CFTC Commissioner Bart Chilton spoke before the Regulatory Compliance Association regarding the future of the financial sector.
First, Commissioner Chilton noted that the financial sector has some reputation-management problems, citing CME Chairman Terry Duffy’s comment, “Wall Street has suffered reputational damage. . . . I am concerned that those of us in financial services forget who we serve – and the public knows it.” In order to address malfeasance in the financial sector, Commissioner Chilton made recommendations which included: (i) serious and significant penalties that are not considered “the cost of doing business,” (ii) that people who commit financial crimes should be sentenced to jail time and not just a fine, (iii) a cultural shift starting with financial firms’ executives and board of directors, and (iv) incentivizing credit and risk managers, including making their recruitment a top priority.
In keeping with the Halloween motif, Commissioner Chilton compared the financial sector to the scary 1958 movie, The Blob. Commissioner Chilton brought up familiar financial players that he believes are, like the Blob, threatening citizens. These threats include “Massive Passives,” which are institutional investors that keep long-term investments with large sums of money, which can distort market pricing; high-frequency “Cheetah Traders” who make rapid trades, often within tenths of a second, using new technology to send off even more trades in a shorter amount of time. These “Cheetah Traders” are not immune to error, explained Commissioner Chilton, noting that the Flash Crash from Knight Capital and the increasing reliance on technology make the market more vulnerable to cyber-attacks and tech glitches. Commissioner Chilton explained that these high-frequency traders need more oversight and data analysis from the CFTC, and that regulation is the first step toward keeping these new high-tech markets safe.
Finally, Commissioner Chilton explained that the financial market place is evolving, and that constant innovation in the financial services industry requires flexibility and management, including shared goals among all stakeholders. He stated that the next five years will set the stage for how the financial sector operates for the next 20 or 30 years, especially since the financial sector has gone global. Commissioner Chilton stated that the future is not so spooky after all, but that effective regulation is key in addition to compliance officers who dare to create “stronger, more ethical, and more sustainable markets” that foster a flourishing financial sector for the future.
It really is time for regulators to become more self-questioning. Here’s a start: Questions 1 and 2: Do non-U.S. customers find doing business in the United States subject to CFTC regulation attractive? If not, why not? Questions 3 and 4: What are the problems that the CFTC is already having with data collection and analysis? Would it be sensible to fix those problems before asserting that more information should be provided to the CFTC when it cannot use what it has? Question 5: Given that the CFTC imposed an incredible $1.7 billion in fines last year, what level of fining power do you think that the CFTC requires to do its job? Question 6: Would it make sense for the CFTC to review the rules of SEFs before requiring that all interest rate swap trades move onto the new markets? Question 7: Would it make sense for the CFTC to fix the problems in the existing Dodd-Frank rules before advocating dozens of new rules?
