Searching for the end of Giancarlo’s white-paper trail

CFTC chairman faces key test to turn thought leadership into real reform

A tough-talking former interdealer broker executive who complained about regulatory overreach during his time as a commissioner after 2014, Christopher Giancarlo seemed a natural choice as chair of the Commodity Futures Trading Commission (CFTC). He was the man to fulfil president Donald Trump’s pledge to “do a number” on Dodd-Frank.

And yet, so far, his main output has consisted of white papers – more commonly used as a marketing tool by private companies than as a policy-making tool by regulators.

After a white paper entitled Swaps Regulation Version 2.0 was published in April, Democrat commissioner Rostin Behnam appeared to lose patience, saying: “Adding another white paper just pushes back the timeline for getting to actual deliverables. It adds another step to the process. It also takes a lot of staff time when budgets are tight.”

And budgets keep on getting tighter. Even though the CFTC is partly responsible for the multi-trillion-dollar swaps market, which played a significant role in the 2008 financial crisis, it is reportedly being forced to consider buying out senior staff. Despite Giancarlo’s pleas for more money, a Congress dominated by his Republican allies has, alarmingly, reduced the agency’s already paltry budget instead.

There has been some justification for Giancarlo’s hesitancy in producing concrete legislative proposals. He was hamstrung by delays to Congressional approval for his last two commissioners, Republican Dawn Stump and Democrat Dan Berkovitz, who were only sworn in at the start of September. They are both widely respected, but even the most competent commissioner takes some weeks to acclimatise to the job; Giancarlo would have been loath to put too much in front of them too soon.

Nonetheless, Giancarlo’s decision to add yet another white paper – Cross-border Swaps Regulation Version 2.0 – at the start of October has raised some eyebrows.

What Giancarlo says is that the white paper is a “concept release”. But proper concept releases solicit the public’s view on a topic, so that an agency can evaluate the need for further rulemaking

“Strange”. “Odd”. “An unusual choice”. This is how various derivatives lawyers, lobbyists and some former CFTC staffers have described a document that even admits it is not an official agency communication.

As chairman, Giancarlo now leads the agenda and has other options available to him, all of which open up dialogue with the public and the industry he is regulating. He could, for instance, issue a notice of proposed rulemaking. And if he feels the issue is not mature enough yet and needs more public consultation, he could issue an advance notice.

What Giancarlo says is that the white paper is a “concept release”. But proper concept releases solicit the public’s view on a topic, so that an agency can evaluate the need for further rulemaking. Yet, anyone who feels particularly strongly about the extraterritorial regulation of the swaps market must wait until the rule is proposed before they can offer input. And that will not be soon, as Giancarlo himself acknowledged in an exclusive interview with earlier this month.

Diplomatic motivation

One explanation could be that the October white paper is primarily motivated by diplomacy. Giancarlo has been vigorously trying to avoid the US swaps market becoming collateral damage as the European Union reacts to Brexit by tightening some of its own cross-border derivatives rules. A 500-plus-page legal document is less likely to grab the attention of EU policy-makers than a snappy piece of thought leadership promising to eliminate some of the obstacles for European firms trading derivatives with US clients.

This, incidentally, may also explain Giancarlo’s oddly servile mea culpa delivered at the London Guildhall in September – he is prepared to abase himself a little if it means maintaining hard-won equivalence agreements with the EU.

But one former CFTC lawyer points out that white papers can be useful dry runs, and their contents have found their way into previous regulations. The CFTC is to propose reform of swap execution facilities within the next few weeks and there is a good chance that the rulemaking notice will draw heavily on the April white paper.

If Giancarlo also delivers on his promise to table final rules on commodity position limits within the next six months, he may at last start to move on from the slightly abstract approach so far and live up to his ‘man of action’ reputation.

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