From the February 2014 issue of Futures Magazine • Subscribe!

Who's looking out for the little guy? Apparently not exchange or regulators in 2013

CFTC’s lack of focus

There is the CFTC’s effort to implement position limits — with an estimated cost to the industry of more than $100 million — based on assumptions regarding “over-speculation” not backed by any empirical evidence. Former CFTC commissioner Michael Dunn, who grudgingly 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.”

Yet the cash-strapped agency had a laser focus on limits while MF Global imploded on their watch and then was more than happy to let the Securities Investor Protection Corporation (SIPC) do the heavy lifting in attempting to claw back customer money illegally diverted. Later it engaged in a costly appeal after the rule was rejected in court. 

Then you have the cumbersome reporting requirements developed under Rule 1.35 that state, “…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.”

Participants at the 5th annual conference on Futures and Derivatives at the Chicago-Kent College of Law of the Illinois Institute of Technology were concerned that new rules will force smaller FCMs out of the business, which will leave the retail customers nowhere to go. “We want a diveristy of FCMs,” said CME Group’s Dale Michaels. “Not every [FCM] is going to clear the dairy farmer in Iowa.”

There was a consensus from the event, which catered to futures industry legal and compliance professionals, that the current (outgoing) regulatory regime 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 result of poor enforcement of existing rules and not a failure of having proper rules in place.

The wrap-up panel on hot topics in compliance revealed a troublesome trend of the CFTC demanding more information from 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 provided further guidance despite a looming deadline.

One professional attending the event stated the attitude of the CFTC was simply that these are the rules and they did not particularly care what burdens it would place on the industry. 

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, forcing more business to the larger bank-run FCMs. 

In the end, the victims of the MF Global and PFG debacles are facing another hurdle, and higher costs are falling on those least able to fight back. 

The CFTC leadership is going through wholesale changes and the new regime may be more responsive to industry concerns and pay more attention to the cost/benefit side of regulations. And if exchanges press their advantage, brought on by demutualization and consolidation, new competition invariably will rise. 

Hilary Till (see “Chicago’s futures industry: A story of crisis and opportunity,” page 14) points out that it often has been in periods of extreme difficulty, like the industry is currently going through now, when the seeds of innovation emerge. That pattern can repeat itself and Chicago’s risk management community is a likely place for it to happen. 

Daniel P. Collins contributed to this article.

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