The Fuse

Commodity Watchdog Remains in Flux as Trading World Evolves

by Matt Piotrowski | September 19, 2017

The Commodity Futures Trading Commission (CFTC), which oversees $34 trillion in futures activity, has had a difficult year. It has operated for most of 2017 with only two commissioners, and since a quorum is necessary for the agency to make rules, the CFTC has not issued a final rule since January. The slowdown in action at the CFTC is worrisome since it comes at a time of large growth in financial markets, including petroleum futures, which are susceptible to manipulation and aggressive trading tactics.

“Without a full complement of commissioners to consider the far-reaching implications of our decisions, we are frozen in place while the markets we regulate are moving faster every day,” said Commissioner Sharon Brown, a Democrat, who reportedly will soon step down. “This fact is intolerable to me.”

In February, Chairman Timothy Massad, an Obama appointee, stepped down, making it virtually impossible for the CFTC to move forward on policy initiatives.

With two of the vacant commissioner openings now filled, the CFTC finally has a functioning quorum again.

Republican Brian D. Quintenz and Democrat Rostin Behnam were recently sworn in as commissioners. With two of the vacant commissioner openings now filled, the CFTC finally has a functioning quorum again.

Republican J. Christopher Giancarlo, the CFTC’s new chair, will oversee finalizing a number of outstanding rules, with the position limits rule—which would restrict trading by speculators—the most notable.

Not only has the CFTC had difficulties with staffing at the commissioner level; it has also dealt with limited personnel in its divisions and offices. For instance, last year, the CFTC had just one specialist examining oil trades. CFTC’s staff have to manage a financial world that is changing quickly, with the amount of raw data to analyze growing and technology software evolving. Every day, the CFTC receives about 50 gigabytes of data from the CME Group in Chicago with the exchange’s daily trades, “and that’s just a sliver of the information the agency gets.” The agency does not have the tools to properly analyze this data.

After the financial collapse of 2008, the CFTC was given the power in the 2010 Dodd-Frank Act to regulate the $400 trillion swaps market in addition to futures trading.

The CFTC serves to ensure market integrity and protect against manipulation and abuse in commodity trading. Besides regulating energy markets, it also watches over trading in agriculture, metals, and financial products including interest rates, stock indexes, and foreign currency. After the financial collapse of 2008, the CFTC was given the power in the 2010 Dodd-Frank Act to regulate the $400 trillion swaps market in addition to futures trading.

The wide range of commodities and products the agency now regulates highlights how important leadership is at the CFTC.

The agency’s operating units, not the commissioners, are responsible for enforcement and investigating violations, and they have been active. In fiscal year 2016, the CFTC filed 68 enforcement actions and obtained orders of about $1.29 billion in compensation, disgorgement, and penalties. It also pursued litigation in more than 100 cases dealing with manipulation, spoofing, and the illegal use of customer funds. According to Law360, the commission’s enforcement actions picked up over the summer months after a slow start in 2017, and “reflects an increased focus on regulating market misconduct.”

The integrity of the futures markets is crucial for both producers and consumers. Businesses, manufacturers, farmers, financial organizations, and institutional investors use them to manage risk.

The agency will still have to operate with limited resources as it works to spot misconduct across the different markets and exchanges it monitors.

Giancarlo has said vigorous policing is his top priority. Before the Senate Agriculture Committee this summer, he stated that he will “oversee robust enforcement of our rules and root out bad actors and wrongful practices.”

The agency will still have to operate with limited resources as it works to spot misconduct across the different markets and exchanges it monitors. The CFTC has argued for years that it is under-staffed and cash-strapped. Now that the CFTC is returning to normal with the recent commissioner confirmations, it will come under scrutiny for the rules it writes and its enforcement in the changing marketplace.

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