The Double-Edged Sword of Analysis
On December 2nd, the International Swaps and Derivatives Association (“ISDA”) and the Securities Industry and Financial Markets Association (“SIFMA”) sued the CFTC, challenging the agency’s new position limits in 28 core physical commodity contracts and their economically equivalent futures, options, and swaps.
The Associations’ complaint claims that the Dodd-Frank Act did not compel the CFTC to promulgate position limits. The agency’s decision to do so, without adequately determining whether the limits were necessary and without analyzing the limits’ effect, was arbitrary and capricious, in violation of the Commodity Exchange Act and the Administrative Procedures Act.
Whether the Dodd-Frank Act mandated the imposition of position limits presents issues of statutory interpretation worthy of a law review article. The lawsuit also sparked an interesting response.
Former Labor Secretary Robert Reich blogged about it and news outlets including the Baltimore Sun and the Christian Science Monitor republished the blog. Mr. Reich struck a chord when he noted that Americans may conduct their own cost-benefit analysis of Wall Street and decide that its costs outweigh its benefits.
But even before society gets to that point, Wall Street may question the wisdom of calling for more “analysis.” Although more studies may delay the adoption and implementation of costly regulations, the studies themselves come with a cost. First, there’s the cost to industry of responding to the information requests themselves. Then there’s the added cost of potential disclosure. To conduct the analysis called for by the ISDA and SIFMA, the CFTC would need information the disclosure of which might reveal trading strategies and other proprietary information. Vermont Senator Bernie Sanders caused a minor uproar when his office leaked information concerning three-year old speculative oil positions.
Eileen Rominger, SEC Director, Division of Investment Management, recently summarized how her Division gathers and analyzes the data it receives from the mutual fund industry. Although made in the context of future regulation, she noted that the data is frequently used as a point of reference for examinations. And examinations can lead to enforcement.
The disclosure of information can also raise more fundamental questions, questions concerning trust and viability. When the Reserve Primary Fund disclosed its exposure to Lehman Brothers bonds, it sparked a classic run-on-the-bank. More recently, MF Global’s disclosure of its foreign sovereign debt holdings led to margin calls and its ultimate collapse.
So while studies and analyses may provide short-term relief from burdensome regulations, they also provide information and insight which some, at least, might prefer to keep hidden.