When the Commodity Exchange Act was written in 1974, Congress did so to ensure that someone with oversight understood the futures and options markets. That’s why the CFTC was created.
EDITOR’S NOTE: The Commodity Futures Trading Commission (CFTC) is the US government agency charged with protecting market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options. Formed by Congress in 1975 to create a better framework for the trading of futures contracts, the CFTC’s mission is to foster open, competitive, and financially sound futures and option markets. Two of the newest CFTC commissioners, Bart Chilton and Jill Sommers, spoke to the Metropolitan Club of Chicago on Oct. 16. Here are excerpts from their speeches.
JILL SOMMERS: During the brief period of time since Bart [Chilton] and I were sworn in as commissioners, the CFTC held a hearing to examine the interrelationship between energy trading on designated contract markets and exempt commercial markets and hosted a meeting of the Global Markets Advisory Committee to learn about the European Union’s implementation of the Markets in Financial Instruments Directive and the new European Code of Conduct for Clearing and Settlement.
We’ve also been involved in a highly publicized case filed by the commission in the US District Court for the Southern District of New York against Amaranth Advisors and its chief natural gas trader, Brian Hunter, alleging violations of the Commodity Exchange Act for attempting to manipulate the natural gas futures market price on the New York Mercantile Exchange (NYMEX).
While there unfortunately is nothing unusual about traders attempting to manipulate energy prices, this case stands out because Amaranth has asked the New York court to stay a parallel administrative proceeding filed by the Federal Energy Regulatory Commission (FERC) alleging manipulation of the NYMEX futures market price under the Energy Policy Act of 2005. While I cannot comment substantively on this pending litigation, the motion raises important issues regarding the exclusive jurisdiction of the CFTC to police the futures markets. The FIA, joined by the Managed Funds Association, NYMEX, the CME Group, and ISDA, recently filed an amicus brief in the case supporting the commission’s exclusive jurisdiction.
BART CHILTON: In 2000, Congress passed the Commodity Futures Modernization Act (CFMA) that made a fundamental change in the way the CFTC works. It is what I call a “regulatory revolution.”
What the CFMA did was move to a form of “principles-based regulation,” which means that we set broad principles for which we expect industry adherence. If industry goes too far, we will tell you, but this principles-based approach allows enormous flexibility. It allows the industry and the CFTC to look around the corner, to be nimble and quick to react - in real time - to changes or potential changes in the marketplace.
Principles-based regulation is in stark contrast to the top down, command-and-control type of regulator that every other agency in the United States government - the SEC, USDA, and every other agency or department - and indeed, around the world, uses.
In real life, what this means is that instead of, for example, a new product taking six to nine months for approval, exchanges can certify new products and they can be up and running the next day. This allows industry to capture the value of new products without long delays. Which, in turn, helps hedgers, speculators, and consumers. And it has helped foster the incredible growth we have seen in the futures industry.
SOMMERS: One issue. . .that is of particular interest to me is portfolio margining of securities and futures positions. The securities industry advocates what is known as a “one pot” approach that would require all positions to be held in a securities account.
I fully support the concept of portfolio margining whenever it can be achieved. It fosters the efficient use of capital, is good for customers, and is good for the economy. But the “one pot” approach raises legal, regulatory, operational, and supervisory issues that would, at the very least, require legislation to amend the Securities Investor Protection Act of 1970 to extend SIPC coverage to futures.
A better approach, I believe, would be the “two pot” approach under which offsets are recognized through a cross-margining agreement at the clearinghouse level between securities held in a securities account and futures held in a futures account. This would eliminate the need for legislation and many, if not all, of the regulatory, operational, and supervisory issues. It would also allow greater capital efficiency by retaining the traditional risk-based calculations for the futures positions that are not yet available for securities positions.
Since our ECM hearing on Sept. 18, CFTC staff has been working hard to prepare a report reviewing specific recommendations from the hearing participants. I think this report will be very helpful for our Acting Chairman, Walt Lukken, as the commission analyzes the regulatory structure created by the CFMA.
In my opinion, the structure created in 2000 was properly vetted and entirely appropriate. Since that time, markets have evolved and grown at a dramatic pace. It is only prudent, therefore, from a regulatory perspective, for us to examine the current framework to see if what made sense then makes sense now, and to ensure a level playing field.
The CFTC does an outstanding job of encouraging market growth and innovation while ensuring the integrity of the marketplace and protecting market users. As a commissioner, I hope to play an important role in promoting strong oversight, fair and flexible regulation, and competition in the marketplace.
“. . .markets have evolved and grown at a dramatic pace. It is only prudent, therefore, from a regulatory perspective, for us to examine the current framework to see if what made sense then [2000] makes sense now, and to ensure a level playing field.” - Jill Sommers, CFTC Commissioner
CHILTON: Your markets work best when they are free of fraud and abuse and manipulation, and we are the federal agency - the cops on the beat, if you will - that has that responsibility. If market users are skittish about using these markets because of concerns about the deck being stacked or anything else, we have a market failure and nobody benefits.
That is why it is so vitally important that we are strong on the enforcement front. I can tell you that we meet each Friday and get a briefing of what is happening in the markets. We are not some “Andy Griffith” operation. We are more like “Elliot Ness” or “James Bond,” or in the case of crooked operations we are shutting down - we are more like the “Terminator.”
We are the 21st century cops on the beat. Every day, since these are really 24-7 worldwide trading markets now, we are mining the internet, e-mails, and instant messages in an effort to gather critical evidence in very high tech, complicated cases - both domestically and internationally.
In fact, at any one time, we are investigating approximately 750 to 1,000 individuals and entities. Some are under suspicion of fraud, some for manipulation, and some for a large variety of other potential violations under the Commodity Exchange Act. That’s more than two for every CFTC employee.
You all remember what we did in Enron? In that case, the commission vigorously went after predatory and unlawful conduct that harmed American consumers - specifically, a pre-arranged buying spree in natural gas in the Henry Hub spot market, which has a direct and adverse effect on the NYMEX futures price - and ultimately settled with Enron for $35 million.
Since that time, the agency has charged a total of 63 companies and individuals for violations of the CEA in the energy sector, and obtained over $300 million in civil monetary penalties in settlements.
If you manipulate these markets, we’re watching, and we’re going to get you.
“If market users are skittish about using these markets because of concerns about the deck being stacked or anything else, we have a market failure and nobody benefits.” - Bart Chilton, CFTC Commissioner
