Neal L. Wolkoff
Personal opinions and information on listed and OTC derivatives and securities from an independent consultant (Wolkoff Consulting Services LLC). Former C Level Executive at 3 exchanges: Chairman and CEO of the American Stock Exchange; Chief Operating Officer at the NYMEX; and CEO at ELX Futures.
Friday, May 17, 2013
CFTC Shows Anticompetitive Behavior With Swap Margin Rules
Another lawsuit may be headed the CFTC’s way over the implementation of Dodd-Frank rules, and the terror of administrative agencies, Eugene Scalia, may be filing it on behalf of Bloomberg. Mr. Scalia, a partner at Gibson Dunn, prevailed on behalf of ISDA in its suit challenging the CFTC’s imposition of position limit rules. He also beat back an SEC rule-making -- but I am not commenting on that; I’m just pointing out his success with the financial regulators.
This time, Scalia is representing Bloomberg L.P., which intends to launch a SEF (an exchange designed for the execution of swaps trades), but is objecting to the CFTC’s rules that would require interest rate swaps to have a margin requirement covering a possible price move over a five-day period.
Interest rate swap futures, and futures in general, do not have any CFTC margin mandate; instead, they have margins set by the exchanges, usually to cover a possible one-day price move. The additional collateral requirements for swaps would clearly cost investors more than maintaining a comparable position in interest rate futures.
Considering all the effort and fuss made by the CFTC and Congress to make sure that swaps are an “open access” market, unlike the vertically integrated trading and clearing operations of the major futures exchanges, this proposal would certainly drive business to the futures exchanges under a “closed access” model and hurt the new entrants to swaps executions that hope to compete.
And, in the case of interest rate swaps, the margin requirements for SEF-traded positions compared to exchange-traded positions does not make sense. Margins are put in place to protect the clearinghouse and its members from the default of another clearing member. Margin requirements are intended as a buffer to protect any clearing member, and thus the clearinghouse that guaranties that clearing member, from having to meet a customer’s loss with its own funds. The thought is that a futures contract can be liquidated immediately should the need arise. Of course, some futures contracts may be too illiquid to provide for quick liquidation of a failed position and should require more than a one-day margin coverage.
Interest rate swaps, on the other hand, are very liquid, and their economic risk can always be hedged with euro-dollar futures contracts should liquidity unexpectedly dry up. The risk, in other words, is less with an interest rate swap than with a thinly traded futures contract, yet the CFTC allows the futures contract to be margined at a far lesser level than the highly liquid swap.
The CFTC has, at best, a small body of direct experience in setting margin requirements, and it has rarely if ever intervened in an exchange’s margin decision. The CFTC’s blanket rule on swaps margins takes away the decision on proper margin levels from the clearinghouses, which really do have the expertise to evaluate risk and determine appropriate margin levels.
Bloomberg is looking to compete in the interest rate swaps space that Dodd-Frank envisioned opening to robust market competition. The CFTC’s one-size-fits-all margin rules for the swaps markets are indeed arbitrary, and show the agency pulling its punches when it comes to seriously laying the foundation to open the largest segment of the over-the-counter derivatives markets to competitive forces.
Saturday, March 2, 2013
DTCC vs. CME: A Battle Between Competition and Regulation?
Two financial industry heavyweights -- the CME Group and the
Depository Trust & Clearing Corp. -- are in a war over the seemingly
mundane topic of derivatives data storage. While the subject matter sounds
unremarkable, the fight shows the difficulty the CFTC faces in bringing
competition to the swaps markets when a less competitive model from the listed
futures world offers a better regulatory tool. The collision between the
Dodd-Frank model of “open access” swaps markets and “closed access” futures
markets presents a stark choice for regulators: Enhance market competition or
regulate the derivatives markets in the best way possible.
