Barack Obama has named Gary Gensler, a former Treasury official under President Bill Clinton, to take over the Commodity Futures Trading Commission (CFTC).
New York Times:
Mr. Obama has vowed to reverse the deregulatory stance of the Bush administration and overhaul the entire system of financial supervision. Though Mr. Obama’s team has not mapped a specific plan, advisers on his transition team said reining in derivatives would be one of the biggest and most complicated parts of that effort.
Wall Street Journal:
Is deregulation to blame? – by Reason Magazine
2) The Commodity Futures Modernization Act of 2000 guaranteed that high-risk tools such as credit default swaps remained unregulated, opting instead to encourage a “self-regulation” that neverhappened.
In late September, Securities and Exchange Commission (SEC) Chairman Christopher Cox estimated the worldwide market in credit default swaps —pieces of paper insuring against the default of various financial instruments, especially mortgage securities— at $58 trillion, compared with $600 billion in the first half of 2001. This is a notional value- only a small fraction of that amount has actually changed hands in the market. But the astounding growth of these instruments contributed to the over-leveraging of nearly all financial institutions.
In the late 1990s, the fight over these and other exotic new derivatives pitted a committed regulator named Brooksley E. Born, head of the Commodity Futures Trading Commission, against the powerhouse triumvirate of Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin, and Securities and Exchange Commission Chairman Arthur Levitt Jr. Unsurprisingly, Greenspan, Rubin, and Levitt won. The result was the Commodity Futures Modernization Act of 2000, which gave the SEC only limited anti-fraud oversight of swaps and otherwise relied on industry self-regulation. The Washington Post has closely chronicled the clash, concluding that “derivatives did not trigger what has erupted into the biggest economic crisis since the Great Depression. But their proliferation, and the uncertainty about their real values, accelerated the recent collapses of the nation’s venerable investment houses and magnified the panic that has since crippled the global financial system.” In other words: The absence of a regulation didn’t cause the crisis, but it may have exacerbated it.
Part of the problem was a technicality. Instruments such as credit default swaps aren’t quite the same thing as futures, and therefore do not fall under the Commodity Commission’s purview. But the real issue was that Greenspan, Rubin, and Levitt were concerned that the sight of important figures in the financial world publicly warring over the legality and appropriate uses of the derivatives could itself create dangerous instability. The 2000 law left clearing-house and insurance roles to self-regulation. Without a clearinghouse, the market for credit default swaps was opaque, and no one ever really knew how extensive or how worthless the derivatives were.
In congressional testimony on October 23, Greenspan seems to have admitted error: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” he told the House Committee on Oversight and Government Reform. But Greenspan still wasn’t convinced that regulation is the solution: “Whatever regulatory changes are made, they will pale in comparison to the change already evident in today’s markets,” he said at the same event. “Those markets for an indefinite future will be far more restrained than would any currently contemplated new regulatory regime.”
Previously: New SEC Chief
– CFTC’s Concept Release on the Appropriate Regulatory Treatment of Event Contracts…- notably how they define “-event markets”-, how they are going to extend their “-exemption”- to other IEM-like prediction exchanges, and how they framed their questions to the public.
– American Enterprise Institute’s proposals to legalize the real-money prediction markets in the United States of America
Previously: The CFTC on prediction markets. + Comments made to the CFTC.
That sounds like a good prediction market proposal.
As you all know:
- The SEC regulates the securities markets (which support capital formation).
- The CFTC regulates the futures markets (which exist to discover prices).
- The SEC is rules based, meaning it sets regulations that institutions must follow, while the CFTC is principles based, in that it sets broad parameters under which the regulated entities try to operate.
US Treasury’-s Blueprint for a Modernized Financial Regulatory Structure (PDF file).
The United States has the strongest and most liquid capital markets in the world. This strength is due in no small part to the U.S. financial services industry regulatory structure, which promotes consumer protection and market stability. However, recent market developments have pressured this regulatory structure, revealing regulatory gaps and redundancies. These regulatory inefficiencies may serve to detract from U.S. capital markets competitiveness.
In order to ensure the United States maintains its preeminence in the global capital markets, the Department of the Treasury (“Treasury”) sets forth the aforementioned recommendations to improve the regulatory structure governing financial institutions. Treasury has designed a path to move from the current functional regulatory approach to an objectives-based regulatory regime through a series of specific recommendations. The short-term recommendations focus on immediate reforms responding to the current events in the mortgage and credit markets. The intermediate recommendations focus on modernizing the current regulatory structure within the current functional system.
