When my kids are acting particularly nutty and inattentive while my wife is attempting to get them to do a particular task, she often looks them right in the eye moves her hands in a directional motion and says “focus, you need to focus.”
It doesn’t always work but it may be worth a try on some regulators who seem to also display an attention deficit problem. Case in point, last Friday a U.S. District Court vacated the Commodity Futures Trading Commission (CFTC) position limit rule, ruling in favor of a challenge by the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA).
The rule had taken a lot of time and attention away from the CFTC even though there has been no definitive evidence that over-speculation has distorted the price of commodities as many had claimed to justify the rule. Yet almost immediately after the decision CFTC Commissioner Bart Chilton says they should appeal the ruling and begin drafting a new rule proposal.
There has been quite a bit of debate, pro and con, as to the effect of long only commodity indexes and whether they and other institutional investors accessing the commodity markets on behalf of investors were distorting the market. Most serious studies seemed to come down on the side that it didn’t or that it couldn’t be proven and clearly there has been no consensus that speculators were distorting commodity markets. A CFTC cost analysis put the price tag of the rule at $100 million plus, putting it in the category of a major rule.
The debate split the commission but eventually the rule was passed despite former Commissioner Mike Dunn’s reluctance. Dunn cast the deciding vote but was clearly conflicted. He famously said, “With such a lack of concrete economic evidence, my fear is that, at best, position limits are a cure for a disease that does not exist or at worst, a placebo for one that does.”
Dunn added that lack of position limits were not a critical element to the financial crisis of 2008 and indicated the commission’s focus on them was misplaced.
So what happened while the commission focused on the dubious issue of positions limits? Well, for the first time since the Commodity Exchange Act (CEA) was enacted a shortfall in customer segregated funds at a major clearing firm created a $1.2 billion hole for futures customers forcing countless farmers, ranchers, introducing brokers and commodity trading advisors out of business. And customer segregated funds were violated a second time. All while the CFTC was busy writing rules and missing deadlines in its responsibilities to regulate the swaps market under the Dodd-Frank Act.
Not only did MF Global fail but the regulators’ response to this crisis was embarrassingly slow and inadequate. While the commission contends that its customer priority rules remain intact despite the liquidation being executed by a Securities Investor Protection Corp. (SIPC) trustee under the Securities Investor Protection Act (SIPA), those priority rules are continuously being challenged by parent company MF Global Holdings’ trustee Louis Freeh. This arguably could have been avoided if CFTC attorneys stood up at a Nov. 1 hearing and did their job of looking out for the industry. But when an attorney for MF Global told the judge there was no shortfall, no one stood up. Maybe CFTC counsel had position limits on the brain.
But one business day after the ruling came out; Chilton stated in a speech he delivered Tuesday to a UN Group in Rome that the Commission should appeal the decision. Chilton wrote, “We should start drafting yet another rule proposal to address any concerns the Court had, drafted in a way that satisfies the objections raised by the court. I am confident we can do so. Any additional proposal should be done on an expedited time frame. We already know what most folks think.”
Chilton may think he knows what people think but most people I talk to think the CFTC failed the industry in the way it mishandled the MF Global debacle, a debacle that is ongoing and approaching its one-year anniversary. And what does Chilton mean by “drafted in a way that satisfies objections?” The question before the court was whether Dodd-Frank mandated spec limits or if the CFTC first must prove there is evidence of excessive speculation before instituting them.
No doubt Chilton had a “focused” audience as the speech is to a UN group. The UN put out one of the nuttiest studies on the subject a year ago where they promoted government intervention into commodities markets similar to the way central banks manipulate interest rates to support monetary policy, in order to “help market participants to better recognize the fundamentals.”
Twice in a year’s time customer segregated funds were violated. Many customers have lost confidence in the markets and the ability of regulators to protect their money. The Chairman of the CFTC recused himself from the MF Global investigation after thoroughly botching it in the first few days and customers still have not been made whole.
“Chairman Gensler, Commissioners Chilton, Sommers, O’Malia and Wetjen — focus.”