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COLUMN-New commissioners open CFTC to change: Kemp

John Kemp
Wednesday, 6 Nov 2013 | 9:00 AM ET

(John Kemp is a Reuters market analyst. The views expressed are his own)

LONDON, Nov 6 (Reuters) - The U.S. Commodity Futures Trading Commission (CFTC) is in for its biggest shake up since the financial crisis as two of its most experienced members and strongest proponents of tougher regulation prepare to step down.

Bart Chilton, the longest serving member who has been a commissioner since 2007, revealed on Tuesday he had notified the president of his intention to leave in the near future.

Chairman Gary Gensler, appointed in 2009, will step down at the end of the year.

Both are Democrats and have been the strongest advocates of enforcing position limits and other new regulations on derivatives markets under the Dodd-Frank Act.

On the five-member panel, one slot is already open after Republican Jill Sommers stepped down in July. The president nominated Christopher Giancarlo, executive vice president at derivatives broker GFI Group, to replace her, but he has not yet been confirmed by the Senate.

The remaining commissioners are Republican Scott O'Malia, a staunchly pro-industry critic of position limits and other regulations, and Democrat Mark Wetjen, the newest member who has served only since October 2011.

Gensler and Chilton have stayed long enough to complete most of the rule-writing required by Dodd-Frank and to re-propose position limits, after a federal district judge struck down their first attempt. But they leave the commission at a crucial stage when much of the implementation is still to be done.

Enforcing the new rules and defending position limits against further court challenges will fall to their successors, who will lack as much experience and may be less determined in the face of industry opposition.

NEW MEMBERS

The confluence of three vacancies creates a crisis of continuity within the commission - and an opportunity to reshape its approach and priorities.

Commissioners must be nominated by the president and confirmed by the Senate. Because of the CFTC's historic role regulating grain and livestock futures, the leading role is played by the Senate Agriculture Committee.

No more than three commissioners at any one time can come from the same party. President Barack Obama must therefore nominate one Republican and two Democrats for the open seats and designate one of the new or existing commissioners to act as chairman.

All the nominations are likely to be considered by the Senate as a package to reduce the threat of partisan deadlock.

In theory, the White House could use its nominations to reaffirm its influence and set direction for the agency, which is supposed to be independent. In practice, derivatives reform has slipped down the agenda, and the White House is unlikely to attach much importance to the nominations or expend significant political capital on them.

For the banks and derivatives dealers, meanwhile, regulation remains a priority. The industry can be expected to lobby the White House and especially the Senate for more sympathetic, some might say malleable, commissioners to replace Gensler and Chilton.

NEW DIRECTION

Gensler has proved a surprisingly tenacious and combative supporter of strong derivatives reform in the teeth of bitter opposition.

In an ironic twist, his confirmation was originally held up in the Senate because of doubts among some Democrats about whether he would be tough enough on the industry.

As a former partner of Goldman Sachs and a member of the Clinton administration's Treasury team, which helped deregulate financial services in the late 1990s, Gensler was seen as a probable soft touch.

He has instead defied expectations and become something of a bĂȘte noir for derivatives dealers.

The CFTC makes decisions by majority on new regulations and enforcement. Chilton, who is even more liberal and strongly disliked by industry insiders than Gensler, has provided the most reliable vote in support of the chairman's reforms.

With both leaving the commission in the near future, the CFTC is likely to adopt a different, less confrontational, approach.

WATCHING WETJEN

Of the remaining and new commissioners, Wetjen is the one to watch. Wetjen is set to play a decisive role in shaping the agency's new direction, whether or not he is nominated as its new chairman, as some press reports have speculated.

With the departure of the others, Wetjen will vault from the commission's most junior Democratic member to its most senior one.

He has already played a pivotal role by providing the crucial, third for agency rulemaking over the past two years.

Wetjen was a senior adviser to Democratic Senate Majority Leader Harry Reid during the passage of Dodd-Frank in 2010, though his precise involvement in the law's fiercely contested Title VII on derivatives remains unclear.

His profile has been far lower than those of either Gensler or Chilton. His cautious regulatory approach has been something of an enigma.

At times, Wetjen has seemed to be groping for a less confrontational middle way between the pro- and anti-regulation factions on the commission and a compromise between the derivatives dealers and their critics.

POSITION LIMITS

Given his more important role, Wetjen's statement was the most interesting aspect of Tuesday's rule-making open meeting, at which the CFTC voted 3-1 to issue new proposals on position limits.

Gensler's and Chilton's votes in favour, and O'Malia's against, were all predictable.

But Wetjen issued a surprisingly strong endorsement of the rationale behind the proposals, even if he questioned the tactics of making new rules rather than appealing the court judgement that struck down the previous rules.

In striking down the first rule, the federal district judge said the CFTC must employ its own experience and expertise to reconcile the apparently contradictory language in the law, especially over whether the CFTC must impose limits by order of Congress or has some discretion to impose them only if it finds them necessary.

Wetjen gave an unambiguous answer: "Position limits are the primary policy tools chosen by Congress to accomplish that mission (combating excessive speculation that can cause price volatility).

"The commission's newest proposal is intended to be responsive to (the) court's opinion and clear in at least one respect: It concludes that section 4a of the Commodity Exchange Act, considered as an integrated whole, may be reasonably construed to require the commission to impose, at appropriate thresholds, limits on the amount of positions in agricultural and exempt-commodity markets."

He insisted, "The commission reached the conclusions in the document before us only after due deliberation and consideration of its experience and expertise in overseeing the position-limits regime over many decades."

In case there was any doubt: "I find it implausible that Congress would add many sections of new statutory text to simply affirm authority that the commission already has. Such a conclusion does not seem to comport with the obligatory language used in the statutory amendments, and it does not comport with my understanding of the statute's intent as informed by my experience working as a Senate aide during consideration of these provisions."

CHEVRON SHIELD

It was a calculated move to shut down at least one route for future legal challenges. The court said the commission must use its experience and expertise to reach a reasonable reading of the statute; Wetjen's answer in effect is that we have done so and, moreover, I should know what Congress intended because I was working there when the law passed.

It is a deliberate attempt to shield the decision from judicial review and put it within the protection of the Supreme Court's ruling in "Chevron versus NRDC," decided in 1984, which insisted the courts must give substantial deference to a reasonable construction of a statute by a federal agency.

Position limits are the most emotive issue for the derivatives industry, though in all likelihood not actually the most significant part of the law in terms of the way banks, dealers and investors conduct their business.

Wetjen's role is set to become more important in future. By giving unambiguous support to the new rule, Wetjen sent a strong signal that he would not shy away from a tough approach, even if that angers some in the industry.

(editing by Jane Baird)