Although Title VII of Dodd-Frank specifically directs that the
trading and clearing of swaps be done in an “open access,” or fully competitive
model, Congress and the CFTC have also chosen time and again to retain a
“closed access” model for listed futures, and they have done so with a complete
understanding of the limits their choices place on competition. Dodd-Frank did
not specifically extend the “open access” provisions to Swaps Data Repository
(SDR) services, and it did not condition or limit a “closed access” market
participant from using its futures-related assets to build a successful “open
access” market to trade or clear swaps. As such, CME is assertively seeking to
take advantage of the benefits its traditional marketplace can bring to its
success in the swaps markets.
DTCC characterizes that assertiveness as impermissible anticompetitive
behavior, in effect imprinting the “closed” practices from the futures world
onto the new “open access” market structure for swaps. DTCC, in its letter to
the CFTC opposing the CME’s proposed Rule 1001 -- which ties the choice of
using CME’s Swaps Data Repository to the decision to use CME’s clearinghouse
for a swaps trade -- dramatically describes its position as protecting “the
integrity of the Dodd-Frank Wall Street Reform and Consumer Protection Act’s
(‘Dodd-Frank Act’) primary objectives.”
The dispute over data storage raises a number of questions about
whether non-competitive practices long associated with the futures industry can
also become a feature of the OTC derivatives space as well. The answer seems to
be yes, as traditional restrictions on anti-competitive business practices meet
a complex new market structure. Given a wide-ranging statutory scheme such as
Title VII of Dodd-Frank, which is enforced by a fully empowered regulator --
the CFTC -- the regulator will decide competition issues in light of how they
impact the regulation of the markets and the safety of the investing public.
Competition concerns will not stand on their own in a black-and-white
determination of whether a new practice will be allowed in the absence of a
statutory mandate.
In the interest rate space, CME will likely clear the large
majority of swaps due to the benefits its customers will receive from margining
their swaps alongside CME’s pool of listed futures. Language in the proposed
rule, which requires approval by the CFTC, gives a customer discretion to ask
the CME to forward the same proprietary swap information to another SDR; but
the rule is silent about whether a customer that requests its data be moved
will incur extra costs in doing so, and thus be deterred from asking.
In the murky waters around competition in the derivatives space,
the CFTC faces two questions in deciding on Rule 1001: (1) Can the CFTC better
regulate the markets where most data -- at least for interest rate futures and
swaps -- is retained by a single entity, in this case the CME? And (2), can
CME’s cost structure be designed to protect users of its clearing services from
being disadvantaged by using the data sharing arrangement called for by Rule
1001?
Competition among SDRs is subordinated in Dodd-Frank to regulatory
interests. In the case of SDR regulation, Dodd-Frank empowers the CFTC to
fashion rules as it sees fit to meet its regulatory burden. The statute even
empowers the Commission to force any or all SDRs to report their data into a
centralized SDR, should that help it better regulate the markets (7 USC §24a(a)(c)(4)(a)).
It is almost inconceivable that the Commission would not be better off in
fulfilling its regulatory duties with a more concentrated deposit of swaps data
than a more dispersed one, especially given the weak customer concerns in
maintaining robust competition in data storage.
Unfortunately for DTCC’s position, the anti-competitive issues that
it raises are not particularly strong in the SDR context. DTCC’s argument over
data storage is a fight between competitors and their allies over issues that
have little, if any, bearing on the well-being of customers in the derivatives
markets. Derivative customers have no commercial interest in where their data
is stored for review by the CFTC, other than how much storage will cost at any
particular SDR. In contrast, customers have strong interests in choosing one
SEF over another, or one DCO over another, because execution and clearing
services are integral components of what makes a trade successful or not.
As to the issue of cost -- which is the only customer interest at
stake in this decision -- the CFTC could easily mitigate such concerns in order
to obtain a better regulatory result by conditioning Rule 1001 on the CME
waiving any fee it charges for SDR services, including transfer of data, to a
customer requesting a transfer. (To glimpse the type of power that regulators
have in controlling fees to maintain a “fair and orderly” market, consider the
SEC’s imposition of a fee cap of 30¢ on exchange fees in securities markets.)
