(February 2, 2012) — Commodity Futures Trading Commission (CFTC) Commissioner Scott D. O’Malia has said he is puzzled by the CFTC’s attempts to regain public confidence through new regulation while reviewing the adequacy of its oversight in response to the collapse of MF Global.
At the Center on Financial Services Law of New York Law School, O’Malia asserted that because MF Global did not result from a lack of regulation, he is particularly puzzled because the Commission’s most recent rulemakings don’t even address MF Global.
He continued: “In December of last year, the Commission approved a final rulemaking on the investment of futures customer funds. In that rulemaking, the Commission restricted the universe of permitted investments. Whereas I was in favor of these restrictions given the volatile economic environment, I’m not aware of any evidence that the MF Global shortfall was related to investments of customer funds. Additionally, earlier this year, the Commission approved a final rulemaking on the protection of cleared swaps customer contracts and collateral.14 In that rulemaking, the Commission enhanced protection of customer funds in the event of a double default. However, this protection only extends to cleared swaps customers. Futures customers – such as the ranchers and farmers bearing the brunt of the MF Global shortfall – do not benefit from such protection.”
Malia concluded that in light of MF Global, the Commission could no longer afford to devote the majority of its resources to swaps regulation, thus ignoring the rest of its mission. “The Commission needs to turn back to its fundamental objectives since its creation in 1975 – namely, to ensure the integrity of futures markets and to protect futures customers,” he said, adding that the Commission must continue focusing on the broken window represented by MF Global. “However, it also needs to develop a thoughtful, coherent approach towards preventing, detecting, and deterring other broken windows. Empowering futures customers with information about their intermediaries, and enabling futures customers to exercise market discipline are central to such an approach.”
Furthermore, O’Malia highlighted his intention to create a new subcommittee to specifically focus on defining and identifying high-frequency trading within the futures, swaps and options markets.
Meanwhile, CFTC Chairman Gary Gensler has said that the agency has ordered the review of MF Global’s collapse after questions emerged about whether the CFTC could have helped to do more to prevent the firm’s fall three months ago. Gensler has directed the agency’s Division of Swap Dealer and Intermediary Oversight to pinpoint ways to heighten agency regulations for how it oversees and what it requires from self-regulatory organizations and futures commission merchants such as MF Global,” an official told Reuters.
But according to O’Malia, the Commission can’t just focus on the one broken window represented by MF Global in order to restore public confidence. “We need to identify delinquencies in our neighborhood, and systematically address such delinquencies. We need to deter violations of the segregation requirement, and to ensure that futures customers feel like they can safely and confidently transact in our markets,” he said.