02/01/2010
CFTC’s Gensler Uses Movie to Campaign for Market Reforms
In the 1983 movie, “Trading Places,” the characters played by Eddy Murphy and Dan Aykroyd profit from trade on illicit information gleaned from a U.S. Department of Agriculture report on juice and oranges.
In the process, they ruin Randolph and Mortimer Duke, the bothers who run a commodities brokerage firm. Misled, the Dukes incur a loss of $394 million, which they are unable to pay in cash to cover the margin call. Their business and private assets are sold off by the trading board to cover their debts.
Gary Gensler, the chairman of the Commodities Futures Trading Commission, retold this story in New York last week to explain the steps he’s taking to reform the commodity futures markets. He said despite the moral behind the movie, using illicit information is not illegal in fact under the current law governing commodity futures trading. He wants to change that.
“We have recommended banning using misappropriated government information to trade in the commodity markets,” he said in a speech at Fordham University Graduate School of Business. Gensler called it the “Eddy Murphy rule,” which will also ban insider trading using nonpublic information acquired from a government source. “In 2008, we watched the financial system fail,” he added. “The financial crisis reminded us of the great challenges facing our economy. It is essential that we bring regulatory reform to the derivatives markets to best protect the American public.”
Besides trading on illicitly obtained information, the CFTC has proposed regulating over-the-counter or OTC trades and setting speculative position limits for futures and options in energy commodities. OTCs and swaps would be required to trade on regulated exchanges, and the proposed limits would apply to energy futures and option contracts.
The CFTC move is part of a broad effort to ensure the markets are transparent and are not cornered by a few big banks and trading firms. The OTC market is currently very opaque, with most deals done on a private-and-confidential basis. Sometimes, deals are done between just a few related firms that have cornered the market. “Wall Street profits from access to trading information while businesses, municipalities, consumers and others pay the costs,” he said. “Dealers should be required to bring their standardized derivatives transactions to regulated clearinghouses. These transactions currently stay on the books of the dealers often for years.”
Gensler also said the commodity and futures markets need to have firewalls that currently exist for securities dealers. Securities regulations require a firewall between research and investment banking on the one hand and trading branches of brokerage dealers on the other. No comparable firewall is there in commodities and futures markets. That too, should change, he said.
“Without parallel protection, trading desks could use information developed by research arms before that information is shared with the firm’s clients, raising serious questions about the integrity of the firm’s services to its clients and confidence in the markets,” he said.