Gensler set for 'aggressive' focus on derivatives misconduct - panel

Gary Gensler, the newly-confirmed chair of US regulator the Securities and Exchange Commission (SEC), will take a more hands-on approach to derivatives regulation than his successors, a panel has agreed.

“There is likely to be greater interest by the SEC under Gensler (pictured) in pursuing misconduct in the derivatives markets,” Colin Lloyd, a partner at New York law firm Cleary Gottlieb, told Global Investor.

“There are a number of people at the CFTC whom Gensler knows well, people who were there when he was chairman,” Lloyd said during a question and answer session hosted by the Futures Industry Association on Thursday afternoon.

“Gensler has a better understanding of derivatives markets that most SEC chairs do when you compare him to Jay Clayton or Mary Jo White, for example."

Gensler served as the 11th chairman of the CFTC, which regulates US derivatives markets, under President Barack Obama from May 26, 2009 to January 3, 2014 leading the reform of the $400 trillion (£290 trillion) swaps market.

“We should expect that Gary is going to be quite aggressively in the enforcement area,” Lloyd said. “He will not view the derivatives markets as outside of his focus in the same way that his predecessors might have been more focused on the traditional equities markets and retail securities markets.”

The SEC and CFTC have said that they plan to harmonise their approach to the regulation of securities and derivatives. In October they set up a joint pilot programme on the disqualification of bad actors after holding their first joint open meeting for 45 years.

In addition, the SEC is bringing together a number of divisions and offices to regulate security-based swaps in preparation for November 2021, when dealers will be required to register with the US securities markets regulator.

“The security-based swap markets will become regulated by the SEC to a far greater extent come November when firms begin register and transactions begin to be reported,” Lloyd said.

In terms of foreign corrupt practices, the panel felt that Gensler was unlikely to signal a sea-change as the CFTC’s anti-corruption initiative is already well-suited to cross-agency co-ordination with both the SEC and Department of Justice.

Acting assistant attorney general Robert Zink, who was chief of the federal agency’s fraud section from January 2019 to August 2020, said this week that the CFTC is fulfilling a regulatory gap by addressing areas of the Foreign Corrupt Practices Act that the SEC is unable to regulate under its statute.

Jonathan Kolodner, another partner at the law firm, agreed that cross-collaboration between the CFTC and SEC is likely. “The fact that he has connections in both organisations is only going to support the efforts of the CFTC to work more closely with the SEC,” he said.

According to Kolodner, while the CFTC is clamping down on matters involving foreign corrupt practices starting with its first foreign corruption enforcement action against Texas-based energy and commodities trading firm Vitol in December, co-ordination between agencies will avoid duplication and bring an anti-piling on advantage.

“The CFTC enforcement division has said…that it does expect to avoid duplicative investigations,” he said. “This is similar to the anti-piling on policy that the Department of Justice has, which takes into consideration whether or not an entity is paying penalties to multiple organisations.

“It helps incentivise companies to come forward, self-report or try to resolve with multiple organisations or entities at the same time, as an effort to take into consideration as part of a global settlement the various penalties that the entity that engaged in the misconduct is going to be paying.”