In a speech before the National Cattlemen's Beef Association, CFTC Commissioner Dan M. Berkovitz expressed concerns about the concentration in clearing services and the systemic risk resulting from the materially reduced number of futures commission merchants ("FCMs").
Mr. Berkovitz reported that due to the concentration in clearing services, the number of FCMs actively clearing futures and options on behalf of customers has fallen from 90 firms in 2007 to 55 in 2019. He said that clearing services are provided primarily by the affiliates of big banks, with ten of the largest FCMs holding 75 percent of all required customer margin.
First, Mr. Berkovitz said that the fewer number of FCMs has resulted in fewer clearing services options for commercial hedgers.
Second, Mr. Berkovitz argued that systemic risk has increased due to current capital requirements that limit bank FCMs' abilities to take on additional clearing clients. Mr. Berkovitz warned that the sudden loss of a single large FCM could disrupt markets if (i) clients' positions cannot be transitioned to other FCMs, or (ii) the affected positions cannot be liquidated in bulk. To help resolve this issue, Mr. Berkovitz called on the CFTC to seek measures that would increase the capacity and diversity of clearing services.
Mr. Berkovitz also emphasized the CFTC's dedication to ensuring that the futures markets serve ranchers, farmers and commercial firms by helping them to mitigate market risk. He stated his commitment to improving hedging and price discovery for commercial operators.
Commentary / Bob Zwirb
Commissioner Berkovitz laments the high level of concentration in the swap trading and clearing sector, while ignoring a significant factor responsible for that trend - the enactment of Dodd-Frank. When it comes to industry concentration, regulation plays an important role. Indeed, two prominent economists from MIT observed thirty years ago that "[t]he effects of economic regulation often differ considerably from the predictions of 'public interest' models, which presume that regulation is intended to ameliorate market imperfections and enhance efficiency. This conclusion follows not simply from the observation that regulation is the outcome of a political process, but from analyses of the impacts of regulatory intervention" (at p. 1496).
Dodd-Frank illustrates the issue. One of the primary objectives of Dodd-Frank, according to former CFTC Chairman Gary Gensler, was to promote greater market participation and prevent the markets themselves from being dominated by a handful of large institutions. Dodd-Frank resulted in the opposite of what was intended "precisely because," as economist Craig Pirrong observes, "regulatory burdens create fixed costs, which favor scale."
Commentary / Steven Lofchie
It would be a useful exercise to go back to the early stages of debate over Dodd-Frank and the initiation of regulation so as to collect the predictions as to what the law would accomplish. A fair number of the claims flew in the face of Econ 101, including that an increase in regulatory requirements (fixed costs) would lead to an increased number of service providers. Likewise, there were predictions that an increase in the costs of regulation would only impact "Wall Street" and leave "Main Street" unaffected. (This is not meant as a rail against regulation generally; only against the continuing promise that regulation is all benefit and no cost. In fact, there are cases where the costs outweigh the benefits, which means that new and existing regulations must be individually assessed).
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