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March 21, 2005 at 07:00 PM
WASHINGTON (HedgeWorld.com)–Congress has begun its once-every-five-years reauthorization of the Commodity Futures Trading Commission.
The most recent reauthorization was accompanied by sweeping reform legislation, the Commodity Futures Modernization Act of 2000, and on Wednesday, March 9, a subcommittee of the House of Representatives listened to 14 witnesses give their assessment of the successes or failures of that act.
The consensus emerging from the hearing before the Agriculture Committee’s subcommittee on general farm commodities and risk management was that the CFMA has been in general successful, but, witnesses said, the reform could use some reforming.
The subcommittee heard from three panels.
First Panel: The Exchanges
The first panel included Terrence Duffy, chairman of the Chicago Mercantile Exchange, Charles Carey, chairman of the Chicago Board of Trade, James Newsome, president of the New York Mercantile Exchange, Frederick W. Schoenhut, chairman of the New York Board of Trade, and Satish Nandapurkar, the chief executive of Eurex US.
Mr. Duffy said that the CFMA of 2000 “represents successful landmark legislation that materially and beneficially reformed some of the nation’s most important financial markets.”
CME’s own average daily volume in February 2005 was more than 50% above the same figure a year before, a continuance of the trend in existence since the CFMA, he said.
But he did have suggestions to fine-tune the legislation. He said that the CFTC has been compelled to devote substantial resources to protecting the off-exchange customers of retail futures traders from fraud–its 70 enforcement actions in this area over four years have resulted in the imposition of more than US$240 million in penalties and restitution orders. The need for so much enforcement suggests, he contended, that something is wrong that “cries out for reform.”
Separately, he noted that securities futures products (single-stock futures and narrow-based indexes, which could not lawfully be traded on U.S. exchanges before the passage of this legislation) have remained an unfulfilled promise. In order to jump-start this market, he proposed letting futures exchanges trade the product as a pure futures contract and to let securities exchanges trade it as a pure securities product. Let the relevant exchanges deal solely with their respective regulator, the CFTC or the Securities and Exchange Commission, rather than having to deal with them both in a hybrid regulatory environment.
Mr. Carey of the CBOT likewise praised the CFMA as “a clear success,” but said that there continue to exist some “areas of uncertainty, overlap and the risk of regulatory inconsistency that deserve discussion.”
He had more suggestions than Duffy did, for the regulators as well as for the legislators. For the benefit of regulators, he cautioned that new market entrants “may have less experience in crafting rules that comply with all the provisions of the act, and we hope commission staff will exercise care in reviewing such rules,” and that some incentive programs may encourage payment for order flow. Further, as exchanges and their clearing operations become cross-border, he is concerned that the level of protection for U.S. customers may lapse.
Mr. Carey had harsh words about the Seventh Circuit’s recent Zelener decision , which he said “provides a road map for unscrupulous persons to engage in over-the-counter contracts involving agricultural and other commodities, with no government supervision whatsoever, and entirely free of the anti-fraud jurisdiction of the CFTC.” He urged Congress to restore that jurisdiction.
Mr. Carey, too, spoke of stock futures products. “Unfair and unnecessary margin inequities inhibit the growth of stock futures and their utility as hedging vehicles,” he said.
The three other witnesses in the first panel, though, discouraged the legislative tweaking Messrs. Carey and Duffy have in mind. James Newsome, of Nymex, and until recently himself the chair of the CFTC, warned that the CFMA included a “good number of delicate compromises. Consequently, changes in one area affect and thus could necessitate changes in many other aspects of the regulation.”
Mr. Schoenhut, of Nybot, said that “we believe the CFMA is working as intended,” and “does not need amendment.”
Mr. Nandapurkar, of Eurex US, said that the committee “should ensure that U.S. market participants continue to enjoy the benefits of competition. The faith that the Congress placed in the virtues of competition give years ago has been amply demonstrated to have been deserved. Competition will continue to yield greater efficiencies for consumers and the markets as a whole.”
Second Panel: Self-Regulation
The second group of witnesses consisted of John M. Damgard, president of the Futures Industry Association, Daniel J. Roth, chief executive of the National Futures Association, Micah Green, president of the Bond Market Association, John G. Gaine, president of the Managed Futures Association, and Robert G. Pickel, president of the International Swaps and Derivatives Association.
Mr. Damgard is of the fine-tuning camp. He believes that “the industry and the public have benefited greatly from the enlightened regulatory approach that Congress adopted in the CFMA.” But a reauthorization bill should address four issues: fair competition, self-regulatory organization governance, security futures products and over-the-counter forex transactions.
