For CME, It’s Time To Lead

Posted by Jeff Carter
on July 14th, 2012

PFG Best was the straw that broke the camel’s back in the futures industry. Certain fraud only because Wasendorf was man enough to admit it. Corzine with MF Global hasn’t admitted it. He came from the banking and political culture where you never admit you are wrong. If you repeat the lie long enough it might turn into fact. Joe Paterno followed that tac too, and it wasn’t until he was dead and gone they uncovered the truth.

The problem that I see is there are so many agencies that want the power to regulate we could be in for a feeding frenzy in the futures industry.

There is the National Futures Association(NFA) that won’t admit any culpability in either case. There is the CFTC, which won’t admit it fell down on the job. There is the FIA, that is silent. CME and ICE are also silent. All are afraid of lawsuits and their lawyers are probably telling them to clam up.

I can understand being afraid of litigation. But, the futures industry has taken two massive torpedo shots and needs to come into port to retool. When it does, all these abbreviated organizations are going to try and flex their muscles to increase their power base, increase the amount of bureaucratic jobs they can create and generally flummox the industry with more paperwork that’s probably not needed. In the first place, the only thing those two firms needed was integrity and you can’t legislate that.

Many are calling for a transaction tax that pays for a regulator. This is such a bad idea I don’t know where to start. Taxes that go to feed a public bureaucracy are never a good idea. Bureaucracies are totally inefficient and always behind the times. Additionally, they get entrenched and then set out to prove agendas even when the market is telling them differently. Bureaucratic minds get made up, don’t confuse them with fact.

The remedy to this whole problem needs to come from the industry in the form of a self regulating organization that is independent. Setting up the economic incentives correctly for the organization so it roots out fraud, and makes sure this never happens again is critical. The futures industry needs to think out of the box, and the big exchanges need to cooperate to make it happen. Since $CME is the big dog, it’s time for it to show leadership.

In order to lead, the world will have to be patient. The best thing that can happen short term is that we get the Wasendorf trial over quickly, and get some certainty as to the criminal fate of MF Global. Figuring out how to make sure customers are protected will take time if they are going to do it correctly.

CME needs to get out ahead of everyone else. No one knows the industry better. They need to fill the void, and start managing the conversation. If they don’t, they will be prey and we will wind up with some really bad legislation and agendas set by power brokers whose only interest is getting more power, not in providing the most powerful marketplace.

My gut tells me there should be some sort of independent insurance for accounts, and some audit standards and risk management standards that auditors and risk managers have to meet in order to participate in the industry. Audits only show the health of a company on that day and if someone is compelled to lie, there is nothing that any statute or standard can do about it. That’s why liars, criminals in this case, need swift justice.

A friend told me that in the aftermarket, MF Global fraud claims are now receiving .96 cents on the dollar. That’s pretty good-but it’s not enough. Those customers should never have lost a penny, and the fact that MF Execs are roaming the world without at least being charged with something is insane.

How does one have confidence in a system that won’t enforce the rules?

UPDATE
From the CME Group website.

“We are appalled by the recent violations of customer segregated funds that have shaken the very core of our industry. These breaches of trust are completely unacceptable not only to CME Group but also the businesses and individuals who rely on these markets to manage their risk. Without question, the current system in which customer funds are held at the firm level must be reevaluated. CME Group is committed to working with Congress, CFTC, NFA, FIA and market participants to restore confidence in derivatives markets.”

Too plain vanilla for me. C’mon CME. Be bold. Lead. You have the expertise, and some have the cojones.

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