Bill would add regulatory oversight to credit-default swaps
Commodity Futures Trading Commission (CFTC) Commissioner Bart Chilton is endorsing a bill that would strengthen CFTC’s regulatory powers, but Chilton says he believes CFTC should have authority to launch criminal investigations.
CFTC regulates the grain, meat and financial futures exchanges in Chicago, New York, Kansas City and Minneapolis. Chilton said in a speech to the Agricultural Roundtable at the Brookings Institution that under current law, CFTC sees only the $5 trillion in derivatives traded on exchanges, but that overthe-counter credit default swaps amount to $55 trillion to $66 trillion. House Agriculture Chairman Collin Peterson, D-MN, has drafted a bill that would put those financial derivatives under the oversight of CFTC. “If we adopt much of what he has proposed, we can ensure that commodity markets will have improved stability and safety, and that traditional markets participants will continue to have a voice in these critically important markets,” Chilton said. The House Agriculture Committee had set a meeting for last Thursday afternoon to debate and possibly vote the bill out of committee.
The bill is called the Derivatives Markets Transparency and Accountability Act of 2009. Chilton does not disagree with futures industry officials’ statements that the run up in oil and agricultural commodity prices was driven by market fundamentals, he said, but he had concluded that “speculators, particularly non-commercial speculators who were new participants in these markets, also played a role.” Chilton added, “As the securities markets began to fail due to the subprime mess and the degrading economy, money flowed into these futures markets like never before. In fact, fully $200 billion in new capital was injected into these markets by passive long investors in about a year. It simply flies in the face of common sense to think that $200 billion didn’t have some impact.”
Chilton said he had come under some criticism for making these statements when prices were high but that when the prices dropped and the investors left the market, “it was more difficult not to conclude there was a strong relationship.”
The high prices last year, Chilton said, affected “consumers in the U.S. and all around the world. In agriculture, the traditional market participants—participants for whom these markets were originally established—had trouble hedging their risks because of increasing margin requirements and the lack of credit.
Producers were essentially told they were not tall enough to ride.” He added that he considers it the responsibility of the politically appointed commissioners to be on the lookout for changes in the markets and what’s going to happen in the future.
Chilton said CFTC should have criminal prosecutorial power because the Justice Department rejects about one third of the cases CFTC sends to it. Many of the rejected cases are too small and complicated for Justice to pursue, Chilton said, but should be pursued because they involve ordinary people’s loss of their life savings.
“When people violate the law and fleece folks out of their money, they should go to jail,” Chilton said. “We should have the ability to do more” than simply levy civil penalties.