How Will the Election Change the US Regulatory Landscape?

As FX markets continue to anticipate what will happen next following Donald Trump’s surprise victory in the US Presidential election, there could also be significant changes in the country’s regulatory landscape that financial services firms need to consider.

For starters, the Commodity Futures Trading Commission (CFTC) could look very different.

Historically, when there’s a transition of parties, the Chairman of the Commission has tendered their resignation on the inauguration day of the new President and then the remaining Commissioners vote amongst themselves for an acting chairman. Generally, they have tended to vote for the senior-most Commissioner of the President’s party.

This means that CFTC Chairman, Timothy Massad, will step down once Trump is sworn in, with one Washington source stating that he is likely to leave the Commission altogether rather than just as Chairman.

This will leave Sharon Bowen, a Democrat, and Christopher Giancarlo, a Republican, as the two remaining Commissioners. Therefore, it seems almost certain that Giancarlo will be named acting CFTC Chairman.

While Chris Brummer and Brian Quintenz, Democrat and Republican respectively, have been nominated to the CFTC, they have not yet been confirmed by the Senate and the Washington source speculates that they might not get confirmed at all.

The source says that the nominations are due to expire at the end of this Congressional session and, given that President Obama nominated Brummer and Mitch McConnell put forth for the President to nominate Quintenz and the Republicans maintained control of the House and the Senate, Congress might defer to Trump to make his own selections.

However, once Massad resigns his position, the CFTC will be left with only two Commissioners, and unless they can agree with each other, then not a lot will get done. This could be significant as any new Commissioners will have to get through a Senate confirmation hearing and this will likely be a lower priority for the government than hearings regarding positions in many other areas, such as the Department of Agriculture, the Treasury Department or the Supreme Court appointments.

It could potentially be several months before the next Commissioners are in place, meaning that a number of regulations, such as the rules around position limits and the Regulation of Automated Trading (RegAT), won’t move forward in the meantime.

Looking at the Securities and Exchange Commission (SEC), Javier Paz, senior analyst, wealth management, at Aite Group, expects Chair Mary Jo White to finish her term, something that he says would have been in doubt had Hillary Clinton been elected, given Senator Elizabeth Warren’s stance towards the SEC chair. 

“Both the SEC and CFTC are unlikely to get budget increases to boost their market surveillance – the CFTC, for instance, had asked for a 32% budget increase in fiscal year 2017. New commissioners and new chairs to be appointed under President Trump will likely set a much more market-friendly tone than that seen during President Obama’s terms,” adds Paz.

He also notes that ahead of the election there was talk of Trump leaning hard on Wall Street, but claims that this was probably a tactical shift to keep Hillary Clinton from outflanking him on the topic of Wall Street reform. 

“Time will tell, but we highly doubt new pieces of legislation building on what Dodd-Frank started will be forthcoming under President Trump,” concludes Paz.

Meanwhile, David O’Connell, senior analyst, wholesale banking and payments, at Aite Group, claims that the stress testing mandated for banks under Dodd-Frank is likely to be impacted by a Trump presidency, “but in a curious way”.

“I see Trump becoming convinced that stress tests are too onerous and costly for banks, with the result being a de facto disbandment of this portion of the Dodd-Frank Act as a result of defunding. But interestingly, the banks I have talked to actually like their stress tests deep down inside.

“This is because these tests are a form of risk analytics that banks know they should have begun doing long before these tests became mandated under their various regulatory labels: DFAST, CCAR, stress tests, etc. In other words, expect the stress-test mandate to go away, but expect banks to keep performing them nonetheless,” says O’Connell. 

Responding to Trump’s election victory, a spokesperson for the high frequency trading (HFT) community, Bill Harts, CEO of Modern Markets Initiative, claims that there is no evidence to suggest that a Trump presidency would negatively impact HFTs.

“We have no reason to believe President-elect Trump is in favour of anything but the cost-effective, efficient markets we have in America today. We don’t need to make our markets great again. They’re already great. We just need to thoughtfully make them even better. We look forward to working with the new administration and its representatives in the financial services agencies and departments on meaningful policies for our markets,” he comments.

galen@profit-loss.com

@Galen_Stops

@Profit_and_Loss

Galen Stops

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