WASHINGTON — Republicans and Democrats sparred Tuesday over the economic impact of derivatives regulations as the House prepared for a broader fight over the budgets of agencies tasked with writing and enforcing the new rules.
GOP lawmakers repeatedly made the case that derivatives restrictions were spooking the markets, threatening to drive U.S. capital offshore and thus potentially costing the country tens of thousands of jobs.
"We have American financial companies severely disadvantaged vis a vis their foreign competitors. … Onerous rules that are unnecessary will without doubt run U.S. capital to non-U.S. markets," said Rep. Ed Royce, R-Calif, at a House Financial Services Committee hearing on the topic. "In the derivatives realm, if transaction costs to end users increase because of duplicative rules, because of complex, unworkable proscriptions, because of damaged liquidity, then end users will simply send their business to European institutions."
Many Republicans also asserted that much of the impetus for clamping down on swaps activities is misplaced. Derivatives end users did not cause the financial crisis, they argued, but were merely swept up in it. Hedging is a valuable tool needed by businesses to manage risk, they said, and should not be stifled.
"Let's be clear up-front, right at the beginning of this hearing, end users of derivatives did not cause the financial crisis," said House Financial Services Committee Chairman Spencer Bachus in his opening statement. "They were among its victims. Although the 2,300-page Dodd-Frank Act was promoted as being directed at Wall Street, as we are coming to understand more clearly, it is the end users of derivatives who will bear so much of the regulatory brunt of this law. As a result, hundreds of American companies could take their capital and jobs elsewhere. One study, released just yesterday, concludes that upward of 130,000 jobs could be lost if U.S. regulators impose new restrictions on derivatives transactions too broadly."
But Democrats — largely backed by a trio of regulators — countered that the new rules would not kill jobs but instead increase transparency, bring about price discovery and bolster confidence in the markets, which could feed economic growth.
"I think effective regulation can promote capital formation, which is in essence the creation of jobs," said Securities and Exchange Commission Chairman Mary Schapiro. "There are a number of studies that will show that good regulation, intelligent regulation — not overregulation — can actually lessen the cost of capital for an industry."
Gary Gensler, the chairman of the Commodity Futures Trading Commission, sought to put some concerns to rest by clarifying that his agency does not plan to impose new margin and clearing requirements on nonfinancial end users of derivatives contracts, an issue that had concerned many in the financial industry. "With regard to the implementation of various requirements of margin, which many members here have raised with us and in the Dodd-Frank Act, Congress recognized different levels of risk posed by transactions with financial entities on one hand and those involved with nonfinancial entities, or what many were calling end users," Gensler said.
"Consistent with this, consistent with what Congress said, that the nonfinancial end users will be exempt from clearing, we believe at the CFTC that margin requirements should focus only on transactions between financial entities rather than those transactions between nonfinancial entities as many members have talked about. … We will get this margin thing right. We understand the congressional intent on that."
A major undercurrent in Tuesday's debate was the issue of funding the CFTC and SEC. Republicans are seeking to significantly reduce funding for both agencies to near 2008 levels in its continuing budget resolution. It would reduce the SEC's 2010 budget by $25 million, or to $188.6 million less than President Obama has requested for fiscal 2011. Republicans also want to cut $56.8 million from the CFTC's 2010 budget levels, or $104 million less than the $261 million Obama requested for fiscal 2011.
Gensler and Schapiro told lawmakers at the hearing Tuesday that such cuts would weaken their ability to enforce existing standards and make implementing the new regulations under the Dodd-Frank Act impossible.
The president's fiscal 2012 budget, released Monday, called for increasing the CFTC's budget by 82%, to $308 million, largely through user fees to be assessed on CFTC-regulated market participants, and the SEC's budget by 28%, to $1.427 billion.
Much of the increases are needed to enforce Dodd-Frank.
Rep. Barney Frank, the panel's top Democrat, said he plans to introduce an amendment to restore funding to the SEC, and other Democrats also opposed the cuts.
"I fear it will make it impossible to implement Dodd-Frank and be responsible regulators," said Rep. Carolyn Maloney, D-N.Y. "How in the world are you going to do that with a reduced budget?"
Schapiro said the proposals would put enforcement into hiatus. "Clearly, we will not be able to operationalize the rules that we will be promulgating and ultimately adopting under Dodd-Frank under that budget scenario," she said.
Gensler agreed. "Taking us back to '08 levels would have to entail significant reductions in force."
Though many prominent Republicans have called on regulators to slow down their implementation of Dodd-Frank, particularly with regard to the SEC and CFTC derivatives rules, regulators declined to take the opportunity Tuesday to ask Congress for additional time to finish the regulations.
Gensler said that regulators had to wait at least two months after the July deadline to begin implementation and had discretion to take longer. "What timing has been put out there is doable," Gensler said. "We are human, some of these will happen after July, no doubt. It's not like a firm deadline, as I understand; we're going to get this right, and some of these will be after July, but we are also going to take up final rulewriting in the spring and the summer. We want to get it right."