DTCC has direct experience from its recent past in a conflict
between competitive concerns and regulatory interests. In the situation in
mind, DTCC (through its subsidiary FICC) received SEC approval to partner
exclusively with a single exchange to offer collateral reductions for that
exchange’s futures contracts when offset by U.S. Treasury Securities held in
DTCC’s utility clearing business. The SEC allowed DTCC to move forward because
it saw a regulatory benefit, notwithstanding the anticompetitive issues. (ELX,
of which I was then CEO, vigorously opposed DTCC’s proposed rules in that
venture). Regulatory interests -- even when not compelling -- can overcome
competitive concerns where markets are subject to a regulatory agency’s
oversight under broad statutory powers, as is the case with swaps regulation.
The CFTC, like the SEC,has the same opportunity to evaluate this case on the
merits of what is best for the market -- more aggregation of data in fewer
SDRs, or more fragmented availability of data in more SDRs.
In its role as the market regulator, the CFTC’s main focus will be
on whether Rule 1001 will enhance its ability to act upon trade and position
information for the benefit of the public. DTCC’s anti-competitive concerns are
indeed substantive, but they will not be evaluated in a vacuum. Rather, they
will be decided, and likely disposed of, in light of regulatory interests, the
relative lack of customer harm, as well as moving the pace of Dodd-Frank
regulation forward in a sensible and effective way.
Tuesday, November 20, 2012
There’s Still Work to Be Done to Rebuild Trust in the Futures Market
The CFTC’s recently
proposed rules for the protection of segregated customer funds in derivatives accounts
would have made it less likely that the MF Global collapse would have proceeded
undetected. But the fact that none of the senior officers of MF Global has been
prosecuted is still of concern.
By Neal L. Wolkoff
We recently marked the first anniversary of the sudden
failure of MF Global, which was led by former New Jersey senator and governor
Jon Corzine. Just months thereafter, Peregrine Financial Group, a non-clearing
FCM, failed when its CEO admitted to a long-running scheme to steal customer
funds to benefit his lifestyle. Both failures highlighted frailties in the
futures industry system for protecting customer funds, as they represented the
first clear-cut violation of the CFTC’s segregation rules.
The Financial Times put it most harshly,
but probably best summed up the headline fears of futures customers resulting
from these two failures: “The twin collapses exposed as fallacy the belief that
customer funds are safe with registered brokers.”
To its credit, with exchange and industry input, the National
Futures Association, an industry-wide self-regulatory organization of a
kind with FINRA, proposed or adopted a variety of operational
changes to help improve the safety of customer funds. Writing in Futures Magazine, Terry Duffy, the
Chairman of the CME Group, nicely summarized these various steps in an article
that he authored, “A
Year after MF Global Failure, Customers Safer than before Collapse.”
The Commodity Futures Trading Commission (CFTC) has now
published its own recommendations to rebuild client confidence in the system of
segregation. The
CFTC has proposed various rules in an uncommonly large federal register
release of more than 400 pages to add further safeguards to better protect the
security of customer funds. The Commission’s staff has composed a handy question
and answer piece to summarize the main points.
The Commission’s proposals will undoubtedly raise concerns
about increasing the costs for FCMs, and perhaps driving some of them out of
the business entirely, thus reducing choice and competition. On the other side
of that fear is a trend of falling volume of business that is hard to attribute
solely to economic conditions. If volume continues to drop because of customer
concerns that the safety of their money is under-regulated, that too will cause
some FCMs to leave the business.
[Related: “<http://tabbforum.com/opinions/evolving-futures-markets-could-squeeze-out-traditional-players>Evolving
Futures Markets Could Squeeze Out Traditional Players”]
According to a prediction
by TABB Group: “The total available revenue of FCMs for listed
futures will be US$4 billion in 2013, a decrease of over 40% in the past five
years.”
