WASHINGTON, DC – Pennsylvania U.S. Senator John Fetterman, along with colleagues Senators Sherrod Brown (D-OH) and Tina Smith (D-MN), today sent a letter to the Commodity Futures Trading Commission (CFTC) Chairman Rostin Behnam sharing their serious concerns with the CFTC’s Proposed Rule on Seeded Funds and Money Market Funds, which they called a “step in the wrong direction” that would “undermine the goals of Dodd-Frank.”
The Dodd-Frank Wall Street Reform and Consumer Protection Act, passed by Congress in 2010, set up comprehensive rules for swap agreements after they significantly contributed to the 2008 financial crisis. Dodd-Frank required the CFTC to set rules for swaps that ensure counterparties hold enough collateral. This collateral protects swap market participants and prevents the kind of dangerous risk-taking that nearly destroyed the financial system in 2008.
The CFTC’s proposed rule would increase market instability by decreasing collateral requirements for some swaps. It would reduce or eliminate initial margin requirements for a subset of swap market participants. Critically, the rule creates a divergence with bank regulators, setting up two sets of rules for swaps: one set of rules that apply to non-bank swap dealers and another set of rules for prudentially regulated swap dealers.
Put simply, if finalized, this rule would roll back a critical piece of Dodd-Frank and put the nation’s financial stability at risk.
“The 2008 financial crisis showed the dangers that swaps can pose to economic stability, and Dodd-Frank directed regulators, including the CFTC, to require initial margin for uncleared swaps specifically to reduce those risks,” the Senators wrote. “It is vital for the CFTC to continue upholding its Dodd-Frank mandate and to maintain high standards and safeguards for this important market.”
“As members of both the Agriculture and Banking, Housing, and Urban Affairs Committees, we are particularly concerned that the CFTC proposes to unilaterally deregulate some market participants without coordination with prudential regulators overseeing other participants in the swaps market,” wrote the Senators. “This regulatory divergence would invite regulatory arbitrage, a regulatory race to the bottom, and likely incentivize the movement of some uncleared swap transactions from prudentially regulated swap dealers to non-bank swap dealers.”