NERA does policy level consulting and provides analysis, research and advice to business, government and the derivatives industry according to Brown-Hruska. “Basically I am going to build a practice that focuses on the futures industry,” she says, adding, “I will continue to do a lot of the same things that I am doing now but do it with the freedom to be an independent analyst and observer.”
Brown-Hruska leaves the CFTC with many important issues unresolved so we spoke with her to get her take on several pending issues:
SBH: We have some good language pending at the Senate. I am hoping that Congress can work its way through. I have opposed the House language as it related to OTC energy market transactions and I hope that the CFTC continues to work with Congress to craft a solution that doesn’t unnecessarily burden the energy area.
FM: Foreign boards of trade?
SBH: My view is that we set the groundwork for cooperation with foreign regulatory authorities that really cracks that nut. You don’t need duplicative regulatory requirements by the Commission on ICE Futures or other entities to ensure that there is regulatory coverage. The FSA (Financial Services Authority) has it well in hand. We work with the FSA, we initiated dialogue with the FSA when I was acting chairman and had very fruitful discussions, and that continues under [Chairman Reuben Jeffery]. I am pleased with the direction of that and I hope there won’t be any substantive change in the Commission’s approach, which is a no-action approach and a recognition of foreign regulatory authority.
FM: What about regulatory arbitrage?
SBH: Those are relevant concerns you need to deal with as a regulatory agency. The CFTC has to deal with the issues of spec limits and should provide relief to Nymex on spec limits. I always thought, even with respect to the Chicago Board of Trade, spec limits are kind of a hardcore market constraint that restricts trading but doesn’t necessarily restrict manipulation or price dysfunction. It is better to find a different approach like position accountability. Position accountability approaches are much more proactive and much more effective at preventing manipulation. Spec limits are not all they are cracked up to be, and position accountability is a much smarter proactive regulatory approach.
FM: What about reporting requirements?
SBH: In the case of ICE futures, the CFTC gets on a daily basis position information through their agreements and relationship with the FSA. So that is not a deal-breaker issue. That is an issue that is resolved; if a foreign firm wants to introduce a product that is competitive with a U.S. market, the CFTC shouldn’t stand in the way. It is important for competition to flourish and sometimes that competition can come from foreign sources. I really believe in the CFTC model endorsed by the CFMA that encourages competition regardless of where it comes from.
FM: Commitment of Traders?
SBH: A lot of people are confused about the Commitment of Traders report. That is information the CFTC provides to the public but it is not the be all and end all of the information that the CFTC receives. The CFTC receives much more fine data about positions.
FM: Are commercial interests being misreported?
SBH: I don’t know that that is accurate. Commercial, non-commercial; the designations are appropriate. If you are a swaps dealer and are hedging your book of business in commodities — that is hedging, that is bona fide hedging. Maybe some would suggest that that is not hedging in a traditional sense, but to me it’s the correct definition. You’ve got to have an open mind about positions and not try and limit bona fide hedging and legitimate market activity based on some backward definition of what constitutes hedging. The old definition — if you are a producer or a merchant you can hedge, but if you are a swaps dealer you can’t — is not a modern view of the world. There are swaps dealers, there are intermediaries who offer products that track commodities and they have used the futures markets to hedge their swaps book and to hedge their intermediation and their market making and we shouldn’t restrain that activity.
FM: What’s next?
SBH: I really want to work with the industry and continue along the same lines that I have developed in the past, but do it not as the regulator but someone who has something to offer as a thinker. One of the really cool things about my new job is that I will stay in the business cultivating the same fields and discover a different perspective.