Attributing this long-term dramatic fall in trading levels
to economic conditions is a tricky job, and probably not supported by the trend
in the normal driver for futures volume -- volatility. While absolute interest
rates have been low, they have continued to be volatile, as have equities,
foreign exchange, energy and metals.[1] Volatility
should be buffering a large-scale reduction in the use of listed risk
management markets. At least some part of the sharp declines in volume must be
attributed to the loss of customer confidence in the integrity of the business,
given that volatility is still robust.
The CFTC, NFA and futures exchanges have done a fine job in
adding a number of sensible new regulations over the custody of customer funds.
The newly proposed regulations, had they been in place, would have made it
considerably less likely that MF Global’s situation would have proceeded
undetected. There would have been additional capital in the secured account,
and the trick of adding secured balances to the segregation report to overstate
the amount of funds on deposit would have been outlawed. Executives would have
been called upon to report their instructions to make certain transfers, and
may have been more careful under the circumstances. Additional welcome reforms
include measures that set minimum standards for an FCM’s risk management
program, along with much improved transparency of funds information to
customers.
Unfortunately, the failure of MF Global in particular --
because it was so much larger than Peregrine, and with much greater prominence
in the industry -- has left a great deal of suspicion among market users about
whether rules will be followed.
MF Global was a fast-moving crisis, and the officers of the
company (who specifically authorized transfers of what were not in fact
“excess” segregated funds) have relied on their history of recordkeeping
failures, lackluster technology, and procedures that seemed to be invented on
the fly with few if any controls in order to avoid or escape liability. Jon
Corzine, the chief executive officer, has proclaimed his own complete lack of
culpability.
“Mr.
Corzine, in his testimony, offered little insight into the missing money. He
said he had learned about the shortfall on Oct. 30, the day before MF Global
filed for bankruptcy. He also said there “were an extraordinary number of
transactions during MF Global’s last few days,” calling it a “chaotic” period
that was “extremely difficult” to “reconstruct.”
“As the chief executive officer of
MF Global, I ultimately had overall responsibility for the firm,” he said in
testimony. “I did not, however, generally involve myself in the mechanics of
the clearing and settlement of trades, or in the movement of cash and
collateral. Nor was I an expert on the complicated rules and regulations
governing the various different operating businesses that comprised MF Global.
I had little expertise or experience in those operational aspects of the
business.”
In fact, Corzine has squarely laid blame on the company’s
Assistant Treasurer, a non-officer of the company, who has invoked her
constitutional right not to testify. (“I had explicit statements that we were
using proper funds, both orally and in writing, to the best of my knowledge,” Corzine:
told a subcommittee. “The woman that I spoke to was a Ms. Edith O’Brien.”)
Taking nothing away from the benefits that will accrue from
adopting the CFTC’s proposed regulations, it is still of concern that none of
the senior officers of MF Global has been prosecuted. A system that treats the
invasion of customer funds as an egregious offense of the fiduciary duty that
corporate officers of FCMs owe to their customers is likely to have the respect
and confidence of clients. A system that lets these same officers wriggle out
of criminal prosecution will undermine the effectiveness of prescriptive
regulations. For those who remain suspicious, the failure to prosecute leaves
open the possibility that egregiously sloppy recordkeeping and controls will,
in a future fast-moving event, serve as a defense to an “unintentional”
violation of rules that result in a large-scale failure of segregation.
The failures of MF Global and Peregrine Financial Services
also highlight a separate frailty within the system of safeguards: Customer
funds that are not used to margin a position are controlled by the FCM and,
notwithstanding a number of important safeguards, are not as secure as funds
held in custody by a clearinghouse to margin positions. An insurance fund is a
needed step to provide assurance that balances that are not covered by the
clearinghouse’s custody would still be protected. A joint program between the
securities and derivatives industry, as is the case in Canada, would keep costs
down to a much lower level than would be the case with a derivatives program
alone. The specifics of such a program are explored in “Expanding
the role of SIPC,”
and require both cooperation and leadership of financial
regulators in order to secure this important investor benefit.
