Filling the International Financial Reform Leadership Void

As we approach the three-year anniversary of the enactment of Dodd-Frank, its implementation is substantially under way. No other regulator has moved the needle further than CFTC Chairman Gary Gensler. This applies to both foreign and domestic regulators. Truly, the CFTC has been the leading force to meet our 2009 G-20 commitment of instituting reforms to the over-the-counter derivatives market.

Knowing Chairman Gensler, this comes as no surprise. He was an invaluable and trusted resource to me throughout the development of the derivatives title of Dodd-Frank. Without his input and seemingly inexhaustible energy, the legislation would not have directed the types of safeguards consumers and taxpayers deserve. Chairman Gensler has also played an active role internationally.

However, given that most of the primary drafters of the Act are no longer in Congress, I do believe it's important that the intent of the legislation is clear as the regulators continue the implementation process. For instance, I share concerns that have been expressed by international regulators, as well as Democrats and Republicans, about the lack of coordination at home and abroad.

For instance, this month the CFTC guidance on how U.S. rules apply to overseas transactions with foreign entities is scheduled to expire. On this issue, a provision of Dodd-Frank known by its legislative heading as "Section 722 (d)" is one area where domestic cooperation is necessary and international coordination is absolutely critical.

Section 722(d) states that the provisions within Title VII should only apply extra-territorially when they "have a direct and significant connection with activities in, or effect on, commerce of the United States." I realize some have interpreted the clause to be expansive. However, it was intended to be read consistently with the SEC's mutual recognition regime which, like the CFTC's substituted compliance system, has been in place and worked well for decades. That was at least my intention in the legislation and I believe should be the outcome of the Act's implementation.

Chairman Gensler should be praised for putting the United States in the leadership role and effectively bringing his international counterparts to the negotiating table. We should not, however, undermine the ongoing international discussions that seek this same objective by placing an arbitrary deadline on ourselves and the rest of the financial world. Though we shouldn't allow indefinite delay, we must also avoid ignoring the reality that more time is required.

I'm not alone in my sentiment; on April 18th nine foreign Ministers of Finance from around the world expressed this view in a letter to Secretary Lew. I believe this is a promising development we should seize to reach a mutually agreeable international solution. Failure to do so will risk causing undue damage. A more recent letter by six of my former Democratic colleagues in the Senate echoes this same concern.

The testimony of Mr. Patrick Pearson of the European Commission in December of 2012 before the U.S. House Agriculture Committee Subcommittee is also illustrative in this matter and I share several of his sentiments.

He rightly points out the importance of sequencing the rulemaking process by noting that "foreign entities will have to register with the CFTC before they know all the rules that they will have to comply with." This is a fair point of view, and we should finalize our framework before asking others to comply.

Mr. Pearson also states that "reforms that are consistent and coherent within a single jurisdiction can have adverse impacts when they apply to cross-border transactions." This, he states, would have negative consequences on both execution and risk management of cross-border transactions and could increase financial risk by insulating U.S. financial firms.

Finally, and perhaps most importantly, Mr. Pearson pointed out that "we need the right cross-border rules and not just rapid rules." I believe his point speaks for itself and once again, I concur.

Chairman Gensler is right to have elevated this issue forcefully. In the absence of his leadership, the global connectedness of our financial markets would not be the front and center issue that it is today and our foreign counterparts may not be showing the willingness to meet our collective objectives. However, Mr. Gensler cannot achieve these goals on his own. I'm particularly pleased to see Secretary Lew's recent engagement because these are issues that deserve and require the attention of our highest ranking finance official.

Our objective must be to reach an international agreement that allows the U.S. to recognize foreign regulatory regimes. The time has come for U.S. and foreign regulators to follow Chairman Gensler's lead and finish the job by putting in place a coherent, and workable, global derivatives reform solution. In the short run, this requires an extension of the CFTC's regulatory relief. In the near future, this requires our foreign counterparts to complete their task as expeditiously as possible to complete a global framework that ensures appropriate regulatory oversight is in place.