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CFTC Commissioner Bowen Outlines Disruptive Derivatives Developments at Brodsky Family Lecture

The fate of financial regulations, and specifically the Dodd-Frank Act, under the Trump administration is one of the biggest questions facing the industry and investors.  CFTC Commissioner Sharon Bowen addressed that question in a speech at the Northwestern University Pritzker School of Law last night as part of the Brodsky Family JD-MBA Lecture Series. Bowen earned her law degree at Northwestern’s Law School and is a strong supporter of the school.

In addition to her role at the CFTC, she was also acting head of the Securities Investor Protection Corporation, chartered by Congress to help protect U.S. investors from brokerage firm losses. Among her many accomplishments, she is a recipient of the 2011 Diversity Trailblazer Award of the New York State Bar Association, and was selected as the New York City Bar Association 2007 Diversity Champion and the Metropolitan Black Bar Association 2006 Lawyer of the Year.

“I remain a firm believer in Dodd-Frank,” Bowen said. “It would be reckless to repeal the law and risk repeating the mistakes that led to the financial meltdown in 2008.”

Nevertheless she acknowledged that “the world has changed” and that we are at a crossroads concerning financial regulation. Regulators don’t want to go back to the “dark ages” of opaque markets.

There are four disruptive developments taking place now in the financial markets, Bowen said, and those are worth examining.

No. 1 is the role of technology, which has been a “sea change” as the pits gave way to the world of algorithms, which bring efficiency but are disruptive. The human cost – jobs lost and a potentially disaffected middle class – must be reckoned with, she said.

No. 2 is demographic change, meaning increased diversity in the job force, including women, people of color, and people of various sexual orientations. This is all clearly for the better, Bowen said, because it brings in a multiplicity of viewpoints. She stressed that we need diversity of every kind – including bringing in white middle class farmers, who sometimes feel their voices are not heard.

No. 3, economic change, is “self-evident,” she said. “Forty years ago there were no swaps markets, and now it is the largest of the CFTC-regulated markets.” This opens up new markets to capitalism. But we may be in the midst of a “third industrial revolution,” in which, despite a rise in household income and the stock market, the average American household feels it hasn’t gotten a raise in a decade and a half, and manufacturing is shrinking. Regulators need to be mindful of the effect of regulations on the ordinary investor and consumer and make sure markets are accessible to all. One regulation Bowen believes is critical to address this issue is the position limits proposal, which is critical to functionality and fairness of our economy, she said.

Disruptions 1, 2, and 3 are not insoluble, she said – however, a fourth trend is more difficult: people are losing faith in our institutions, in particular government and financial entities. There has been an erosion of trust, which opened up a space for “outsiders” who might “shake things up.”

Tough as it is to address this, the one solution she mentioned seems obvious – “Hold people accountable!”  Regulators need to be more aggressive in enforcing the rules fairly, and “take more big cases to court,” she said, while acknowledging that the CFTC is given too small a budget to do a thorough job on this. (Their budget has been flat for two years and any change in that is highly doubtful.)

Another obstacle for the regulators is that Bowen is one of only two commissioners left at the CFTC, and according to CFTC rules the two cannot have direct conversations with each other and need to go through staff.

One hope, she said, lies in more smart people joining government, and she urged the young law students and graduates in the audience to do so, despite the pull of bigger money in the private sector.

Bowen emphasized that regulators don’t want to stand in the way of technological innovation, but need to understand it. It’s important to remind people of the benefits of regulation and convince companies and firms that compliance and transparency are actually good for the bottom line.

 

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Rudolph is managing editor of John Lothian News (JLN).