Chilton seeks alternatives to rule

Mar 22, 2013
by DTN

—Small-market users must be protected.

Commodity Futures Trading Commission (CFTC) Commissioner Bart Chilton wants to make sure customers are protected if another futures commission merchant fails, but he also wants to address industry concerns about the expense of a CFTC-proposed rule on customer protections.

“My mantra is protecting consumers,” he told DTN in an interview on the sidelines of the National Grain and Feed Association (NGFA) annual convention. “I want to figure out a way to do that. If it’s excessively expensive and we have to do it to protect consumers, we’ll do it. But I think we might be able to find a different way to achieve the same goal that isn’t excessively expensive.”

CFTC’s proposed rule has two provisions that attendees at NGFA are concerned with, said Todd Kemp, NGFA treasurer and vice president of marketing. The first would require futures commission merchants to take a capital charge if accounts are under-margined one day after a margin call is issued, compared to the current three-day rule. The other concern is with residual interest, which would essentially “require customers to be 100 percent margined in real time. It’s a huge change in CFTC’s interpretation.”

The grain industry emphasized the cost of the proposal in public comments on the rule, and leaders of NGFA met privately with Chilton on the conference sidelines to discuss their concerns, along with other customer protections issues such as insurance for futures and derivatives accounts and a pilot program of a fully segregated account model.

Account insurance

NGFA is currently cooperating with a study on different approaches to creating insurance with the Futures Industry Association, along with other stakeholders, that will likely be finished in April. After that, the organizations will take their ideas to several insurance companies to figure out what an insurance program could cost.

There are a few different forms insurance could take, Kemp said. Chilton is a proponent of SIPC (Securities Investor Protection Corporation) style insurance, while others advocate for an industry owned model.

“The securities world has insurance up to $500,000; bank accounts have up to $250,000,” Chilton said. “In the futures world, you’re out of luck if the firm goes down and your money’s there. That’s not right, and it’s irresponsible of us not to try and figure out a way to address it.”

Insurance has to be paid for, Kemp said, and right now, the conversation is about how much will it cost and who will bear the cost.

“If we do that, if we have a futures insurance fund, then I have a little less concern about customers being negatively impacted by this residual interest issue,” Chilton said. “These things are related. Like in life and government, the question is about balance. I’m hopeful that we’ll reach that. It’ll be good for markets, but it’ll be better for consumers.”

However, the time lines for creating an insurance program and approval of the CFTC’s proposed rules don’t align. Kemp said CFTC could vote on the rule in as little as 45 to 60 days, but it will take much longer than that to get any form of insurance up and running.

CFTC is up for reauthorization this summer, which provides an opportunity to make substantive changes to the law, like adding insurance.

Protecting even the small customer

Chilton used to carry a letter with him from a California couple who lost most of their life savings when MF Global collapsed. They were taking care of their adult son, who has a brain injury, and told Chilton they risked losing their home. Chilton tracked down their phone number to ask permission to use their name. It was disconnected and he never found out what happened to the family.

“It’s the people like that that you need to make sure you’re protecting, not the millionaire fat cats on Wall Street,” he said. “More and more, I hear that retail guys, average guys, farmers, smaller guys are getting out of the markets, and they’re getting out because they don’t have confidence in the markets.

“If they (farmers) get out, it’s just a gambling venue, that’s all that is,” Chilton said.

“Then the market just becomes a plaything for the speculators.” — Katie Micik, DTN