The Commodity Futures Trading Commission (CFTC) needs more funding and a larger staff in order to revamp the agency and rules to address "a regulatory system that failed the American people," according to acting Chairman Michael Dunn.
The CFTC must take "pragmatic steps to address serious concerns," including increasing transparency in markets so both the agency and the public have a clear window into the factors driving price discovery. "More transparency in supplies and storage and more transparency into market makeup will help market participants make better decisions," he said. Dunn also called for a careful review of speculative position limits during a speech Thursday at the 34th Annual International Futures Industry Conference in Boca Raton, FL.
Congress also has a role to play. Dunn called for legislation to close loopholes that allow fraudulent trades to occur in off-exchange markets for energy and metals. "These contracts should be on-exchange so we can effectively monitor and police their sale."
Dunn noted pending House and Senate bills that would variously provide the CFTC additional oversight authority over over-the-counter (OTC) markets, eliminating exclusions and exemptions that would essentially move OTC trades onto regulated futures exchanges. Other provisions being considered would mandate clearing of OTC transactions, require CFTC mandated position limits, establish conditions for granting hedge exemptions, require increased record keeping and reporting, and provide additional requirements on foreign boards of trade, index traders, and swap dealers. "These are good steps," he said.
Dunn suggested the need for interagency task forces to develop new models for cooperative regulation, for instance the CFTC and the Securities and Exchange Commission and the Federal Energy Regulatory Commission. Rather than attempting to merge agencies, "the real solution is harmonizing financial regulatory approaches," and that includes collaboration with international regulators.
To further market transparency in the near future the CFTC will be issuing a concept release seeking public comments on how it should consider revising the way it classifies commercial and speculative traders and how it issues exemptions to speculative position limits for hedgers. "Given the high percentage of open interest attributable to noncommercial positions speculative trading in some of our markets, I believe that a careful review speculative positions limits is required," the acting chairman said.
The CFTC needs "an infusion of human and fiscal capital" if it is to sustain its current level of work, according to Dunn. "We also are working with fewer people at a time when the markets we regulate have grown exponentially." In 1992 the CFTC had 592 full-time employees; today it has 490. Recent legislation and the latest administration budget would boost the agency's budget by a total of 41%, but more resources are needed, he said.
Dunn described himself as "a place holder" for Gary Gensler, President Obama's nominee for CFTC chairman. During his confirmation hearings last month Gensler urged Congress to give the agency "more tools" to deal with abuses in the futures markets (see NGI, March 2). Gensler said the CFTC should "bring the whole over-the-counter derivatives [market] into the regulatory regime with centralized clearing and exchanges." As for credit default swaps, which are blamed for the credit crisis, Gensler said they "raise an additional set of unique challenges" (see NGI, Feb. 9).
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