An Interview with the CFTC's Tim Massad

THE NEW CHAIRMAN: An Interview with the CFTC’s Tim Massad 26 Futures Industry | www.fia.org FI_MAG_V24N4_final_cc-r2_cc.indd 26 9/8/14 5:20 PM AS THE NEW CHAIRMAN of the Commodity Futures ing to Washington in 2009, he spent 25 years at the law Trading Commission, Tim Massad faces a diffi cult chal- fi r m of Cravath, Swaine and Moore, where he specialized lenge. Th e U.S. and the European Union are on a col- in advising corporations on securities off erings, bank fi - lision course regarding a key area of derivatives regula- nancings and other types of transactions. From 1998 to tion, and if they cannot reach an accord in the next few 2002 he was one of the fi rm’s top partners in Hong Kong, months, markets on both side of the Atlantic could be where he worked on transactions for clients throughout severely disrupted. Asia, including the Singapore Exchange’s initial public off ering. At the start of his career, he helped draft the The heart of the issue is how clearinghouses should be original International Swaps and Derivatives Association regulated outside their home jurisdictions. Most of the master agreement for over-the-counter swaps, an experi- world’s major fi nancial centers are implementing the G-20 ence that he says helped him understand the importance mandate to require clearing for over-the-counter deriva- of standardization then and now. tives, but there are diff erences in the details, and that has raised some questions about whether some sort of “mutual Massad also is no stranger to public service. When the recognition” would avoid duplicative regulation for clear- credit crisis hit in 2008 and 2009, he off ered to work pro inghouses that operate in more than one jurisdiction. bono for the Congressional Oversight Panel, the ad hoc group then chaired by Elizabeth Warren to oversee the The issue is particularly acute for clearinghouses in Treasury Department’s response to the crisis. He became Europe and the U.S., which account for the majority of an expert on the Troubled Asset Relief Program, the gov- global trading in OTC derivatives. EU offi cials have sig- ernment program that injected capital into more than 900 naled that they view several Asian countries as meeting banks, auto manufacturers and other companies. Th at led their standards for “equivalent” regulation, which would to a stint at the Treasury Department, where in a succes- allow clearinghouses in those countries to clear trades in sion of positions he oversaw the implementation and then the EU. But the offi cials are not yet ready to propose the the winding down of TARP. While TARP was hugely un- same for the U.S. until certain diff erences are resolved. If popular with voters, Massad succeeded in selling off the the EU does not reach an equivalence determination for government’s stakes at a substantial profi t. As then-Trea- the U.S. in the next several months, European banks that sury Secretary Tim Geithner commented, Massad turned are members of U.S. clearinghouses will face a punitive in- TARP from a “four letter word into a real success story.” crease in their capital requirements and some may reduce or even terminate their clearing operations. Massad was born in New Orleans, the grandson of Lebanese immigrants who settled in Oklahoma. His father Going in the opposite direction, EU offi cials have served in the U.S. Navy during World War II, then went asked the CFTC to recognize their clearing regime as to work in the oil industry and rose to become president comparable and exempt European clearinghouses from of Mobil’s exploration and production division. Massad U.S. regulation. CFTC offi cials insist, however, that all was raised in Texas and Connecticut and went to college foreign clearinghouses are subject to U.S. law if they clear at Harvard University. After working for consumer activ- swaps for U.S. customers. In eff ect, that would require ist Ralph Nader, he returned to Harvard for a law degree, nearly every major international clearinghouse to register then joined Cravath in 1984. with the CFTC as a “designated clearing organization” and in many cases could set up a confl ict between CFTC In late July, Futures Industry interviewed Massad and rules and local requirements. asked him about his agenda as chairman and how his experience as a corporate lawyer informs his views on the Despite more than a year of diffi cult negotiations on derivatives markets and the CFTC’s mission. Massad this issue, Massad is hopeful that it will be resolved soon. stressed the importance of listening to the concerns raised Since taking over the CFTC in June, he has made two by commercial end-users and others who use derivatives trips to Europe for talks with EU regulators on cross- and promised to apply some “fi ne-tuning” to the imple- border issues. In an interview with Futures Industry, mentation of Dodd-Frank. He also said he expects to work Massad said he recognizes how important it is to resolve closely with other U.S. policymakers, many of whom he this issue and stressed that each side will have to agree to knows personally from his time at Treasury. But he also give “appropriate deference” to the rules of the other. stressed the importance of restoring confi dence in the derivatives markets, not only in the sense of preventing an- While Massad is new to the regulation of derivatives, other crisis but also in restoring the public’s perception of he’s no stranger to international negotiations. Before com- the market’s fairness and integrity. Futures Industry | September 2014 27 FI_MAG_V24N4_final_cc-r2_cc.indd 27 9/8/14 5:20 PM Timothy Massad INTERVIEW FI: Can you give us a sense of the trail of page bespoke agreements. Standardizing the nize the importance of fi nding a resolution events that led you to this job? forms gave this business the engine to grow and I’m hopeful that we can fi nd a resolu- MASSAD: I spent 25 years in private prac- to be a global industry. Now standardization soon. tice. When the fi nancial crisis happened, tion is really a principal driver of what we’re When you look at the substance of it, I volunteered to help the Congressional doing in terms of bringing transparency and while I generally agree that each country Oversight Committee. It was an opportu- oversight to this industry. We are requiring should have appropriate deference with re- nity to use my skills and experience to serve clearing of standardized swaps. We are re- spect to the laws of other jurisdictions, one my country. Th at led to me joining Trea- quiring transparent trading of standardized thing to keep in mind in clearing is that sury. I spent fi ve years there overseeing the swaps. So I have the historical perspective of we’ve had a regime of dual registration [for TARP. As I was fi nishing my work on TARP, seeing that evolution and seeing the impor- clearinghouses] and cooperative oversight I was asked whether I would be interested tance of standardization. for some time. Th at’s worked very well, par- in chairing this agency. I was honored to be I think the second thing it gives me is ticularly to ensure protection of U.S. cus- asked to do this. It was an opportunity to an appreciation of the wide variety of busi- tomer funds. address one of the causes of the crisis and nesses that rely on the derivatives markets, Now, in a lot of ways, we totally defer also to chair an agency which is really at the not just interest rate or currency swaps but to Europe in clearing. We don’t insist, fi rst forefront of regulating some of the most really the whole range of products that are of all, that clearing even take place in the interesting developments in the fi nancial used in these markets. I know these mar- U.S. Th ere are a lot of products that can be markets. As a lawyer in private practice, I kets seem esoteric to a lot of Americans. cleared without any involvement of U.S. had had a lot of experience in derivatives. But they really are fundamental to the law. But there are certain areas, swaps being I’d worked all over the world doing all sorts strength of our economy and to the many one because of what the law says, and also of diff erent fi nancial transactions. So I felt businesses that rely on them to hedge price futures that are traded on a U.S. exchange, that my background also gave me a good risk and currency risk and interest rate risk where the law basically requires that they be basis for this job. and so forth. done in a way that’s consistent with certain Finally it gives me an appreciation of the customer protection standards. FI: Can you give us some examples of the cross-border issues and the importance of derivatives transactions you worked on those. Th e drafting of those standard forms FI: Where does substituted compliance fi t when you were in private practice? was the fi rst exercise in trying to harmonize into this? MASSAD: I was one of a small handful the laws of diff erent jurisdictions. It’s inter- MASSAD: I think where we’ll get to is of lawyers who drafted the ISDA agree- esting that we are in a place today where a regime of appropriate deference.

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