The short-term and intermediate recommendations will drive the evolution of the U.S. regulatory structure towards the optimal regulatory framework, an objectives-based regime directly linking the regulatory objectives of market stability regulation, prudential financial regulation, and business conduct regulation to the regulatory structure. Such a framework best promotes consumer protection and stable and innovative markets.
The CFTC is not that seduced by the idea (PDF file):
Statement of CFTC Acting Chairman Walt Lukken Regarding Department of Treasury’s Blueprint for Modernizing the Financial Regulatory Structure March 31, 2008 Washington, DC
Today, the U.S. Department of Treasury released a regulatory blueprint that includes recommendations to improve the U.S. financial regulatory structure with the goal of enhancing U.S. competitiveness in the global marketplace. Some of the proposals include recommendations related to combining the Commodity Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC). CFTC Acting Chairman Walt Lukken made the following statement in response to the blueprint:
It is essential to examine ways to enhance the competitiveness of U.S. financial markets and seek improvements to the regulatory structure. Policymakers all strive for good government solutions that protect the public, reduce duplication and enhance competition and innovation. While I am still studying the Blueprint’s many recommendations, I applaud Secretary Paulson and the Treasury Department for their work on this critical undertaking and for recognizing the CFTC model of regulation as an advantageous one.
The CFTC utilizes a flexible and risk-tailored approach to regulation aimed at ensuring consumer protection and market stability while encouraging innovation and competition. [*] Congress gave the CFTC these powers with the passage of the Commodity Futures Modernization Act (CFMA) in 2000, which shifted the CFTC’s oversight from a rules-based approach to one founded on principles. This prudential style is complemented by strong enforcement against market abuse and manipulation as evidenced by the $1 billion worth of penalties assessed by the CFTC since the CFMA. [**] The regulatory balance fostered by the CFMA has enabled the futures industry to thrive and gain market share on its global competitors with volumes on the U.S. futures exchanges increasing over 500 percent since 2000. During recent economic stress, these risk-management markets have performed well in discovering prices and providing necessary liquidity.
Although the creation of a new unified regulator for securities and futures could bring efficiencies, the tradeoffs of such a significant undertaking should be weighed carefully given these turbulent economic times and the competitive global advantage currently enjoyed by the U.S. futures industry. The CFTC is a world-class regulator because of its focused mission, market expertise, manageable size, problem solving culture and global outlook—all of which may be jeopardized with the creation of a larger regulatory bureaucracy. Any regulatory reform effort must preserve the benefits of the CFTC’s principles-based model and recognize the distinct functions of the futures markets and mission of the CFTC.
Many of the benefits of a unified regulator can be immediately gained through enhanced coordination and information sharing between agencies. In fact, the CFTC and SEC recently signed a cooperation agreement aimed at addressing cross-agency issues, including the approval of hybrid products that may have otherwise fallen between our jurisdictional divide. These sorts of agreements should be given time to bear fruit. As Treasury recognizes in its Blueprint, the laws that govern the securities markets should be modernized similar to the futures laws before unification is contemplated to improve its chances of success. Unless the securities laws are first rationalized with those governing the futures markets, a merger may ironically make the U.S. futures industry less competitive globally and run counter to the explicit goal of this important endeavor. I look forward to working with policymakers to ensure that these issues are properly debated and addressed.
[*] Quite true.
[**] Which includes the fining of InTrade.
The Wall Street Journal
Via mister Jason Ruspini
Previous blog posts by Chris F. Masse:
- If I had to guess, I would say about 50 percent of the “name pros” you see on television on a regular basis have a negative net worth. Frightening, I know.
- You can’t measure the usefulness of a system by how many resources it consumes.
- STRAIGHT FROM THE DOUBLESPEAK DEPARTMENT: NewsFutures CEO Emile Servan-Schreiber, well known to chase tirelessly the Infidels who dare calling “prediction markets” their damn polling system, is eager to sell the confusion to his clients and whomever would listen.
- John Delaney is such a poor marketer that he is willing to outsource the making of InTrade’s next logo (a company’s most important visual message) to the first moron met over the Internet who is stupid enough to work for a bunch of figs.
- ProKons strongly believe that (play-money) prediction markets are bozo immune.
- REBUTTAL: SalesForce, StarBucks and Dell demonstrate that enterprise prediction markets as intra-corporation communication tools (as opposed to forecasting tools) are overhyped by the prediction market software vendors and a little clique of uncritical courtisans.
- Comments are often more interesting than the post that ignited them.