Last year was full of big news and events for the futures and options industry, and this year promises to be full of more major headlines. SmartBrief asked FIA President John Damgard to share his insight on industry developments, regulatory reform and other changes coming in 2012.
You just announced the appointment of Walt Lukken as the FIA’s president and CEO. Why the change in leadership?
After nearly 30 years at the head of the FIA, it’s about time for me to hand over the reins to someone new. I think Walt’s a great choice. His many years in government will be a tremendous asset in dealing with the structural reforms mandated by Dodd-Frank and similar laws around the world, and his experience in running a clearinghouse will be particularly useful as the FIA works with regulators in the over-the-counter market’s transition to clearing. I’ve known him for a long time, and I’m looking forward to welcoming him to the association in time for our annual meeting in Boca Raton, Fla., in March.
What do you see as the top issue for the FIA in 2012?
MF Global is certainly first and foremost in our minds. While there certainly are many other issues ahead — position limits, transaction taxes, mandatory OTC clearing, to name a few — none of them is as urgent as the collapse of MF Global, and particularly the unprecedented breach in the segregation of customer funds. The fact that customers still do not have 100% of their funds has dealt a severe blow to confidence in our system of customer protections, and item No. 1 on our agenda is to find a way to restore that confidence.
We still don’t know what exactly went wrong, but once all of the facts emerge, we expect to offer specific suggestions on what should be done to prevent this type of situation from ever happening again. I have no doubt that the Commodity Futures Trading Commission and the self-regulatory organizations will also come forward with some concrete proposals in the not-too-distant future. Congress will examine those proposals very closely and possibly come up with its own proposals, and we as an industry will need to step up and participate constructively in the dialogue.
What about Dodd-Frank rule making? What are your expectations in that area?
It’s become obvious to everyone that the regulatory reforms in Dodd-Frank are considerably more complicated than Congress realized. The regulators have truly put in best efforts to meet the deadlines in the statute, and I don’t think that we should blame them if the deadlines are not met. If anything, the extra time has made it possible for all of us to think through the implications. We are still well ahead of the rest of the world in meeting the deadlines set by the Group of 20 leaders.
One of the biggest emerging issues in 2012 will be the cost of compliance with Dodd-Frank. I think everyone in the derivatives industry is struggling to understand the application of the rules and the cost of compliance. For example, transparency as a general principle is a very good thing for markets, but the rules that are being put in place to meet that goal are very, very complicated. Look at what happened with the large-swap-trader reporting rules. Even after the rules were finalized, there were many questions on how to implement the reporting requirements. The CFTC didn’t put out the final guidance on how to comply until a week before the first reports had to be submitted.
We have been working with the CFTC to ease the burden on the industry, and I am pleased to see that the folks over there are listening to what we have to say. But as a general matter, it’s becoming clear that the ultimate cost of compliance with these and other rules will be much higher than anyone would have expected when we started down this road. And the likely consequence, which I don’t think anyone intended, is that the number of firms able to provide clearing services for derivatives will get smaller, not larger. That’s not good for the industry or for the public, and I hope the regulators recognize that as they finalize the reforms here and abroad.
You sound pretty gloomy about the future. Is there anything positive on the horizon?
You’re right, there is a lot weighing down on us. But I very strongly believe that there are solid reasons to be positive about the future despite these challenges. I’ve been in Washington a long time, and I’ve seen the regulatory pendulum swing back and forth many times. Nobody ever gets it 100% right on the first try, and I fully expect Congress to take a good hard look at Dodd-Frank and rework some of the sections that are proving to be particularly troublesome. That may take several years to play out, but the process is already starting, and I expect the FIA to play an important role in that.
Furthermore, I don’t think the core function and purpose of this industry will be any less necessary in the future than it is today. If anything, the need for protection against adverse price movements is greater than ever. We live in uncertain times, and this business at its core is all about providing people with certainty about the prices they pay for the products they consume and the revenues they receive for the products they sell. So long as we keep sight of that goal, so long as we keep our costs down and keep up our competitive edge, the demand for our services is bound to strengthen.