633 trillion swaps market, Gensler alienated many people he dealt with.


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