Jay Clayton faces a predicament. The Sullivan & Cromwell partner has been nominated to lead the Securities and Exchange Commission (SEC) by a White House hostile to the complex regulatory framework that took shape under the Obama administration, but he would be taking the reins at an agency that has a huge amount of regulation on its to-do list.
As of April 2017, derivatives markets are still awaiting Dodd-Frank Act mandates establishing capital, margin and segregation rules for security-based swaps, as well as regulations governing execution of the products on regulated trading venues and the mandatory clearing of the instruments at central counterparties.
In the absence of these rules, a non-bank actor making markets in credit default swaps is today able to engage in the same uncollateralised, non-cleared and non-capitalised credit derivatives trading that brought American International Group to the brink of collapse in 2008.
It didn’t have to be like this. As this month’s cover story reveals, SEC staff wrote a proposal calling for the mandatory clearing of approximately 100 single-name credit default swap contracts back in 2013. That proposed rule was passed up to the SEC commissioners, but was never put to a vote, and withered on the vine.
A new effort to finalise the entire suite of security-based swap rules got underway in 2014, only to see the clock run out in November 2016. The shock election of President Donald Trump derailed the sequenced rollout of the final regulations, and SEC chair Mary Jo White instructed the agency’s staff to pause all rulemaking activity until the new administration had appointed her successor.
This brings us back to the balancing act now facing Clayton. The White House expects him to lead its deregulatory agenda by simplifying SEC rules to relieve the compliance burden on US securities markets.
At the same time, however, one of the first issues facing Clayton upon assuming the chairmanship is what to do with the outstanding Dodd-Frank rules that remain to be finalised. The agency’s division of trading and markets has a suite of security-based swap rulemakings ready to put to an immediate vote. Will Clayton give the go-ahead to finalise the rules? Or will he instruct the staff to drop the matter and recalibrate their efforts for a new era of deregulation?
Clayton himself seems unsure. At his confirmation hearing before the Senate Committee on Banking and Urban Affairs on March 24, he stated he has “a problem with regulations that are unnecessarily complex”, but then hedged that position by reassuring Democratic senators that “rulemaking should go forward with respect to rules required under a statute”.
How Clayton will proceed in the months ahead is anyone’s guess. But one thing is certain: watching him attempt this delicate tightrope walk will make for fascinating viewing.