A Free Market Program: From the CFTC's Chair to the ABA's Ears

KEY WEST, Fla. (HedgeWorld.com)–The acting chair of the Commodity Futures Trading Commission gave the keynote address at a Feb. 4 meeting of the American Bar Association’s committee on the regulation of futures. She outlined the principles that guide her discharge of her duties and the tasks that lie ahead, both for the CFTC and for other regulators of, and lawyers for, the derivatives markets.

After the usual caveat that her views don’t necessarily represent those of the CFTC or its staff, Sharon Brown-Hruska said that her own understanding of how regulation can and should contribute to the important market functions of price discovery and risk management results in large measure from her exposure to the work and the passion of Gordon Tullock and James Buchanan, two central figures in the law-and-economics school.

In their spirit, she is wary, for example, of the idea that regulators or legislators ought to impose exchange-style transparency on over-the-counter markets, energy markets in particular. That would be “operationally difficult to implement” and it could “do significant harm to the markets if … done without regard to market structure.” In other words, regulation could dry up liquidity, leaving the remaining illiquid markets more, rather than less, susceptible to manipulation.

Mr. Buchanan won the Nobel Prize in economics in 1986. He and Mr. Tullock together founded the Center for the Study of Public Choice, which now is housed at George Mason University, Fairfax, Va. They taught Ms. Brown-Hruska, as she told the ABA, that the scientific rigor of economics could be brought to bear on questions of law and policy. Further, they have taught her that the positive role of regulators is to instill credibility in the markets while minimizing legal uncertainties.

Regulators shouldn’t seek to affect prices, she said. “The markets will take care of prices as long as we take care of the markets.”

Legal Certainty, Hedge Funds and the Seventh Circuit

With these notions as her foundation, she reviewed some contemporary issues for the assembled lawyers.