Critics oppose rule that would weaken risky derivatives market regulation

Commodity Futures Trading Commission

U.S. Senator Elizabeth Warren, financial fairness advocate Lisa McCormick and Better Markets Derivatives Policy Director Cantrell Dumas, each sent recent letters to the Commodity Futures Trading Commission (CFTC) urging the agency not to move forward with proposed rules that would weaken margin requirements and restrictions on using money market funds in uncleared swaps.

The CFTC, an independent agency created to regulate U.S. derivatives markets, proposal would roll back current protections that are in place to protect market participants.

Largely influenced by America’s political system being funded by private donations— that have been called ‘legalized bribery’ —deregulation of complex financial markets has created massive crashes that brought on 1929’s Great Depression, the 2007 global mortgage crisis, and the subsequent 2008 Great Recession.

In 2010, the Senate passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which strengthened the CFTC’s regulatory authority to oversee the swaps market – transactions that were previously unregulated and at the center of the 2008 financial crisis – and impose margin requirements on swap dealers to protect the financial system. 

“The Commission is now proposing to weaken these existing margin requirements and collateral restrictions that apply to swap dealers and major swap participants, rolling back important Dodd-Frank Act reforms and increasing risks to the stability of our financial system,” wrote Warren. “I urge the Commission not to move forward with this proposed rule and maintain existing regulations for seeded funds and the use of money market funds in uncleared swaps.”

US Senator Elizabeth Warren, New Jersey Democrat Lisa McCormick, and Better Markets Director Cantrell Dumas oppose CFTC rule change.

In the letter, Warren raised concerns with both the CFTC’s Seeded Funds and Money Market Funds proposals. The first would relieve swap dealers and major swap participants from the requirement to post an initial margin when they engage in uncleared swaps with eligible seeded funds. The Money Market Funds Proposal would allow swap dealers to use money market funds for eligible initial margin collateral, which is currently restricted.

“If finalized and implemented, the proposed rule would differentiate the rules governing swaps between those that are covered and not covered by Prudential Regulators, introducing inconsistency among U.S. banking regulators’ rules,” wrote Warren.  “The CFTC proposal would loosen margin requirements that were designed as ‘the most basic risk management tool’ and considered ‘best practice and a foundation for systemic stability’ – creating new potential vulnerabilities.”

In a powerful comment letter addressed to CFTC Chairman Rostin Behnam, McCormick called for the protection and preservation of margin as a crucial risk management tool to shield the financial system from instability.

“The CFTC’s proposed rule would allow swap dealers to circumvent the requirement to post and collect initial margin with certain seeded funds,” wrote McCormick. “This would weaken the Dodd-Frank margin requirements and make the financial system more susceptible to instability.”

“The financial industry has a long history of putting profits ahead of safety. This greed led to the 2008 financial crisis, and it is now leading the financial industry to pressure the CFTC to weaken the Dodd-Frank margin requirements,” wrote McCormick. “The CFTC must resist this pressure and uphold the Dodd-Frank margin requirements. Weakening these requirements would be a dangerous mistake that could put the financial system at risk again.”

McCormick also criticized members of Congress from New Jersey who she claims voted against protecting consumers and ensuring the stability of America’s economy following their acceptance of financial contributions from the financial industry.

McCormick alleges that Garden State lawmakers took payoffs from the six biggest banks, which have been on a crime spree that subjected them to 490 legal actions and more than $207 billion in fines, in various amounts including $572,300 to Sen. Robert Menendez and $428,710 to Sen. Cory Booker.

House members also took money from banksters, including $543,581 to Josh Gottheimer, $135,121 to Mikie Sherrill, $127,495 to Donald Norcross, $114,615 to Bill Pascrell Jr, $75,320 to Frank Pallone Jr, $61,763 to Andy Kim, $55,596 to Jeff Van Drew, and $51,146 to Chris Smith.

“The CFTC’s approach conflicts with the clear language and intent of the Dodd-Frank Act, the comprehensive set of reforms designed to prevent future financial crises,” wrote Dumas, whose organization was founded to promote the public interest in the financial markets. “Moreover, it reflects a cavalier attitude towards a key financial market safeguard. Just like a down payment, margin is not an added expense, but a vital buffer designed to protect all parties involved in transactions and the overall stability of the financial system. It should not be seen as a dispensable feature to be waived for cost-cutting purposes but rather as a steadfast requirement aimed at reducing risk and enhancing systemic stability.”

“Money market funds are far too susceptible to systemic instability to serve as reliable margin,” wrote Dumas. “At the very least, such an approach would have to wait until the SEC establishes further safeguards against money market fund run risk, including a uniformly floating net asset value and significant capital buffers.”

“In the complex world of financial regulations, it’s crucial to remember that eroding Dodd-Frank is like playing a game of Jenga,” wrote Dumas. “Removing a single piece may appear inconsequential at first, but with each successive extraction, the entire structure becomes less stable and more likely to collapse.

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