The CFTC’s rule proposals address an extensive list of
possible shortcomings in addition to those directly related to the custody of
funds, including accountant qualifications and better training of FCM
personnel. As a package, it is well thought through and does not try to redo the
brokerage and clearing systems from the ground up. Prosecution decisions, at
least criminal actions, are outside the purview of the Commission, and an
insurance fund is a more complex endeavor that cannot be implemented solely
with new regulations. On the basis of the problems the CFTC had before it --
and its powers to address them -- the proposed rulemaking is a solid piece of
work. One hopes that the areas outside of its jurisdiction will also be treated
with assertive, sound actions by the officials holding the power in their hands
to act.
[1]
Sources:
CBOE Volatility Indexes (VIX
Calculations)
Estimated
Historical One Year/Ten Year Basis Point Swap Rate Volatility, 2007 - 2012
The
CBOE Crude Oil ETF Volatility Index ("Oil VIX") http://www.cboe.com/micro/oilvix/introduction.aspx
The
CBOE Gold ETF Volatility Index ("Gold VIX", T GVZ)ticker - http://www.cboe.com/micro/gvz/introduction.aspx
The
CBOE EuroCurrency Volatility Index ("Euro VIX", Ticker -
EVZ) http://www.cboe.com/micro/evz/introduction.aspx
The
CBOE S&P 500 3-Month Volatility Index (VXV)
CME v. CFTC – A Regulator’s Conundrum
The Commodity Futures Trading Commission faces a conundrum that impedes its
ability to create an efficient and cost effective solution to establish a
comprehensive data-set of interest rate swaps.
The lawsuit that CME has recently
brought against the CFTC highlights the issues facing a regulator to implement
an often poorly drafted statute. It also
highlights the disruption to the existing futures industry as it seeks to enter
and compete in the swap market. Before
describing the Catch 22, a review of the issues in CME v. CFTC is useful.
The Commission has determined that CME, as a registered Derivatives Clearing
Organization, or “DCO,” is obligated to report all swap data, including
proprietary customer information, to a third party Swap Data Repository, or
“SDR,” most likely the DTCC. Of all the
parties to compel the CME to report to, DTCC is among the most sensitive
competitive possibilities as DTCC currently competes directly with the CME on
interest rate futures clearing.
The CFTC is preparing to oversee a newly regulated world of swap
transactions for which it has little technical infrastructure already
established. In theory, having all swap
data aggregated through a single SDR could alleviate the cost, development
effort, and “time to market” for the Commission to employ a system to aggregate
data across many SDRs and DCOs in order to view the positions and exposures of
swap entities in a single location and format.
Section 20a(c)(4)(a) of the Commodity Exchange Act (Act) , 7 USC § 24a
(c)(4)(a) - Swap Data Repositories - explicitly allows the Commission the power
to require SDRs to send swap data, including proprietary data, to a central
SDR:
“A swap data repository shall—
(4) (A)
provide direct electronic access to the Commission (or any designee of the
Commission, including another registered entity);”
In governing the data requirements of SDRs, Section 20a of the Act
broadly empowers the Commission to establish data standards for SDRs’ public
price and transaction dissemination as well as for collection and retrieval of
proprietary data.
CME is contesting the Commission’s authority to require it as a DCO to
follow the Commission’s directives. The
suit makes two main claims: (1) the Commission’s
regulation requiring CME to report non-public swap data to an SDR violates the Commodity
Exchange Act by requiring a DCO to perform actions that are outside the
statute’s allowable area of regulatory authority; and (2) the Commission failed to perform a sufficient
cost-benefit analysis even if the regulation is otherwise permissible.
The CME’s Complaint highlights the various and clear distinctions in the
CEA governing the duties of a DCO with respect to sharing transaction data for
cleared swaps with SDRs. Specifically,
the CME draws a bright line between providing price and basic reporting
information to an SDR for contemporaneous public reporting (a market data
function) versus providing detailed information of proprietary client
information, such as name, counterparty, clearing firm, account designation,
etc. As paragraph 70 of the Complaint
states,
“CEA Section
5b(k) unambiguously requires DCOs to make nonpublic regulatory reporting of
cleared swap data available to the CFTC.
