In order to bring commodities under the same regulatory umbrella as financial securities, Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler said last Wednesday he wants Congress in its financial regulatory reform legislation to install firewalls and block insider trading.
Speaking before the House Committee on Agriculture Subcommittee on General Farm Commodities and Risk Management, Gensler said he wants Congress to impose the “Eddie Murphy rule,” alluding to the actor’s 1983 movie Trading Places, in which the Duke brothers intended to profit from trades in frozen concentrated orange juice futures contracts using an illicitly obtained and not yet public Department of Agriculture orange crop report.
“In real life, using such misappropriated government information actually is not illegal under our statute,” Gensler testified. “To protect our markets, we have recommended what we call the ‘Eddie Murphy’ rule to ban insider trading using nonpublic information misappropriated from a government source.”
As for firewalls, Gensler noted that the House of Representatives included some of the CFTC’s recommendations in its recently passed financial regulatory reform package, noting that the bill would establish similar firewalls for commodity and futures dealers that currently exist for securities dealers.
“Securities regulations require the establishment of firewalls between the research, investment banking and trading arms of broker-dealers,” he said. “Without parallel protection in the futures markets, trading desks could use information developed by research arms before that information is shared with the firm’s clients, raising serious questions about the integrity of the firm’s services to its clients and confidence in the markets. The House bill also includes language authorizing the CFTC to police the markets for disruptive trading practices and to ensure that the CFTC has the ability to enact regulations that it determines are necessary to implement the requirements of the Commodity Exchange Act.”
Gensler noted that the when the House passed its financial regulatory reform bill in December (see NGI, Dec. 14, 2009), CFTC staff had not yet finished drafting legislative language for some of the changes recommended in the harmonization report. As a result, the Commission said it will provide language to the Senate as they consider financial regulatory reform legislation. “Chief among these recommendations are reforms to fiduciary standards for investment advisors and prohibitions on using misappropriated government information to trade in the futures markets,” he said.
The House-passed financial regulatory reform legislation would regulate over-the-counter (OTC) derivatives for the first time. While preserving an exemption for commodity trades involving end-users or commercial traders hedging bona fide commercial risk, the House bill aims to bring transparency to commodity futures and derivatives trading by requiring all nonexempt OTC derivative products transactions to be centrally cleared and traded on regulated exchanges. In late January Gensler said if Congress is determined to grant commercial end-users an exemption from mandatory clearing of OTC derivatives or swaps under financial reform legislation, the end-users still should be required to report their trades (see NGI, Feb. 1).
On Wednesday Gensler noted that any person who offers investment advice to customers should be governed by the same fiduciary standard, regardless of whether the underlying financial instrument is regulated by the Securities and Exchange Commission or the CFTC. “Currently, broker-dealers, investment advisors and commodity trading advisors are all subject to different standards, depending on the particular financial instrument that is offered, even though they perform the same function — to deliver investment advice,” he said. “We have recommended that there be a uniform standard that financial advice should be solely in the interest of the customer, without regard to the advisor’s own financial interests.”
Gensler also reiterated the CFTC’s need for additional resources, noting that the move to an electronic marketplace has transformed what was once a group of regional domestic markets into a global marketplace. He added that what was once a $500 billion business has grown to a $33 trillion industry.
To keep up with the rapidly growing marketplace, he noted that the CFTC’s Budget and Performance Estimate for fiscal year (FY) 2011, for existing statutory authorities, would increase the agency’s funding by $47.2 million to $216 million and would augment agency staff by 95 full-time employees (FTE) to a total of 745. President Obama’s administration earlier this year proposed a major annual budget hike for the Commission (see NGI, Feb. 8).
“The president’s budget proposes additional appropriations for the Commission contingent on the enactment of financial regulatory reform legislation,” Gensler said. “Commission staff estimated that with enactment of H.R. 4173, the Commission would require an additional 238 FTE to carry out its provisions. The budget recommends $45 million, including $27 million to provide for 119 additional FTE in FY 2011 and anticipates funding in FY 2012 for an additional 119 FTE.”
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