Futures Traders Seek Sweeping Legal Reforms : Commodities: Review of 1930s laws governing the industry is under way. Some say regulations have not kept pace with times.
The futures industry is seeking sweeping legal reforms and wants Congress to examine ways to change laws to make the domestic futures business more competitive.
The revisions could profoundly affect the industry’s regulator, the Commodity Futures Trading Commission.
CFTC Chairwoman Mary Schapiro told Reuters that three senior CFTC staff members have begun a complete review of the laws governing the industry, based on the 1936 Commodity Exchange Act (CEA).
Schapiro said this was an effort to determine “where we started and how we got to where we are . . . with respect to jurisdiction, and to outline for Congress and the commission some road maps for how we can improve the structure of the CEA.”
Schapiro said the CFTC aims to be done with the review by the end of autumn.
The matter is likely to become the focus of hearings in Washington, even though no dates for any hearings have been set, industry sources said.
The futures industry is huge, and getting bigger.
In 1994 in the United States, which accounts for just less than half the world’s volume, futures contracts traded totaled 426 million. This was a 26% increase from the 339 million traded the previous year.
A single contract allows the owner to control, for example, $100,000 worth of Treasury bonds, or 5,000 bushels of wheat.
Increasingly, due to the volumes--and risk--associated with trading such contracts--the futures industry has become largely the preserve of big institutional investors.
A leading U.S. economist, Merton Miller, who won a Nobel Prize in 1990 for work in financial economic theory, says that regulation has not kept pace with such developments, and says the CFTC has spent too much time trying to protect the retail investors who are scarcely a factor in modern futures trade.
He said the CFTC has taken “a Ma and Pa Kettle” approach to regulation.
The CFTC implements the 59-year-old Commodity Exchange Act, set up long before numerous innovations in the futures industry. The act predates the rise in sophisticated new, over-the-counter derivatives instruments, such as swaps. It predates the enormous upswing in trade in financial, as opposed to agricultural futures.
“The CFTC has a problem. It’s an anachronism. It’s based on the CEA of the 1930s. This is 1995 and everything is different,” Miller said in an interview.
Miller, currently on the board of governors of the Chicago Mercantile Exchange, also has served on the board of directors at the Chicago Board of Trade.
He said government agencies, including the CFTC, should pay some attention to cost-benefit analysis or their efforts to regulate could end up costing consumers more than the losses, which stricter regulation aims to prevent.
Miller, now professor emeritus at the University of Chicago’s Graduate School of Business, says congressional hearings should discuss current laws governing the industry, which he says now are too vague. There is even a lack of clarity as to what constitutes a “futures” contract.
“In the hands of an aggressive CFTC, this inherent vagueness becomes really serious,” Miller said.
The Chicago Board of Trade and the Chicago Mercantile Exchange--the nation’s largest futures exchanges--want to see some revisions to current laws. They also worry they may foot the bill if the CFTC needs money to pay for any expansion.
“The CFTC should be funded, but not with transaction taxes or user fees,” said Chicago Board of Trade President Thomas Donovan.
Chicago Mercantile Exchange Chairman Jack Sander said he does not directly tie any CFTC funding to a CFTC revamp, but says Congress needs to examine the agency before giving it more money.
“We’re a strong advocate for getting CFTC appropriations, and a strong advocate for revisiting statute, but one is not a precondition of the other. With respect to the current structure, he said, “We firmly believe . . . that we’re funding a Model T Ford.”
