On September 25, 2013, the CFTC formally closed its five-year investigation into allegations of manipulation of the silver market with an atypical public announcement of that fact. Unfortunately, this leaves the public at large, and the investing public in particular, in an unenviable position.
The silver market has been suspected of being corrupt for a long time. Few who were old enough to have money to invest can forget the colossal attempt of the Hunt brothers to corner the silver market in the 1970's. More recently, Commissioner Bart Chilton stated categorically, at a meeting on October 26, 2010 to consider new rules on Anti-Manipulation and Disruptive Trading Practices, that the silver market -- which had been under investigation for two years at that point -- was being manipulated.
Now the CFTC announces that, despite spending 7000 Enforcement Division staff-hours looking at everything it could think of, it cannot find sufficient evidence to conclude that the market is being manipulated.
This poses the critical question, then, of what is happening to the silver market. This is, of course, not necessarily within the Commission's mandate, so perhaps we should not fault them for not providing some answers or at least working hypotheses. But the high-level alternatives are mighty unappealing. Either the market is being manipulated and the regulators can't figure out how, or, the market is not being manipulated but, for unknown reasons, is behaving in what well-placed experts believe is an irrational way. Neither of these options provide anyone -- but those in privity with the manipulators, if there are such people -- any comfort concerning how to hedge or speculate in the silver market.
Tuesday, October 1, 2013
Wednesday, March 6, 2013
Hit 'em again? Is LIBOR still being rigged?
When CFTC Chairman Gary Gensler spoke to the annual meeting of the Institute of International Bankers held in Washington on March 4, he discussed, among other timely topics, the continued reliance of the credit markets on the London Interbank Offered Rate (LIBOR), which he correctly asserted is ill-advised. He mentioned that in 2012 LIBOR was dramatically more stable than comparable measures of volatility. According to Chairman Gensler, for more than 115 straight trading days the LIBOR three month U.S. dollar rate did not change.
Perhaps it is time to investigate LIBOR once more, starting where the recent settlements left off. The marvels of modern word processing could make the burden of issuing new subpoenas a matter of minutes. The attorneys and investigators that first snagged the liars now have a learning curve behind them. It could be a perfect example of doing more with less. And if this unbelievable stability is a sign of unbelievable stupidity or hubris, doesn't it cry out for continued redress? Perhaps the tuition was too low for the last lesson in civic responsibility.
Chairman Gensler's public expression of skepticism about this remarkable turn of events implies that his staff likely shares his doubts. Hopefully, enforcement officials will be able to head off any corps of bankers hammering away at the "delete" buttons on their keyboards and running red-hot shredders.
Perhaps it is time to investigate LIBOR once more, starting where the recent settlements left off. The marvels of modern word processing could make the burden of issuing new subpoenas a matter of minutes. The attorneys and investigators that first snagged the liars now have a learning curve behind them. It could be a perfect example of doing more with less. And if this unbelievable stability is a sign of unbelievable stupidity or hubris, doesn't it cry out for continued redress? Perhaps the tuition was too low for the last lesson in civic responsibility.
Chairman Gensler's public expression of skepticism about this remarkable turn of events implies that his staff likely shares his doubts. Hopefully, enforcement officials will be able to head off any corps of bankers hammering away at the "delete" buttons on their keyboards and running red-hot shredders.
Monday, February 18, 2013
Fiscal cliff as constitutional crisis
The news is filled lately with the "fiscal cliff" looming on March 1 and the devastating effects going over the cliff will have on a broad range of public services, such as food inspection, air transportation, and, certainly, financial regulation. The threat of going over the cliff also has widespread negative implications for the private sector. I wrote about some of these problems at the end of January. And we have more recently witnessed financial regulators renewing their pleas to congressional leaders for adequate funding merely to attempt to carry out their missions -- e.g., CFTC Chairman Gary Gensler still trying to inch his meager staff of about 630 toward the 1000 mark. But a new and deeper issue of the governmental dysfunction represented by the "fiscal cliff" has occurred to me recently and caused me to revisit the matter.
