Perhaps the future of Dodd-Frank banking legislation will hang dependent upon the trip CFTC head Gary Gensler will make later this month, and very few are paying attention.
That's scary, because the reforms of Dodd-Frank legislation are so critical to the future safety of our financial system, but have been sabotaged by the complexities of global, borderless markets, as well of course, by the outright and more clandestine blockage of progress by the investment bank community.
What's at stake is a financial system with a modicum of checks and balances to prevent another 'leverage-fest' that caused the financial disaster of 2008, and might even return us a little more closely to a banking world that was safer, before the passage of the Commodity Futures Modernization Act of 2000. That little piece of legislation upended nearly 70 years of smooth, crisis-less banking.
The Dodd-Frank rulemaking process, now in its fourth year, has been so long, wonky and arcane that it has entirely lost the interest of the public and the press -- as perhaps was the plan of its detractors. Still a major portion of the legislation, dealing with the most complicated definitions and guidelines for derivative trading and clearing has been written and is preparing to take effect in the U.S. banking system in July.
But the age of electronics and networks has made banking a global business and hardly a rule imposed by the U.S. can be enforced efficiently without an agreement that also applies to overseas branches of U.S. financial institutions, as well as foreign banks who do business in the U.S. This is the focus of the meeting that Chairman Gensler will undertake in Montreal on June 20th.
Opponents of Dodd-Frank have complained that without global compliance, U.S. banks would be at a stark competitive disadvantage to foreign banks operating under lax rules for derivative sales and trading. Advocates of Dodd-Frank contend that waiting for the global community to uniformly adhere to a U.S. model is impractical. If the rules are to have any impact at all, they say, they need to be applied first with pressure for global compliance in the more active financial markets to follow.
Investment banks and their advocates have already secured a six-month delay in the application of Dodd-Frank rules last December and are pushing for another six-month interval before the rules are scheduled to take effect in July. Chairman Gensler is adamantly opposed to another delay, but he is unlikely to have the votes from his own commission to make the rules take effect. That's why the meeting with EU commissioners in Montreal is so critical.
Without a plan of global compliance emerging from that meeting, Gensler will likely lose in the vote applying new derivative rules and banks will become their own compliance officers in how the new guidelines should be applied.
And more than likely, that would mean that all the work done crafting Dodd-Frank rules since 2010 would be ignored. And banks would be just as free to reenact the behavior that destroyed our financial system back in 2008.