CFTC chairman Gary Gensler’s testimony in front of the Senate Banking Committee today contained a few nuggets worthy of note. Due to his connections to Corzine, Gensler had recused himself from the MF Global CFTC investigation, falling under heavy criticism in the process. Since then, he has stalwartly refused to comment on the subject, but today, that silence was broken. To be fair, much of the commentary on MF Global was touting the company line that the CFTC did everything they could under the circumstances – actually becoming defensive during lines of questioning related to concerns about Corzine in the investigation, stating that they, “didn’t care beans about Corzine,” instead focusing on the client money at stake.
However, for us, there was one very critical component of his prepared testimony that stood out to us. While the comment was made in the context of the swaps debate, Gensler stated (emphasis ours):
Some commenters have expressed the view that if a transaction is done offshore, it should not come under Dodd-Frank. Others contend that as long as an offshore dealer is regulated in some capacity elsewhere, many of the Dodd-Frank regulations applicable to swap dealers should not apply. The law, the nature of modern finance, and the experiences leading up to the 2008 crisis, as well as the reminder of the last two weeks, strongly suggest this would be a retreat from much-needed reform. When Congress and the Administration came together to draft the Dodd-Frank Act, they recognized the lessons of the past when they expressly set up a comprehensive regulatory approach specific to swap dealers. They were well aware of the nature of modern finance: financial institutions commonly set up hundreds if not thousands of “legal entities” around the globe with a multitude of affiliate relationships. When one affiliate of a large, international financial group has problems, it’s accepted in the markets that this will infect the rest of the group. This happened with AIG, Lehman Brothers, Citigroup, Bear Stearns and Long-Term Capital Management.
Gensler’s comments were no doubt focused on the London based losses of JP Morgan that came to light over the past few weeks. For us, viewing these comments through the lens of the MF Global experience, this is a larger truth than just the necessities of strict interpretations on swaps. If you’ll remember, one of the major concerns about how the money from MF Global had happened to go “missing” was the potential use of rehypothecation abroad by JP Morgan, above and beyond the limits of U.S. law. Their ability to do so was based on this loophole Gensler broadly referenced – that U.S. based institutions may skirt U.S. law by conducting transactions via off shore subsidiaries.
For the protection of investors everywhere, we hope that Congress will take this comment to heart. We can’t say we know exactly what happened during the collapse of MF Global, and conspiracy theories certainly abound, but in our minds, we want to know that regardless of the MF Global situation’s ultimate resolution, FCMs cannot abuse investor trust here or abroad.