Unhedged: Election Special
What does the election mean for derivatives?
Listen, I could count on no hands the number of people who asked me this question, but I know it’s on everyone’s mind. Lucky for you, you got this email.
That image is how I initially discovered the election results Wednesday morning. While YouTube does not seem to know what I do, Twitter/X does.
Highlights
Gary’s Exit: Like his predecessor, Gary will likely step down before the January inauguration. His new employer will be lucky to have someone with his expertise onboard.
Enforcement – slows down to focus on big ticket items (e.g., fraud, manipulation, anything which clearly involved a bad actor or negligent actor), and less “regulation by enforcement” or as I have heard it described as “less use of novel legal theories by the Division of Enforcement”
Rules: Historically, it’s tough to roll back established rules. But anything in the “proposal” stage could just stay there indefinitely (or be re-proposed substantially different).
CFTC: I wonder if one of the two Republican Commissioners will be the new Chairwoman, or will we get a new person? I have always thought Commissioner Pham’s dissents were intentional in trying to position herself not only for this role, but to provide an objective sense as to how she would operate the CFTC. Now, we can see if other’s have liked what she had to say.
Bank Regulators – expect the OCC to have a new leader in relatively short order because the “Comptroller of the Currency” is officially titled “Acting Comptroller of the Currency”. The FDIC will be interesting since Democratic FDIC chair Martin Gruenberg has said he'll step down once Congress confirms his replacement, and the replacement in waiting is the CFTC Commissioner Christy Goldsmith Romero. Unclear how this will play out. Following reports about workplace issues, there could be an argument that Trump can remove the current FDIC chair “for cause”, and Commissioner Romero never gets her opportunity. J-Powell isn’t going anywhere, but unclear what Michael Barr (vice chair for supervision) will do.
So…Gary’s Gone?
No, not really. I know Trump said he would fire Gary on Day 1, but he cannot….though he could fire him in the Television way (“Gary, ya fired.”), and we all have a good laugh, but Gary would still be working at the SEC as a commissioner
Trump, however, could designate a new interim SEC Chairman. So Gary can lose that title, and “interim” or “acting” Chair title could go to one of the current Republican commissioners (e.g., Hester Peirce).
I am sure Gary is considering employment post-SEC.
I am not your guy for how the DC machine operates, but whatever Gary does will be very interesting. Gary is a former partner at Goldman Sachs, and he also ran the CFTC during its epic release of the entire swaps regulatory framework. In short, the guy’s knowledge of the SEC and CFTC regulatory space (business and legal) is potentially unmatched. I guess he could continue to pivot in ways which should not hurt his ability to potentially be appointed U.S. Secretary of the Treasury under a Democrat-president, or maybe he takes his talents to the private sector. The latter would be amazing and, if the culture works, an amazing grab for any company (or law firm).
So….Gary is not gone, but he will be leaving. It’s what is best for Gary and I wish him the best. Also, Gary stepping down would be consistent with his predecessor, Jay Clayton, who left the SEC in December 2020 ahead of President Biden’s January 2021 inauguration.
No More Regulations? Remove Regulations?
Again, no. It’s not the case that regulatory agencies stop enforcement and/or the next four years are about any regulator saying “Please delete the following regulations and circulate a clean plus blackline for the market’s review.”
However, the future under Trump would likely focus enforcement on major/serious violations such as fraud, market manipulation, and misrepresentation and misappropriation cases. These are cases where you can point to an actor who either knowingly acted with bad intentions or, when they acted, did so negligently or with some implied/express acceptance that a regulatory risk was being warehoused.
This latter one, the “implied/express acceptance that a regulatory risk was being warehoused” is the real grey area. I am thinking of companies that take a regulatory risk, and do not have a CYA memo to show they appreciated or cared about the risk.
For example, we have seen many instances where a market participant is penalized for non-compliance, but we can understand why: either (i) the actions never raised any alarms because it’s a nuanced area of law, or (ii) the market participant likely had an internal regulatory view that differed from the regulators. CYA memos in situation (ii) are helpful, and there’s not much you can do about item (i) other than hope the regulator appreciates your perspective.
In a Trump-led enforcement approach, we might see more settlements with regulators, resulting in lower or fewer fines. Take the use of personal devices, for example, and how everyone is now paying SEC and CFTC fines for recordkeeping violations. These cases would have occurred under any president, but at some point, this became more of a revenue generator than a means of providing meaningful guidance to the market on expectations in this area.
In crypto, we would probably see fewer cases targeting existing and established market participants for “failure to register” under rules that don’t fully consider the nuances of digital assets. However, if someone tries to raise money for a new venture and issues “tokens” instead of securities, that’s still probably not a great idea.
To be clear, enforcement agencies are still focused on (i) protecting the markets and (ii) generating more fines than what they request from Congress for their budget. That objective never changes.
CFTC
This will be interesting. My guess is that the Democratic Commissioners will be exploring new job opportunities—not because they need to but because they can continue advocating for change and assisting the market by working outside the CFTC. Leaving now doesn’t sideline them from potentially returning to a regulatory position in the future. You can even find articles speculating whether former CFTC Chairs Tarbert or Giancarlo will become the new SEC Chair under Trump.
Currently, we have two Republican CFTC commissioners: Summer Mersinger and Caroline Pham. It would be interesting to see if (i) either stays on and (ii) one is then appointed Chairwoman of the CFTC. Summer Mersinger has extensive experience with the DC landscape and its operations, as most of her career has been in that area. Caroline Pham was an MD at Citi. Both are invaluable assets for helping the CFTC navigate both DC and the regulated market (and its participants). I believe the market is better off if we can retain both and continue to benefit from their expertise.
Consumer Financial Protection Bureau
“Ed, ‘swaps’ and ‘consumer’ do not go together.”
True, but the CFPB has actually been a significant player in the crypto market and could do even more. Unlike the SEC Chair, the CFPB Director can be quickly replaced by Trump, so expect changes here. Symbolically, given Trump and his campaign’s push to reconsider the administrative state, I wonder if or to what extent they might attempt to shutter certain agencies or even the CFPB.
However, people much more familiar with this process have said “I don’t see evidence that Mr. Trump is interested in dismantling the CFPB”.
FDIC & OCC & the Fed
This, too, will be interesting. The current FDIC Chair is under the weight of a scandal, with Democrats and Republicans alike calling for his resignation. While that was ongoing, CFTC Commissioner Christy Goldsmith Romero was nominated as his replacement. There was no rush to act on that nomination before the election, and now, there may never be any rush.
The OCC will have a new “Acting” Comptroller of the Currency relatively soon.
J-Powell was asked if he would resign before his term expires in May 2026, and he briefly stopped the money-printing machine to reply, “No”. Never change J.
It is also unclear what Michael Barr will do. His term goes on for a good bit longer (July 2026 as Vice Chair for Supervision, and until 2032 as a member of the Board of Governors), so he can stay, but if Trump is able to reshape the FDIC and have a new Comptroller of the Currency, the question is whether Barr wants to work in that environment. Ideally, it's about consensus-building, and Barr could see himself in a great place to seek that compromise—but again, I do not know how the DC machine works.
Basel Endgame Capital hikes are probably not happening as proposed, if ever. While there could be a “re-proposal,” it is also possible that Trump may look to withdraw from the Basel III accord.
Ed Ivey
No one has called me, yet. The CFTC lacks a Division of Gifs, something I could immediately fix.
