January 18, 2021

Lessons of MF Global: Stop Starving the Regulators, Especially the CFTC

Posted on 19. Apr, 2012 by Stephan Helgesen in Economy, Politics

Accountability through the “Sustainable Funding Act”

Anyone who thinks we’ve shut the barn door on misdeeds in the financial, commodities and futures markets just because of the well-intentioned Dodd-Frank Wall Street Reform and Consumer Protection Act (that became law on July 21, 2010) apparently has never heard of the latest debacle, MF Global.  The clarion call that arose out of the 2008 financial meltdown is still pealing.

A majority in Congress – regrettably, not all of Congress – quickly saw from the detritus of our broken economy the need for real oversight and meaningful regulation, but the non-majority in Congress who are so obviously beholden to Wall Street have been doing everything they can since to keep the barn door open.  And open it remains, as MF Global has proved.

Genuine futures market accountability is still pending, and the ability of the U.S. Commodity Futures Trading Commission (CFTC) to pursue the four critical areas of its charter is still only a prospect until Congress gives the Agency the permanent funding needed to hire the personnel and develop the resources it requires.

If those personnel and resources had been in place by as late as just last September, the MF Global collapse might well have been prevented, and certainly would have been mitigated.

And the bulwarks would already be up to defend customers and investors against the next similar transgression.  As the CFTC’s extremely able Chairman, Gary Gensler, has made clear, more thorough registrations and product reviews, better examinations, more probing surveillance employing better real-time data, and more rigorous enforcement are still needed.

Fortunately, there are ready answers.  One is called the “Sustainable Funding Act” (HR 3665) which has been introduced by Reps. Rosa DeLauro (D-CT), Leonard Boswell (D-IA) and Peter Welch (D-ME) to provide the CFTC with a permanent funding source, and the other is Reps. DeLauro’s and Welch’s “Anti-Excessive Speculation Act” (HR 3006) to amend the Commodity Exchange Act to prevent excessive speculation in commodity markets in general and on energy contracts in particular.

Currently, the CFTC relies on an annual appropriation to keep its lights on and guns loaded, yet the FY2012 federal budget saw a cut of 33% to the Commission’s operating budget and further cuts are expected for next year.

This is all part of the House Republicans’ effort to accomplish in the budget process what they are unable to achieve on the combined floor of the House and Senate, namely cut every regulatory agency budget to the bare bones so that actual enforcement is emasculated.

In other words, if you don’t like a law, then make sure it’s not enforced by disarming law enforcement.

The Sustainable Funding Act, modeled very simply after the SEC’s own permanent funding mechanism, would collect transaction fees from all futures market participants.

The Act is especially sensitive to the fact that not all futures transactions are created equal, and thus it provides for a thoughtful range of fees covering the entire range of commodity transactions.

Up until now, the CFTC has been something of a blunt enforcement instrument.  It has not been able to develop a meaningful distinction between futures trades that involve real goods and financial products integral to our large dynamic economy versus purely speculative commodity trades and trades in the ‘swaps’ marketplace which have no underlying rationale except speculation.  Dodd-Frank sought to address this persistent schizophrenia, and in response, the CFTC has now identified 32 areas where new rules will be necessary in order to implement the Act.

The most important by far are those related to inherently risky, speculation-based financial instruments and to speculation in energy-related commodities (oil, natural gas and gasoline).

The former are what drove MF Global (and earlier many other financial service firms) out of business and our economy into distress – the latter are responsible for as much as a third of the exorbitant and unjustified price of oil.

Futures are a critical tool for a sophisticated economy, which means few regulatory agencies are more important than the CFTC.  Whether you’re a farmer needing to hedge your crop and livestock prices, a small or medium sized manufacturer needing to hedge the prices of some of your raw materials, or an airline CEO trying to shelter your flying public from the vagaries of oil price swings, the CFTC offers ‘solutions’ not available anywhere else.

But pretty obviously if instead you’re a financier who wants to make big risky bets on the price swings of volatile financial instruments or indirectly drive up the price of gasoline, then you want the CFTC to remain underfunded and unfocused.

For then you can continue your strategies of using the credit of American taxpayers to underwrite your risks in gaming the system, and you can lay the consequences of your gasoline price manipulation off on the backs of the driving public.

Simply put, you must both keep the Commission from enforcing its new Dodd-Frank promulgated rules and block new legislation like Reps. DeLauro’s and Welch’s energy speculation bill.

There is nothing that more destabilizes markets and economies here at home and around the globe than the unchecked combination of ‘spec trading’ in swaps and commodities.

Yet today, the CFTC, with a budget that has left it hitting only about half its performance targets, is trying to regulate both a $300 trillion domestic swaps market – which is nearly eight times the size of the entire futures market – and a commodities market in which speculators, rather than producers, wholesalers and end users, control 85% of the crude oil futures market and 70% of the wheat contracts.

The risks from inadequately funding the CFTC are apparent for all to see, as power without the means to enforce it is actually worse than no power at all.

Unenforced power, even more than pure laissez faire regulatory constructs, says to ‘bad guys’ and ‘good guys’ alike that the nation really doesn’t care about misdeeds.  Repeated analysis has shown that such perceptions by ‘good guys’ very quickly turns them into ‘bad guys’ as well.

The CFTC will finally have the tools it needs when the Sustainable Funding Act and the Anti-Excessive Speculation Act are enacted.  And thank heaven for the likes of Reps. Boswell, DeLauro and Welch, who have never shirked from trying to make Dodd-Frank into the meaningful regulatory response that the Obama administration and the majorities in Congress intended.

Now, let’s just pass these bloody bills!  Let’s have no more using the federal budget process to thwart the intentions of the people, and no more ‘hiding the pea’ when it comes to masking the effects of regulatory non-enforcement.

This article was submitted by Leo Hindery Jr. who is chair of the US Economy/Smart Globalization Initiative at the New America Foundation, co-chair (with USW President Leo Gerard) of The Task Force on Jobs Creation, founder of Jobs First 2012, and a member of the Council on Foreign Relations.  He is the former CEO of AT&T Broadband and its predecessors, Tele-Communications, Inc. (TCI) and Liberty Media, and is currently an investor in media companies.


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