One-day seminars geared towards lawyers and compliance officers in the Futures industry tend to run on the dry side and can lead to depression for the folks forced to sit through the often tedious regulatory material but the material itself, while perhaps leading to drowsiness, is usually not the cause of depression.
That is no longer the case as example after example of new and cumbersome rules adding costs and work hours as well as some potential conflicts for legal and compliance officers of registered entities in the futures world was described in detail at a recent event in Chicago.
On Friday Oct. 25 the Chicago-Kent College of Law of the Illinois Institute of Technology put on its 5th annual Conference on Futures and Derivatives. (Chicago-Kent Table of Contents).
And while the material was not boring but rather interesting and informative, one walked away from it a bit depressed as it is clear new rules from the Commodity Futures Trading Commission (CFTC) that have and will soon go into effect will have a negative impact on the business. (Speaker Biographies)
What is clearly on display is a regulatory regime that isn’t in touch with the industry, isn’t particularly concerned with knowing the impact of its rules and is incapable of looking inward to see that many of the recent problems were the results of poor enforcement of existing rules and not a failure of having proper rules in place.
The odd thing is that a regulatory overhaul that began as a way to rein in the lawless world of over-the-counter trading and apply futures industry style regulation will, in the end, arguably have a greater impact on the already regulated futures world than the OTC space that created the credit crisis which peaked in 2008 and led to the regulatory overhaul in the first place.
What happened in the meantime were failures in enforcement leading to the twin debacles of MF Global and Peregrine Financial Group (PFG) and the lobbying power of the major investment banks (that were responsible for creating and marketing a lot of the derivatives products that created problems) softening the impact of Dodd-Frank on them and leaving less powerful players with a greater regulatory burden.
As noted here before, based on the responses of other industry veterans the current CFTC shows very little concern over the cost impact of the policies and rules they are initiating.
One speaker paraphrasing the CFTC’s response to the industry as promptly noting their concerns and just as quickly dismissing them and moving on with their agenda.
The wrap-up panel on hot topics in compliance revealed a troublesome trend of the CFTC demanding more information from Futures Commission Merchants (FCMs) without a thought to its impact on those firms. According to Mary Beth Rooney of Citigroup Global Markets, FCMs are expected to have a specific policy and procedure for every new rule. She noted that industry participants were unclear on the extent and detail needed of these policies and procedures yet the CFTC has not provide further guidance despite a looming deadline.
What is unclear with all the additional rules are the specific benefits they are expected to produce.
In talking to participants following the conference, everyone seemed to be concerned that new rules will force smaller FCMs out of the business, which will leave the retail customers they cater to, nowhere to go. “We want a diversity of FCMs,” said CME Group’s Dale Michaels. “Not every [FCM] is going to clear the dairy farmer in Iowa. Not everyone is going to take that business.”
So a regulatory overhaul made necessary to a great extent by the creation and marketing of dubious investment products by large investment banks will end up causing more consolidation and eliminating smaller players forcing more business to the larger bank run FCMs.
It seems the CFTC is so focused on completing the rules mandated to it as part of Dodd-Frank, they can’t see that what is happening is that the rules are adding to the problems they were supposed to be addressing —Too big to fail.
Note: The Conference was a great event and we will be sharing some of the material provided and invite attendees to share their thought on the event.