Senate Appropriations Subcommittee Holds Hearings on SEC and CFTC Budgets
Commentary by Steven Lofchie
The U.S. Senate Appropriations Subcommittee on Financial Services and General Government held a hearing to discuss the fiscal year ("FY") 2015 budget requests of the SEC and the CFTC. SEC Chair Mary Jo White and CFTC Acting Chair Mark Wetjen testified before the Subcommittee, each explaining the reason for the relevant Commission's request for a substantially expanded budget.
Commentary
Chair Wetjen was forthright as to why the CFTC's budget needs have expanded substantially:
"The notional value of derivatives centrally cleared by clearing houses was $124 trillion in 2010 (according to ISDA data), and is now approximately $223 trillion (according to CFTC data from swap data repositories ('SDRs')). That is nearly a 100 percent increase. The expanded use of clearinghouses is significant in this context because, among other things, it means that the Commission must ensure through appropriate oversight that these entities continue to properly manage the various types of risks that are incident to a market structure dependent on central clearing. A clearinghouse's failure to adhere to rigorous risk management practices established by the Commission's regulations, now more than ever, could have significant economic consequences."
In contrast to statements by the prior CFTC chair that the use of central clearing corporations eliminated risk to the financial system, the current CFTC chair asserts that clearinghouses can fail and that any such failure "could have significant economic consequences". While it is possible that massive centralization of risk in the clearinghouses will reduce systemic risk, it quite possibly will not. Whichever side of the debate one may take, Chair Wetjen's remarks acknowledging the risk that is being concentrated in clearing corporations opens an honest discussion – itself an advancement in developing a sound regulatory structure.