Christopher Giancarlo, a Republican member of the Commodity Futures Trading Commission who has supported looser regulations for some of the markets the regulator oversees, is a top candidate to become its next chief.
Giancarlo, who has been at the agency since 2014, is the only Republican among the three current commissioners; as a result, he's expected to become at least interim chairman when Timothy Massad steps down as the Democratic Obama administration hands power to Donald Trump on Jan. 20. Typically, the agency is run by five commissioners who are appointed by the president to staggered five-year terms.
A Trump Administration spokesman declined to comment last week about whether Giancarlo is a serious candidate to become the next CFTC chairman but reports suggest that he is the most likely choice.
The CFTC, which has little name recognition on Main Street, was created in the 1970s to supervise markets in commodities futures such as corn and wheat that had been actively traded since the mid-19th century. After the 2008 financial crisis, its charter was expanded to include the multi-trillion dollar market for swaps, derivative contracts that allow financial institutions to hedge against events such as changes in interest rates or credit losses.
Branded as one of the culprits in the crisis, which occurred when the $15 trillion mortgage market imploded and related securities became impossible to value, swaps trading had previously been unregulated.
Should Giancarlo be appointed, he would almost certainly work to undercut derivatives regulations set up by the Dodd-Frank Act, which subjected Wall Street to stricter rules in an attempt to prevent a recurrence of the crisis, regulatory observers say.
Such a strategy, however, carries significant risks for U.S. taxpayers, said Michael Greenberger, a top CFTC official from 1997 to 1999. Greenberger said he's particularly concerned about a lack of U.S. oversight of swaps trading by overseas subsidiaries of big U.S. banks.
Such trading helped aggravate the 2008 financial crisis, which forced the government to spend billions on taxpayer-backed bailouts to shore up the U.S. financial system. AIG (AIG) - Get Report , which became a poster child for financial market risk-taking, received $182 billion, in part to fund payments from its derivatives business to U.S. banks such as Goldman Sachs (GS) - Get Report and foreign institutions.
Trump appointees to the CFTC and other bank regulators are nonetheless likely to be less stringent in enforcing regulations involving derivatives and other securities, said former International Monetary Fund chief economist Simon Johnson. He believes the administration's approach will mirror that of former President George W. Bush from 2001 to 2007.
"We're going to see it all happen again," said Johnson, a member of the Systemic Risk Council and an entrepreneurship professor at the Massachusetts Institute of Technology.
Already, Giancarlo has pushed for a major re-write of derivatives-trading rules, arguing that Dodd-Frank standards have harmed the U.S. derivatives market by pushing international trading away from financial institutions subject to CFTC rules.
"The time has come for the CFTC to revisit its flawed swaps-trading rules to better align them to market dynamics, allow U.S. swap intermediaries to fairly compete in world markets and reverse the tide of global market fragmentation," Giancarlo said at an International Swaps and Derivatives Association conference in London in December.
"Only with clear-eyed attention to the true challenges facing contemporary markets can we ever restore the market vitality that will be necessary for broad-based economic prosperity," he said then. "Flourishing capital markets are the answer to U.S. and global economic woes, not diminished trading and risk transfer."
Such statements give Greenberger pause, particularly when it comes to a provision of Dodd-Frank that seeks to limit risk-taking in the global derivatives market, dominated by the biggest U.S. banks. When the commodities trading commission applied that provision to the banks' overseas divisions, the parent companies stopped "guaranteeing" the units and convinced the agency that swaps by "de-guaranteed" subsidiaries should be exempt from the law, he said.
Massad, the outgoing CFTC chairman, led a push in May to adopt margin rules for un-cleared swaps that would apply even to unguaranteed foreign operations. It was approved by a 2-to-1 vote, and Giancarlo, the dissenter, described it as "overly complex, unduly narrow and operationally impractical."
The requirement would make it harder for "U.S. financial institutions to compete globally and serve American businesses," Giancarlo said. He didn't return a message seeking comment for this article.
While the banks' strategy in removing guarantees from overseas units was intended to protect the U.S. from financial responsibility for derivatives losses, "in the real world," neither the parent bank nor the American taxpayer would escape, Greenberger said.
"If Giancarlo becomes the CFTC chief, then he will take an already too bank-friendly CFTC and make it have an even greater affection for banks," Greenberger said. "He's the most openly hostile commissioner to Dodd-Frank."
Indeed, while the commission proposed further rules in October that would limit the de-guaranteeing tactic, many observers don't believe that a Giancarlo-led panel would adopt the measures. Another likely casualty is a rule required by Dodd-Frank to set position limits on commodities trading; a proposal was re-introduced for the third time late in the Obama administration.
"Giancarlo has taken a dissenting stance at the CFTC," Greenberger said. "Many of those actions in the minds of market reformers are too friendly to the banks."
The Bank for International Settlements reported that the gross market value of all outstanding derivatives contracts, including swaps, was $20.7 trillion at the end of June, 2016. The notional value -- the price of all derivatives if exercised (many are not) and including instruments such as options to buy and sell stocks that essentially cancel each other out -- was $544 trillion.