The Next Chapter for Derivatives Regulation


Under the Dodd Frank financial reform law, the Commodity Futures Trading Commission, a five-member panel of three Democrats and two Republicans, has an all-important role in regulating the multi-trillion dollar market in derivatives.

Since the passage of Dodd-Frank in 2010, the C.F.T.C. has put in place dozens of generally sound new federal rules — on transparency and oversight — against nearly impossible odds, including relentless lobbying by big banks resisting regulation and severe Republican-driven budget shortfalls that have required tireless work from a skeletal staff. Though much work remains, credit for the progress that has been made largely goes to the commission chairman, Gary Gensler, a Wall Street derivatives expert-turned-reformer, chosen by Mr. Obama in 2009, and Democratic Commissioner Bart Chilton, a firm reform advocate, chosen by President Bush in 2007 and renominated by Mr. Obama in 2009.

Both commissioners are nearing the end of their terms and plan to leave their posts: Mr. Gensler at the end of this month, Mr. Chilton, sometime next year. Mr. Obama, however, has shown no interest in choosing replacements with similarly strong reform records and expert credentials. In November, he nominated Timothy Massad, a relatively unknown assistant Treasury secretary to be the next chairman. Mr. Massad, a former securities lawyer at a Wall Street law firm, has spent his time in the Obama administration overseeing the bank bailout program and the largely ineffectual foreclosure prevention effort. He has no deep expertise in derivatives or commodities.

Now, the administration is reportedly close to nominating Sharon Bowen, also a Wall Street securities lawyer, to replace Mr. Chilton. Ms. Bowen, an African-American, would bring much needed diversity to the commission, but she has no reform record and only a tangential connection to derivatives. She serves as the acting chairwoman of the Securities Investor Protection Corporation, a federally chartered entity that works to return investor assets held by failed broker-dealers, like MF Global.

If Ms. Bowen is nominated and confirmed, that would leave the commission without a proven reformist or a technical derivatives expert. That situation would be unacceptable. The third Democratic commissioner, Mark Wetjen, has a reputation for second-guessing and watering down reforms. As for the two Republican seats on the commission, one is held by a foe of reform, and the second is vacant. For that seat, Mr. Obama nominated an industry lobbyist, J. Christopher Giancarlo, in August.

To make a difference, the new rules must be vigorously defended, monitored and enforced. The C.F.T.C. is sure to be barraged with demands for regulatory relief and subjected to political pressure to ease up. Only a deep understanding of the markets coupled with an unshakable commitment to reform will enable the new regulatory regime to survive. With his choice of nominees, Mr. Obama has to ensure, in a way that he has not yet demonstrated, that the C.F.T.C. will continue to make progress.