‘Little Child’ CFTC Ignores Futures Oversight Role, O’Malia Says

The U.S. Commodity Futures Trading Commission is fixating childishly over Dodd-Frank Act rules while ignoring its traditional responsibility for overseeing futures markets, Commissioner Scott O’Malia said today.

“The commission has acted like a little child, abandoning the old toy and ‘swapping’ them out for the new,” O’Malia, one of two Republicans on the five-member panel, said in remarks prepared for a conference at New York Law School. “It has concentrated on swaps rulemaking, while averting its gaze from the futures markets and their developments.”

The agency should be focused on identifying weaknesses in existing regulations that failed to prevent as much as $1.2 billion of client money from going missing as futures broker MF Global Holdings Ltd. collapsed last year, O’Malia said.

Dodd-Frank, the regulatory overhaul enacted in 2010, gave the CFTC authority to regulate most of the swaps market after largely unsupervised transactions helped fuel the credit crisis that led to the 2008 bankruptcy of Lehman Brothers Holdings Inc. CFTC Chairman Gary Gensler has said the agency may complete the regulations this year.

The agency’s recent rulemakings to improve customer protection in derivatives markets aren’t comprehensive efforts to understand what went wrong at MF Global, O’Malia said.

“I’m puzzled by the commission’s attempts to regain public confidence through new regulation. I am particularly puzzled because the commission’s most recent rulemakings don’t even address MF Global,” he said in the speech. “I am not aware of any evidence that the MF Global shortfall was related to investments of customer funds.”

‘MF Rule’

The agency on Dec. 5 unanimously approved restrictions on how customers’ funds can be invested by brokers in a measure dubbed the “MF Rule.” On Jan. 11, the CFTC voted 4-1, with O’Malia in support, to complete regulations for the segregation of customers’ funds in swaps markets.

O’Malia said regulators should have a system of random spot-checks to ensure compliance with rules governing the segregation of customer funds. Futures and other brokers should face higher disclosure requirements to their customers about the risks of their own trades, he said.

The agency should recommend that congressional lawmakers make explicit in law that customers are first in line to recoup money when a broker files for bankruptcy, he said. “If there is a shortfall, the intermediary’s proprietary assets must go to customers first,” O’Malia said.

The CFTC, Securities and Exchange Commission, Justice Department and bankruptcy trustee overseeing the liquidation of MF Global are investigating the missing money.

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