FM: What is your opinion on the position limit rule just passed by the CFTC?
JD: You can read our comment letters, but we don’t believe that position limits make a lot of sense for markets that exist outside the United States. They can be a tool for regulators in the ag markets with physical deliveries where there can be congestion in delivery months. [Though] surveillance and jawboning has worked well in preventing manipulation in the stressful times in the market. But when there is a decent supply in the market, when the CFTC has ample opportunity to see positions, arbitrary position limits set today can be very restrictive tomorrow. And my real concern is markets outside the United States that don’t have position limits. Why would any global traders bother to run the risk of trading a market in any of these products where 24-hours a day, offices spread all over the world are doing business.
The CFTC has bitten off of a tough one here. They may end up failing to achieve what the people who have pushed this expect to happen. People that think this is going to reduce the price of buying corn for corn flakes or oil may find that by reducing liquidity, they are increasing volatility. They may very well end up seeing prices increase as a result of this.
FM: I know we don’t have all the facts yet but what is your take on what happened at MF Global?
JD: It’s been less than a week since the firm collapsed, and at this point it’s impossible to know for sure what happened. What I can say is that this is an extremely unfortunate turn of events for everyone involved. MF Global played a very important role in our industry, not just here in the U.S., but in many markets around the world, and it’s a real shame to see it come to such a sad end. The absolute cornerstone of financial integrity in our markets has always been and will continue to be the protection of customer funds. This principle should never be violated.
FM: Can you compare this to other FCM bankruptcies and perhaps rogue trader scandals that have occurred since you've led the FIA?
JD: I think we need to wait for the authorities to reach their verdict before we render judgment, but one thing stands out immediately. When Lehman Brothers collapsed in 2008, we were able to move all of the customer positions and collateral out of Lehman in less than a week (in the United States). The process with MF Global has been far less smooth, and that should be a matter of considerable concern for all of us in the industry. Since the news broke on Monday morning [Oct. 31], everyone has been working very long hours to transfer customer positions and collateral out of MF Global. I have been on a number of conference calls with member firms and the clearinghouses, and I know everyone is doing their best to sort this out. When the dust settles, I think it behooves us all to take a long look at what happened here and determine what steps need to be taken to improve the handling of customer funds both before and after bankruptcy.