Washington Outlook Mixed for Futures

CHICAGO (HedgeWorld.com)–Refco’s problems aside, this has been a pretty good year for the futures industry. Volumes are up, as are profits and bonuses on Wall Street.

Yet despite that success, or perhaps in part because of it, one gets the feeling there is a hint of unease in the glances the industry keeps casting toward Washington. The Commodity Exchange Act is up for reauthorization, and a number of potential issues remain, including more clearly defining the regulatory reaches of the Commodity Futures Trading Commission and the Securities and Exchange Commission.

Also energy markets–in particular, oil–have come under scrutiny by members of Congress. On Tuesday [Nov. 8], executives from five oil companies answered questions from senators and representatives about the record profits the companies earned during a period that saw gasoline prices soar above US$3 per gallon for a time after two hurricanes hit the Gulf Coast.

In response to high gas prices, some members of Congress have discussed tightening position and price limits in oil markets, specifically at the New York Mercantile Exchange; increasing the criminal and civil penalties for market manipulation; giving the CFTC enhanced authority to review price spikes; and requiring more record-keeping by over-the-counter market participants and making those records subject to periodic CFTC review.

Moderating a panel framed as the Washington outlook at this week’s Futures Industry Association Expo in Chicago, FIA President John Damgard said there were a number of “misguided amendments” pending on Capitol Hill, particularly with respect to the energy industry.

Not everyone on panel was happy, either, with the progress thus far on the Commodity Exchange Reauthorization Act. Terrence Duffy, chairman of the Chicago Mercantile Exchange, said he thought the recommendations of the President’s Working Group “fell far short of our hopes for reauthorization.”

Specifically, Mr. Duffy said the CME wants to see provisions allowing for more risk-based portfolio margining, which he said is being done elsewhere in the world but has been stymied in the U.S. except for a couple of pilot programs at the New York Stock Exchange and the Chicago Board Options Exchange, and that there should be as part of the reauthorization certainty surrounding what constitutes narrow-based securities indexes, which have been regulated by the SEC, and broad-based securities indexes, which have fallen under the purview of the CFTC.

The reauthorization, known as S-1566, contains a provision that critics say introduces subjectivity into the process for coming up with a standard definition for broad-based indexes so as to resolve the question of who would regulate futures on debt instruments. The reauthorization act effectively proposes leaving it to the SEC and CFTC to work it out. This is considered a step back from the 2000 Commodity Futures Modernization Act, which clearly outlined which indexes were to be considered broad-based (tracking entire markets) and which were to be considered narrow-based (tracking more thinly traded securities), and allowed the trading of futures on single stocks and narrow-based indexes, although it did not specifically address debt futures.

Mr. Duffy called it “ludicrous” that, nearly six years after the CFMA, a firm definition for narrow- and broad-based indexes was still up in the air. The reauthorization act directs the SEC and CFTC to work out a definition for narrow-based indexes that excludes indexes based on U.S. debt instruments, foreign equities, foreign debt and other U.S. securities. In the past, the idea has been to include in the narrow-based index category indexes of securities that are relatively illiquid, and thus more susceptible to market manipulation.