CFTC’s priorities wrong given budget constraints

January 17, 2014 09:41 PM
Blog first appeared in DanCollinsReport on Nov. 1, 2013

So the Commodity Futures Trading Commission (CFTC) is too broke to do its job. Outgoing CFTC Director of Enforcement David Meister told as much to the Wall Street Journal, even going so far as to suggest the agency is not going through with key investigations due to budget constraints. And other media outlets, particularly those that lean left,  are picking up on this claiming it is part of a grand scheme.

There are a lot of folks in the Futures industry who would have liked the commission to have declared bankruptcy a year or so ago before writing rules likely to put their businesses on the edge of solvency.

While being critical of the CFTC over the last few years I have acknowledged that they have been given a much greater mandate without a great increase in its budget to accomplish it. But the probability the agency would face budgetary threats was out there since before the 2010 election (when its results became likely) and given this fact it is appropriate to question many of the priorities the CFTC has chosen to pursue.

Recently the CFTC decided, belatedly, to drop its appeal of its position limit rule that was struck down by a Federal court. Not only was the decision to appeal this ruling an odd one given its resources but the rule itself arguably was a giant waste of time and resources. The position limit debate was a political one from the beginning with the current commission leadership dismissing the commission’s own research to satisfy politicians on the left who wanted to blame speculators for the increase in commodity prices.

Former commissioner Michael Dunn, who begrudgingly cast the critical vote moving the rule forward , 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.” And Dunn consistently pointed out that position limits were not a critical part of regulatory reforms needed in response to the economic meltdown that the agency was charged with addressing in the aftermath of the credit crisis.  At best it was of secondary concern but was pursued with much vigor despite the mandate for writing Dodd-Frank rules and a glaring example with the MF Global debacle of what happens when an agency takes its eye off the ball.

Former MF Global customers were harmed due to the CFTC not doing its job well and are now being punished again by the agency.

More recently the agency has approved rules that will put undue burden on the industry as well as its staff. Rule 1.35 due to go into effect Dec. 21 states, “…FCMs, certain IBs and RFEDs are required to keep a record of (and therefore tape record) all oral communications provided or received concerning quotes, solicitations, bids, offers, instructions, trading and prices that lead to the execution of a transaction in a commodity interest and related cash or forward transaction, whether communicated by telephone, voicemail, mobile device, or other digital or electronic media for a period of one year.” I guess that means someone will need to catalogue and listen to all those tapes. And even if from an agency perspective, the onus is on the industry to record and catalogue these calls and they will only need to demand those records if there is an incident, how can you cry poor when putting such a burden on the industry you are charged with regulating. If you can write such an unreasonable capricious rule the concept of efficiency or cost analysis is just not on your agenda.

In the aforementioned position limit rule, the fact that the cost analysis came back north of $100 million, making it a major rule, did not seem to phase Chairman Gensler even as he struggled with citing concrete reasons for it. At the meeting when the rule was passed, Gensler said, “this rule is another tool to protect price discovery and promote fair and open and competitive markets, it helps protect against parties having excessive market powers… .” There was more regarding large position reporting, information the Commission already receives, but $100 million seems like a large burden for just another tool. The cost estimate would seem to require the Commission to make a stronger case for the necessity of this rule.

The CFTC has also recently settled many enforcement actions going back several years. One case cites violations occurring in 2008-09. According to a source at the National Futures Association, segregated fund balances are check daily. This makes it hard to understand why the CFTC would just be getting around to violations that happened five years ago. That many of these actions cite very old violations and are related to segregated funds of futures commission merchants raises questions. Why did it take the CFTC so long to pursue these cases? And were they cherry picked from the past to help justify its reinterpretation of its controversial and much maligned residual interest rule. Either way, it doesn’t seem to be a real productive use of limited resources.

About the Author

Editor-in-Chief of Modern Trader, Daniel Collins is a 25-year veteran of the futures industry having worked on the trading floors of both the Chicago Board of Trade and Chicago Mercantile Exchange.