The CFTC Needs to F Off
Often when financers hear of the term “democratic legitimacy’ they’ll either go running for the door as if the FBI HRT team is try to catch for crimes against humanity, or simply shake their heads. When it comes to the commodities houses and the CFTC, the Commodities Futures Trading Commission, there is a legitimacy problem.
Historically, legitimacy stemmed from the regulator have tacit agreement from the regulated, and thus their support their latter giving information, help, and often advice, to make the regulator’s job easier. Legitimacy, at the likes of the Securities Exchange Commission, originally setup by FDR, existed since investment and commercial banks understood the role the SEC played – to offset the one-time monopoly by J.P. Morgan, to reduce insider trading, to look into other mischievous uses of bank trades and the stock market made by third-parties on Wall Street. So, there was obviously a mandate that stakeholders and the overseer had, in addition to mutual respect and understanding of the parameters and limits which the two could not overstep.
Step forward to the CFTC, setup in the 1970s in order to regulate everything from internet-rate futures to corn futures, and you have an orphaned child of the SEC with no home, no future, constantly trying to prove itself mature enough to remain independent and an important force in finance.
Lately, however, the CFTC has gone too far though. It’s breached its mandate, which had been strong – where many members of the CFTC and the CBOT and CME Board of Executives worked together to uncover fraud, to exchange information despite being rivals, and to mediate over larger disputes, and roll out new, very innovative products (like Eurodollar Futures for example, see Richard Sandor’s book, Good Derivatives: A Story of Financial and Environmental Innovation), this has all but collapsed.
For instance, the CME and CBOT are now one. Self-regulation, which was not possible sine the two exchanges competed directly for a limited pool of client and customers, and could have easily undercut each other by introducing a number of new products that may have caused unintended market volatility, indirectly hurting the other exchange, without being tested, was one difficulty. In addition, the CFTC has expanded its powers over to the commodities and brokers too.
One key example to understanding this new CFTC is MF Global; a fine example of CTFC mismanagement, was totally ignored for years. Now it is gone – only now is the CFTC backstopping and creating rules to stop another MF Global crash in place despite the investment house was a uniquely large commodities dealer on Wall Street.
In addition, the CFTC has created rules that are literally running an industry where the majority of brokers are actually mid-tier, mid-cap brokers, out of business, and unduly forcing them to pay and hold more risk with no additional reward. I am talking of course the new rule where, to protect customer funds, customers must post variation margin in cash. Futures brokers and clearing houses now need to have their own fund to cover all deficits customers might incur due to variation margin (changes in prices require new margin requirements posted before the next trading day).
How this helps? No idea. Is the CFTC doing this without any of the support of the industry it is regulating? Yes it is. Is this wrong? You bet.
It’s wrong for a regulator to do something totally uncalled for, and I mean entirely uncalled for, if the regulated have no recourse but to accept this change -- except by lobbying Congress to stop the CFTC from actually following through. This leads to Congress having more to deal with, especially since it was never supposed to Guard the Guardian of the Guardians of the commodities industry (remember, the CBOT is an exchange and does strictly regulate its members already, so we are talking about multiple layers of self-regulation before we get to the CFTC and Congress) in this case. Rather, its job was to simply appoint a new chairman – and in this Congress is uniquely unqualified to stop a regulator running rampant from stopping, thinking, and re-addressing its mandate; which at present is in tatters.
