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US Energy and the Dodd-Frank Act

By Dr Sam Van Vactor, a former US Treasury economist and President of Economic Insight, Inc

August 10 - US energy markets face a new regulatory framework arising from the failings of the financial sector. Trading costs will rise, threatening liquidity.

However, many key elements of the Wall Street Transparency and Accountability Act have been passed on to regulators. Their true nature will emerge only with time.

The Act does little to streamline oversight activities, while the biggest problem may prove to be 'regulatory creep'.

The House of Representatives quickly approved the legislation, but it stalled in the Senate where a super-majority is required to avoid filibuster.

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After considerable maneuvering, the bill passed on July 15 as the Wall Street Transparency and Accountability Act of 2010, requiring only the signature of President Barack Obama to become law.

Many superlatives have been used to describe the Act – historic, all encompassing, groundbreaking, etc., but it is far too early to judge its long-term impact.

This is because many, if not most, of the key elements have been delegated to regulators to work out over the next year. The Act only provides an outline.

The US Chamber of Commerce counts over 350 rules and regulations plus dozens of studies that regulators will be required to craft.

Like so many policy decisions taken in response to the 2008 financial crisis: "the can has been kicked down the road." Now the real lobbying can begin.

Treasury on top

For the energy sector, the Commodity Futures Trading Commission will make the key decisions. Its authority expands to include the market for Over-The-Counter swap trading, which until now has been largely unregulated.

However, from another perspective, the independence of the CFTC and other Commissions has been constrained.

The CFTC, along with nine other agencies and financial regulatory bodies, will form the body of a newly created Financial Stability Oversight Council. The Secretary of the Treasury chairs the Council.

To support the Council's work the Act establishes an Office of Financial Research at the Treasury.

According to the House's press release, the Office will "be staffed with a highly sophisticated staff of economists, accountants, lawyers, former supervisors, and other specialists to support the council's work by collecting financial data and conducting economic analysis."

For those not familiar with the bureaucratic vernacular, this means that the Treasury Department is more or less going to run the show.

A number of federal regulatory agencies -- particularly the Securities and Exchange Commission -- were criticized during the financial crisis for inadequate oversight and insufficient interagency coordination.

For a time, Congress considered merging the SEC and the CFTC, or setting up completely new regulatory bodies.

The FSOC may be a reasonable resolution of the obvious difficulties surrounding either of these alternatives; it remains to be seen.

The Act also mandates much closer direct coordination between the CFTC and the SEC.

Indeed, much of the Act's language provides parallel directions to the two Commissions, and it orders them to prepare a joint memorandum of understanding on jurisdiction.

Clarity may be difficult to come by, since the line between securities and commodities has blurred and promises to become even fuzzier.

This obfuscation is further compounded by the plethora of electronic exchanges, "dark pools," bulletin boards, hedge funds, high-frequency traders, and related computer systems that have grown up around the OTC market.

Attempts to rationalize regulation broadly through all markets will be a major challenge.

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