Section 5b(k) does not mention SDRs.”
As the CME points out in its Complaint, it has outstanding with the
Commission an application to be designated as an SDR. However, the Commission has not approved the
CME’s application, and has so far indicated that without changes to the CME’s proposed
operating rules as an SDR it is not inclined to give its approval.
It appears that the Commission’s most straightforward solution to the
claims leveled in the lawsuit would be to grant the CME its application to be
an SDR, and then use the powers given to the Commission under Section 20a
a(c)(4)(a) of the Act to require the CME as an SDR, and not as a DCO, to report
swap data to a designee. In the case of
interest rate swaps presumably that designee would be the DTCC. Of course, even if CME were designated as an
SDR it might still litigate to avoid sharing proprietary information with a
competitor.
However, litigating as an SDR, and not as a DCO, would appear to considerably
weaken the CME’s arguments. First, Dodd
Frank grants the Commission clear statutory authority to require “SDR to SDR”
reporting, but does not grant the CFTC specific authority to require “DCO to
SDR” reporting of proprietary swap data.
The CME’s “cost-benefit” argument
would also be weaker. Unlike the recent federal
court ruling against the Commission (ISDA v. CFTC) on position limits - where
the court found an unambiguous requirement in Dodd Frank to justify the
imposition of position limit regulations on hard data - in this instance, Dodd
Frank does not appear to make a similar fact-finding condition a prerequisite of
regulation. In addition, the Commission presumably
could make a clear showing of the heavy impact on its own costs, as well as
causing delay to implement a core statutory purpose of Dodd Frank, should it
not designate interest rate swap reporting to a central depository.
The CME’s lawsuit describes a standoff between it and the CFTC over the
issue of the Commission’s view of the competitive requirements of Dodd Frank as
they pertain to the CME’s application for designation. According to the CME’s Complaint:
“57. The FAQ
also makes clear that a DCO cannot require, through agreement or otherwise,
market participants to select the DCO’s SDR or an affiliated SDR: “Market
participants may choose to use a. . . DCO’s SDR for reporting swap
transactions, but a.. . DCO as part of its offering of trading or clearing
services cannot require that market participants use its affiliated or
‘captive’ SDR for reporting.”
58. CFTC staff
has taken the position that CME must amend its SDR application to show
compliance with the FAQ before staff will recommend approving the application.
This piece is not intending to pass judgment on the merits of the
Commission’s position with respect to the CME’s application to be an SDR. However, while Dodd Frank requires the
Commission to take steps to not promote anticompetitive conduct, the statute
also circumscribes the authority of the Commission to compel sharing of proprietary swap data other
than between registered SDRs.
The Commission’s Catch 22, it appears, is to approve the CME’s SDR
application, notwithstanding its competitiveness issues (which of course might
prompt other lawsuits from other parties), or to limit its ability to create an
efficient, cost-effective mechanism to centralize interest rate swap data –
which is critical to the success of its Dodd Frank mandate to understand,
monitor and regulate swap exposure.
Will the CME amend its SDR application to satisfy the Commission’s
concerns while its lawsuit is pending and likely to be successful? Will the CFTC justify approving an SDR
application that it believes is problematic in order to quickly get the
technology solution to implement a rational method of interest rate swap data
collection?
As I said: a conundrum.
Monday, November 12, 2012
Expanding the Role of SIPC to Provide Futures Account Insurance
Following the collapses at MF Global and Peregrine Financial Group the futures industry has been considering various steps to reclaim investor confidence in the safety of funds deposited with registered futures commission merchants. Regulators have adopted various proposals to improve audit standards by requiring electronic record submissions, and self-reporting by FCMs of transfers of segregated funds that exceed prescribed thresholds.
