The Commodity Futures Trading Commission has been in the news lately, especially as it restarts after the government shutdown.
The Wall Street Journal had an interesting story about the CFTC being undersized and lacking funding to bring charges in certain cases:
The Commodity Futures Trading Commission is so cash-starved that the agency is being forced to delay cases, shelve certain probes and decided not to file charges against two former traders over J.P. Morgan Chase & Co.’s “London whale” trading mess, a top official said.
In an interview, David Meister, who stepped down this week as the CFTC’s enforcement chief, said the agency is “absolutely undersized” for the sprawling futures and options markets it must police.
“We will do everything we can…but we have limited staff and limited resources,” Mr. Meister said. “Ultimately, it comes down to the math.”
The 50-year-old former prosecutor’s warning came Wednesday, his last day at the CFTC after a near-three-year enforcement stint. Since he joined the CFTC in January 2011, the once-obscure agency has reinvented itself to become an apparent force to be reckoned with.
During Mr. Meister’s watch, the CFTC nearly doubled its enforcement actions and tripled its sanctions, compared with the previous three-year period. This year alone, it has filed a number of high-profile cases, including civil actions against Jon S. Corzine, former chief executive of MF Global Holdings Ltd., and CME Group Inc., the world’s largest futures-exchange operator. Both deny wrongdoing and are fighting the cases.
The call for more funding came after the New York Times had a story Oct. 30 about the agency’s move to tighten rules and enforce new ones:
In October 2011, as the futures broker MF Global teetered on the brink of collapse, it dipped into client accounts in an effort to avert bankruptcy.
But the action failed to save the broker, and its implosion left thousands of clients short a total of $1.6 billion.
Two years after MF Global’s bankruptcy, regulators have sought to restore confidence in the industry, tightening rules that force brokerage firms to better safeguard client money.
The Commodity Futures Trading Commission voted 3 to 1 on Wednesday to finish rules proposed a year ago to protect customers, including measures to close loopholes, reinforce internal risk controls and force brokers to provide more information to clients.
“This new information is critical in today’s world of high-frequency trading,” said Gary S. Gensler, chairman of the commission. “Thus, with these reforms, the commission will get additional tools to oversee the markets’ largest day traders and high-frequency traders.”
The new rules are part of a wider shift in policy to better regulate the futures industry after years of lighter-touch policy.
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Brokers will be subject to tougher auditing standards and will be required to provide daily reports that include details of each separate client account. Those reports will be filed electronically. Mr. Gensler said that step was “the right place to be in the 21st century.”
The commission also voted to close a loophole that allowed brokerage firms to use money from client accounts that traded overseas under an exemption called the “alternative calculation.”
The most debated of the new rules will change how brokers keep collateral and make margin calls to ensure limits on defaults. Brokers, who are required to provide a financial buffer in client accounts, will also be forced to make clients pay several days earlier than they do now.
The regulations come after the agency had to furlough workers during the government shutdown, disrupting negotiations with firms as well as the ability to take enforcement action. Bloomberg had this story Oct. 24:
The Commodity Futures Trading Commission, the main U.S. derivatives regulator that pried $1.7 billion in fines and other penalties from the firms it regulates during the past year, is furloughing workers because it doesn’t have enough money to pay them.
“This is the budget reality we face,” CFTC Chairman Gary Gensler told employees today in an e-mail, which announced they would be asked not to work on as many as 14 days in the fiscal year that began this month. “I understand this is extremely tough news for your families and you. I want to thank each and every one of you for your dedication to this agency and your hard work, which is of great benefit to the American public.”
The CFTC’s investigation of manipulation of the London InterBank Offered Rate, which sets rates on products such as mortgages and interest-rate derivatives, led to fines this year including $700 million from UBS AG. The furloughs coincide with the Washington-based regulator’s mandate, stemming from the 2010 Dodd-Frank Act, to start overseeing the $633 trillion over-the-counter derivatives market.
“The timing is unfortunate given the need to implement Dodd-Frank,” said Robert Webb, a finance professor at the University of Virginia. The 16-day partial U.S. government shutdown this month also disrupted the agency, and further time off will only make the CFTC’s job harder, he said.
It’s going to be hard for the agency to enforce new rules if it doesn’t have money. This is another unforeseen aftermath of new financial regulations, granting new oversight but not giving agencies the ability to follow through.
