Forced applause usually follows a regulator’s remarks to the regulated. Not so inside the pink stucco walls of the Boca Raton Resort and Club in Florida this week.
Chris Giancarlo of the Commodity Futures Trading Commission received a standing ovation when he spoke to hundreds of traders, brokers and exchange executives.
The enthusiastic response reflects hopes in the derivatives industry for a better relationship with the CFTC, its principal watchdog. Hours before, President Donald Trump nominated Mr Giancarlo to be the next commission chairman.
That puts him in charge of a powerful financial regulator that oversees trillions of dollars in futures and swaps contracts.
After the financial crisis, the CFTC was transformed by the Dodd-Frank law from a regulatory backwater to being an aggressive policymaker and enforcer in derivatives markets. Some large traders and brokers duly grew frustrated with its reams of new rules and demands for information as global regulators focused on taming the realm of privately negotiated derivatives deals, blamed for exacerbating the financial crisis.
In his speech at the FIA futures industry conference, Mr Giancarlo promised a new tack. “It’s got to be something to get a standing ovation from this crowd,” says Carl Gilmore, chief executive of Chicago-based Integritas Financial Consulting. “There’s a sense of relief and optimism that we’ve not seen for a long time.”
Mr Giancarlo will become the first Republican chairman to lead the CFTC in eight years. His two immediate predecessors, Gary Gensler and Tim Massad, were Democrats appointed by Barack Obama. Mr Giancarlo joked the transition was seamless: “One 50-ish bald guy had replaced two 50-ish bald guys.”
The derivatives industry has already felt a positive jolt from rising US interest rates, which have injected volatility and potential profitability back into markets for traders and brokers. Mr Giancarlo has emboldened executives with a new approach to regulation.
In his speech, he argued efforts to craft rules in response to the 2008 financial crisis had lost sight of new challenges and that derivatives markets were struggling because of flawed and excessive regulation.
By some measures, listed derivatives markets have done fine under tougher regulations. CME Group and Intercontinental Exchange, the two biggest US futures exchanges, reported record daily volumes in 2016. Customer assets held by futures clearing firms have increased in the past five years.
But some industry executives argue rules passed after the crisis and scandals like the collapse of MF Global, the New York broker, have bogged down their business.
Because of regulation “our muscles have atrophied a bit on how to innovate, how to compete, how we grow as an industry”, says Walt Lukken, FIA chief executive. “With today’s environment, it’s an opportune time to get back in the gym and flex these competitive muscles.”
Mr Giancarlo was appointed a CFTC commissioner in 2014 and has served as acting chairman since January. Before that, he served as an executive at GFI Group, a US interdealer broker that specialised in the swaps that were unregulated before Dodd-Frank was passed in 2010.
Executives at the FIA conference drew a contrast with Mr Gensler, a former Goldman Sachs executive who took a hard-charging approach to regulation that still leaves the industry riled. Mr Massad, a former Treasury official, was more conciliatory.
“Gensler was a hammer to the banks as he wanted to further his political career; Massad was unobtrusive. But Giancarlo has personal respect. He’s a proper market practitioner,” says one chief executive.
Questions remain as to how far Mr Giancarlo’s approach could relax the current regulatory regime.
Moreover, market participants are not calling for wholesale change. Don Wilson, the head of DRW, a Chicago-based proprietary trader, says mandates such as clearing houses processing derivatives deals had been good for the market.
However, he believes regulators have taken other policies too far. Mr Wilson is fighting a CFTC lawsuit alleging his company manipulated interest rate futures markets several years ago.
“I’m hopeful that under the new administration in the United States, the regulatory agencies will work with market participants to make markets better rather than continue this adversarial and counterproductive approach,” he told the conference.
Mr Giancarlo may yet also face opposition over the Dodd-Frank rules for trading swaps in the US on electronic marketplaces known as swap execution facilities. Terry Duffy, chief executive of the CME, said they were “too prescriptive” and called for a rethink.
But Mr Giancarlo argues they are modelled too much on the futures industry. They also prevent innovation, such as the auction technologies underpinning the Uber cab ordering service. “That’s where the rules are wrong,” he says.
Mr Giancarlo, who hails from the bank-dominated world of over-the-counter derivatives, said Congress did not mandate the CFTC to design a market open to all, such as proprietary trading firms. But he said he did want swaps markets to be like healthy, diverse ecosystems and not favour one type of trader over another.
“I’d like to see the Chicago prop boys competing against the Wall Street banks every day for every trade,” he said in an interview.
Notably he also says he would not back down on policing rule-breakers, warning attempts to cheat or manipulate markets “will face aggressive and assertive enforcement action by the CFTC under the Trump administration”.
Underscoring his point, he plans to move parts of the CFTC’s surveillance branch, which scans markets for irregularities, into the enforcement division, which prosecutes wrongdoing. Mr Giancarlo said: “Market surveillance means they’re looking at suspected wrongdoing.”
If that is the case, there may be softer applause at next year’s Boca conference.