Still waiting on the sidelines is the discussion around an insurance fund for futures accounts held at FCMs. The futures industry, for all its value to the financial markets, is quite small compared to the securities markets. An insurance fund solely dedicated to protecting futures accounts raises concerns over the prospect that significant fees will need to be added to futures trades, and that liquidity will be curtailed as a result. These fears are entirely reasonable. The markets have become accustomed to low transaction costs, and enjoy a level of efficiency that we do not want to lose.
MF Global and Peregrine Financial were relatively small actors in the scheme of things. However, in combination, they represent the fear of clients of federally registered FCMs that they do not have an effective mechanism to evaluate the financial health or financial honesty of the firms with which they do business. Certainly, investors do not have a better process to evaluate these firms than the federal regulators and the SROs. The financial crisis of 2008 highlighted the fragility of even the largest firms (and by deduction their affiliated FCMs). Whom can you trust?
In the 1960s, the securities industry had to deal with similar concerns about the safety of customer accounts held by federally registered broker-dealers. In the late 1960s, the increase in volume in securities transaction began to overwhelm the system. The NYSE was forced to close early on Wednesday afternoons to help deal with the logjam caused by a spike in volume up to 12 million shares per day. The amount of errors, or fails, became so substantial as a result of a fourfold increase in volume from the start of the decade that many firms were left with large errors. In a self-correcting process, volumes began to decline as investor confidence eroded in the ability of the industry to perform as needed.
In 1969, share prices started to fall and volumes fell along with them. The plunge in volume reduced commission income, and along with the liabilities incurred because of the fails resulting from operational difficulties in clearance and settlement, approximately 160 NYSE member firms declared bankruptcy, closed, or merged with other firms in an effort to survive.
The SEC and Congress acted aggressively to restore investor confidence in the securities industry. It took tangible steps to improve the record keeping mess, raise broker-dealer capital requirements, and the transparency of financial well-being of each broker-dealer.
It was in this environment that Congress passed the Securities Investor Protection Act of 1970, or SIPA, which created the Securities Investor Protection Corporation, commonly known as SIPC. The prospect of investors wondering about the safety of their accounts after numerous broker-dealer failures was not tolerable, and Congress along with the SEC acted decisively. There were other significant actions taken at the same time to consolidate clearing and simplify processing, but the introduction of an insurance plan that was modeled on the FDIC to insure bank accounts was a big piece of the solution.
Whether Congress and the regulatory agencies are up to decisive and aggressive action to address the current problem of customer trust in the futures industry is an open question. Certainly, our national finances do not permit many new government initiatives. However, in the case of SIPC account insurance, the burden is on the industry to finance the insurance fund through small transaction assessments, and is not a government funded initiative. The introduction of something similar for the futures industry suggests that a government created safety net for financial accounts need not be an add-on to the current deficit.
Nonetheless, introducing a fee large enough to create a meaningful fund for the futures industry risks affecting the liquidity of the markets. Additionally, for Congress to pass an entire new piece of legislation is a daunting and unlikely prospect. However, amending SIPA to combine insurance funds across both the securities and futures industries is an attractive concept to resolve our current crisis of confidence among futures customers. Significant hurdles must be overcome. Two of the biggest are the willingness of one industry to subsidize a benefit for the other; and where jurisdiction lies post-SIPA amendment over the futures industry. But, in looking at the separation of jurisdiction and regulation of the markets, we might find a better way of managing oversight of futures and securities, and placing both industries on level ground of customer trust.
Canada has a regulatory system for financial markets that is separated among provincial regulators, while the insurance coverage for securities accounts and futures accounts is still a national program – the Canadian Investor Protection Fund. Getting Congress to act across Committee jurisdictions, and regulators to act across regulatory fiefdoms are complex and difficult tasks. The SEC and CFTC would need to jointly lead on this issue, and coordinate between themselves and across Congressional oversight committees to show that client concerns over funds deposited in securities or futures accounts are affected by a lack of trust in either area.
Similar to the 1960s, the lack of confidence that clients have in the safety of their futures accounts is not tolerable. A solution is needed, and an integrated fund for securities and futures accounts is a plausible one.
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