Culture change is a top priority for the futures market

Corporate America desperately needs a serious ethical overhaul, and that includes the financial sector.  Leadership, from the board of directors and the CEO down through the layers of an organization, is essential to establishing and maintaining an ethical corporate culture.  Management must continuously stress the need for ethics through every available channel of communications -- speeches, articles, training, leadership conferences, compensation systems, recruitment and retention policies, and the like.  Corporate structure must reflect a commitment to ethical behavior.  The Board of Directors should have a committee charged with independently monitoring the ethical climate of the organization.  Employees should have a channel of communications separate from the chain of command and reporting directly to top management through which they can raise critical ethical issues without fear of reprisal.

CFTC Commissioner Bart Chilton presented a compelling keynote speech at the Hard Assets Investment Conference in Chicago on September 21 advocating several critical actions to improve the distressing ethical climate in the financial sector.  The full text of his remarks is available on the CFTC's website.  Essential points he recommends include:

• Aligning compensation systems to stress risk management over periods of time that reflect an emphasis on sustainable growth rather than immediate profit;

• Recruiting and hiring a workforce receptive to balancing risk and assuring that a drive for profits does not overwhelm other considerations; 

•  Providing sufficient funding to the CFTC through a user fees similar to those used to fund other financial regulators; and

•  Focusing regulations on 
• a corporate structure that emphasizes independence and diversity of viewpoints and skill sets among its directors;
• ownership rules that reduce the chance of conflicts of interest;
• internal and external business conduct standards that clearly demarcate acceptable practices;
• preventing conflicts of interest through limitations on proprietary trading by banks, with careful distinction between hedging risk and proprietary trading; and
• requiring registration of high frequency traders and insuring that they test their algorithms before using them for trading and include a "kill switch" to shut them down if they seriously malfunction.

Some of Commissioner Chilton's recommendations are already contained in draft or final rules, although implementation and operational experience will undoubtedly provide essential data to guide revision and further development.  In any case, his suggestions deserve serious consideration over what will be a long period of rehabilitating the reputation of the financial sector.