Once again there are a handful of open positions at the Commodities Futures Trading Commission (CFTC). First Jill Sommers, then Gary Gensler and now Bart Chilton are leaving. This agency’s mandate is to regulate commodity futures and options markets in the United States. Unfortunately, it is being run by people who have never traded commodities, run a clearinghouse for commodities or sat on an exchange board.
There is something inherently wrong with this thought process. It would be like me sitting on the medical practices board. Although I am sure that all the people on the CFTC have IRAs and other brokerage accounts, that doesn’t make them experts, just like having health issues doesn’t put me in a position to regulate doctors.
What does this mean when people with so little trading experience run an agency? Simply a replay of the past. Clearinghouses and financial services firms such as Refco, MGF and PFG have collapsed as a result of faulty oversight by the very agency pledged to oversee them. It will happen again.
There is a false sense of safety about swaps and derivatives being traded and cleared on exchanges. Brokers believe they can trust the contract, but having a settlement price doesn’t guarantee safety and liquidity. Many derivatives are lightly traded once established, so when a major world event happens many of the swaps will not have the volume to unwind the positions. If this occurs, it will make the unwinding of the Lehman derivatives look simple.
With the addition of cleared swaps now trading as well as lightning-fast trading technology, the CFTC has its work cut out for them. The agency has not kept up with the pace of the changing markets.
For example, the commodities clearing system is not as strong as it once was. With the fall of MFG, the days of having many large clearinghouses (the backbone of the CME Group clearing system) are gone. The big banks that trade have found ways to limit their exposure to the exchanges if a blow up should happen in the energy or bond markets, but investors of all levels will feel the pain.
The commodities cleared swaps are going to be the next too big to fail crisis, and with the lack of risk management experience at the CFTC, it is going to be a major shock to the global trading community.
President Obama ran on a platform of change. It’s time for real changes today. A large number of top brass is planning to leave the CFTC. Now is the time to replace them with competent, experienced personnel who understand the commodities market. People who will ensure a safer future for the American public.
Is now really the time for change? Okay, then let’s have some.
Follow David on twitter @GreenbergCap.
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