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March 5, 2014

The Senate Agriculture Committee Must Ask the Right Questions of CFTC Nominees

The Commodity Futures Trading Commisson (CFTC) has enormous responsibilities for protecting the American people from another devistating financial crisis: it is the primary derivatives regulator in the U.S. and is in charge of ensuring the transparency, stability, fairness, and integrity of most of the $700 trillion derivatives market.  It was in this shadowy market that the last financial crisis was invisibly incubated, with poorly collateralized, opaque derivatives that acted as a conveyor belt to transmit the crisis throughout the U.S. and global financial system. 

For a small, grossly underfunded agency, the CFTC has done an admirable job enacting most of the rules required by the financial reform law, but the CFTC still has a lot of hard and very important work to do. Without the right leadership, commitment and funding, not only won’t that work get done, but much of what the CFTC has already accomplished risks being undone. 

Therefore, the importance of the CFTC Commissioners, who ensure that the agency fulfills its duty to the American people, cannot be overstated. However, very little is known about the President’s nominees it is the Senate’s job during the confirmation process to determine whether these nominees do indeed have the qualifications and toughness to protect the public interest and reject the self-interested claims of the industry. 

The next CFTC Commissioners must not only have the experience and skills to run the agency, but also an unwavering commitment to financial reform and a healthy skepticism of those pushing their narrow self-interest and talking their book (while almost always claiming they are acting in the public interest). The protection of American families, farmers, taxpayers, financial markets and the entire economy are at stake.

The Senate Agriculture Committee has an important job at its hearing on Thursday, March 6th on the nominations of three Commissioners to the CFTC: Timothy Massad, Sharon Bowen, and Christopher Giancarlo. 

Given how little is known about any of these nominees’ derivatives experience, qualifications or views, this hearing will likely be the only opportunity for the public to discover their positions on critical matters that may, or may not, prevent future financial crises.

To determine if these three nominees will effectively and steadfastly represent the public interest, they must clearly and fully answer the following questions:

1.    Commodity markets:  What specific experience/knowledge do you have of the commodity derivatives markets?  Do you think that there is excess speculation in some/all commodity markets?  How do you define excess speculation?  What do you think is the proper role for speculation in the commodity markets? How would you prioritize the concerns of commodity end-users in relation to financial intermediaries with respect to the role of speculation? Have you thought about commodity index funds and their impact on commodity markets in general and the level of speculation in particular? If so, what are your thoughts?  If not, will you review the issue and respond in detail after the hearing?


2.    International reach:  Derivatives dealing is a global business that crosses international boundaries and regulatory jurisdictions, and many of the international regulatory regimes are incomplete or woefully inadequate, particularly as compared to the U.S. How will you make sure that the Commission’s derivatives regulations are strong enough to prevent risks overseas from coming back to American taxpayers, as happened in 2008 in the case of AIG and so many others?  How will you approach foreign regulators in advocating for regulatory regimes that appropriately protect the U.S. taxpayer and U.S. markets?  How will you ensure that there is a global race to the top for regulatory protections rather than a race to the bottom of regulatory arbitrage?


3.    Funding:  Will you commit to making increased funding for the CFTC a priority so you can have the staff and technology necessary to police the huge markets you are now responsible for?  Do you believe that a fee to self-fund the CFTC, similar to that imposed by the SEC, makes sense and, if so, how would you work to make that a reality? Do you agree that getting industry support for increased funding and/or a self-funding fee would be helpful? What specifically will you do to make this happen?


4.    Implementation:  With most of the CFTC’s derivatives rules finalized, how will you ensure that they are implemented properly and faithfully, particularly with an insufficient budget, increased threat of legal challenges from industry, and deteriorating staff morale?


5.    Automated trading:  Do you believe that algorithmic trading strategies can present unique and substantial risks to markets?  What do you see as the Commission’s role in addressing these risks?  How do you envision the Commission working with the Securities and Exchange Commission to provide effective oversight of this part of the markets? 


6.    FERC cooperation/data analysis:  How do you envision working with regulators at FERC to ensure robust collection and analysis of commodity market data?  What role does the broader collection and analysis of market data play in comprehensive regulation of derivatives markets?  How would you address and seek to overcome the challenges that the Commission has faced in recent years with respect to collection, analysis, and utilization of market data in the regulatory process?


7.    Economic analysis:  As specifically set forth in the statute and as recently affirmed by the DC Circuit Court of Appeals, the CFTC has only a limited duty to consider certain costs and benefits in its rulemaking process.  However, Wall Street, some politicians, and some courts have been pushing the CFTC to do what they call “cost-benefit analysis,” which when scrutinized is really “industry cost only analysis.”  Given that requiring this analysis is not the law and would bias rulemaking to protect Wall Street profits over protecting taxpayers, and that so many of the benefits of CFTC rules and actions (like protecting commodity producers and consumers, the markets and financial system, as well as our economy) are incalculable and unquantifiable, how will you ensure that onerous one-sided analysis not required by law is not undertaken by the agency?


8.    Layers of protection/physical commodities:  The post-Great Depression combination of laws and rules protected the country for almost 70 years before deregulation took down the multiple layers protecting Main Street from Wall Street, which included:  (a) limiting banking activities, (b) forcing the separation of different types of banking, and (c) policing by regulators.  Do you agree that such layers of protection are needed?  What role do you see for the CFTC in ensuring a proper separation between banking and commerce, particularly with respect to financial firms operating in physical commodities?


9.    Enforcement policies:  The SEC and the DOJ have recently settled enforcement claims in high-profile cases without ensuring that reviewing courts and the public have a full understanding of the facts and the basis for the settlement terms.  This is an important issue because settlements are a widely used component of every government enforcement program.  How will you approach settlements in CFTC enforcement actions, and specifically, what steps will you take to ensure that settlements are transparently documented, explained, and reviewed by courts or other public tribunals?  When matters are settled out of court, will you commit to full and detailed public disclosure so that the American people can determine for themselves that the settlement is appropriate and that the punishment meets the crime?


10.  Individual accountability:  Virtually all the actions brought to court or settled take no action against individuals.  Do you think there can be accountability and deterrence if individuals are not punished for their misconduct? Will you ensure that deterrence is a foremost objective of the agency and that individual accountability is a priority?  How will you ensure that? 


11.  Agency transparency/committees/outreach:  CFTC has committees and outside advisors, but almost all of them are from industry.  Will you require greater public disclosure of everyone who has such direct or indirect access to the CFTC and any possible conflicts of interests they may have? Given that Wall Street and special interests are almost all of the “public” comment received by CFTC, what will you do to make sure that you hear all sides of a debate and get balanced input before making policies or rules?  Do you have any special outreach initiatives or plans in mind?  Shouldn’t that be a priority so that an informed decision can be made from the start?  Will you continue the current policies of requiring all meetings and contacts by industry with the agency be promptly and fully disclosed?


As was unfortunately demonstrated before the last crisis, the CFTC was not up to the job, was an ineffective non-regulator completely captured by Wall Street, and failed the American people miserably. That must not be allowed to happen again and the Senate must ensure that it does not.



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