Did CFTC cherry pick actions to justify rule?

Blog first appeared in DanCollinsReport on Nov. 7, 2013

There has been some interesting activity on the regulatory front this past year particularly as it involved enforcement actions,  while the Commodity Futures Trading Commission (CFTC) has battled the industry over its reinterpretation of the residual interest rule.

The CFTC has filed many enforcement actions against futures commission merchants (FCMs) this past year involving technical violations of customer segregation rules. You would think that FCMs would be much more careful in how it handles customer segregated funds following the twin debacles of MF Global and Peregrine Financial Group. And for the most part they have been as some of these cases cite violations that preceded both MF Global and PFG.

An industry regulator pointed out to me that in nearly all these cases, where some pretty hefty fines were levied, there were never an issue of an FCM being under segregated, just some technical violation of how they handled moving these funds.

One case cited was from 2008-09. How does the CFTC take so much time to adjudicate a relatively simple issue? CFTC Chairman Gary Gensler indicated that CFTC has worked diligently on these cases and file actions when they are ready. But just prior to this, in addressing the Futures Industry Association, he  said that the agency has had to hold back on certain investigations due to budgetary issues and that the agency would in fact be forced to furlough some employees before the end of the year. In this atmosphere, I wonder why you are spending time on five-year old violations and refighting the battle over position limit. Seems that there is an issue with priorities.

When the CFTC takes five years to settle an enforcement action, it brings up the issue of just how efficient the CFTC is in its investigations.

This case was particularly ironic because it involved Vision Financial Markets. I had just questioned why the CFTC had never taken action against Vision despite a pretty long history of National Futures Association violations. The NFA had just cited Vision yet the CFTC case had nothing to do with charges involving Vision’s association with Yu-Dee Chang, who was charged with allegedly misappropriating $2.1 million in customer funds.

But the question is, why would the CFTC, with all of its staffing and budgetary woes be concentrating on violations from several years ago? Well, that brings us back to the battle over the residual interest rule.

Somehow general business media outlets has tied this rule change into an answer to MF Global. As we noted here, that doesn’t make sense but making sense is not necessarily a requirement of regulations (see Rule 1.35).

CME Group and the futures industry in general have held that prior to MF Global, the sanctity of segregated funds had never been violated. It seem that the CFTC has built up a pretty large back log of cases involving some violation regarding the handling of segregated fines. Perhaps they are arguing that MF Global may not have been so unique and if any of these FCMs faced insolvency while these issues were going on there may have been another disaster. And who knows perhaps they have a point. But of course these firms where not under segregated by hundreds of millions and arguably did not have the mountain of red flags that MF Global had and that the CFTC knew about like being negative cash reserves a few months earlier and even lobbying the CFTC to be able to utilize cash from secured accounts. It had also fought and lost a battle regarding margin with another regulator so the CFTC should have been on very intimate terms with MF Global.

It appears that just as the CFTC is crying poor, they have completed some rules of dubious value and have also gone back in history to investigate and sanction firms in what appears to be an attempt to justify an unpopular rule. This does not seem to be an efficient use of limited resources.

About the Author
Daniel P. Collins

Editor-in-Chief of Futures Magazine, 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. Dan joined Futures in 2001 and in 2005 he was promoted to Managing Editor, responsible for overseeing all the content that went into Futures and futuresmag.com. Dan’s incisive reporting and no-holds barred commentary places him among the most recognized national media figures covering futures, derivative trading and alternative investments.

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