Clearly the spectacle of a legislature that cannot even agree on a budget for the federal government -- which thus has to "close down" (to the extent that can even be done) -- is not new. There have been brief government closures, and several near misses, in the past. That threat still exists with the expiration of the current continuing resolution funding the government until March 27. Failure to fund the government for a new fiscal year is deeply dysfunctional to be sure -- true nonfeasance. And history is filled with highly beneficial bills that should have become law but did not through such nonfeasance.
But I cannot recall an instance when Congress passed and the President signed a law which all parties knew when it took effect would be positively detrimental to the nation. This seems to me to be an even deeper level of dysfunction than we have seen before -- malfeasance rather than nonfeasance. Democratic institutions do not function well in the absence of existential crises. But when the legislature creates a synthetic crisis in hopes of scaring itself into action, and then fails to avoid the crisis it has created (or moves the date of the disaster ever onward), the level of governmental dysfunction approaches a constitutional crises in which the very structure of the government prevents it from accomplishing its stated purposes ("provide for the common defense and security", etc., etc.).
If you know of other cases when Congress enacted legislation that it knew would be detrimental to the country, have thoughts on my proposition that this is a deeper and more critical level of dysfunction than the usual nonfeasance we previously experienced, or have any other illuminating thoughts on what this means for the viability of our system of government, the administrative/regulatory state, or any similarly lofty matters, please let me know.
Clearly the spectacle of a legislature that cannot even agree on a budget for the federal government -- which thus has to "close down" (to the extent that can even be done) -- is not new. There have been brief government closures, and several near misses, in the past. That threat still exists with the expiration of the current continuing resolution funding the government until March 27. Failure to fund the government for a new fiscal year is deeply dysfunctional to be sure -- true nonfeasance. And history is filled with highly beneficial bills that should have become law but did not through such nonfeasance.
But I cannot recall an instance when Congress passed and the President signed a law which all parties knew when it took effect would be positively detrimental to the nation. This seems to me to be an even deeper level of dysfunction than we have seen before -- malfeasance rather than nonfeasance. Democratic institutions do not function well in the absence of existential crises. But when the legislature creates a synthetic crisis in hopes of scaring itself into action, and then fails to avoid the crisis it has created (or moves the date of the disaster ever onward), the level of governmental dysfunction approaches a constitutional crises in which the very structure of the government prevents it from accomplishing its stated purposes ("provide for the common defense and security", etc., etc.).
If you know of other cases when Congress enacted legislation that it knew would be detrimental to the country, have thoughts on my proposition that this is a deeper and more critical level of dysfunction than the usual nonfeasance we previously experienced, or have any other illuminating thoughts on what this means for the viability of our system of government, the administrative/regulatory state, or any similarly lofty matters, please let me know.
Monday, February 4, 2013
Swapping swaps for futures
The hottest topic of the day is the migration of swaps to the futures market, which appears to have taken regulators somewhat off guard. The basic idea is that market participants will prefer to use futures contracts that mimic the performance of swaps rather than using the swaps themselves. The apparent motive behind this migration is the impending regulation of the swaps market, with the imposition of the usual regulatory requirements relating to margin, block size, transaction reporting, central clearing, swap dealer registration, etc.
On January 31, 2013, the CFTC held a public roundtable to solicit input on the benefits and burdens of this migration. Written comments can be retrieved from the agency website and a video of the day-long session will be available there soon. The trade press is also providing extensive coverage of the views of scholars and partisans on this matter.
Certain basic principals can easily be agreed upon, regardless of where one's interests may lie. Opportunities for "regulatory arbitrage" between the swaps and futures systems should, naturally, be eliminated or at least minimized. The increased burden on "end users" who use swaps to hedge their actual risks in the marketplace should also be held to a minimum, although that will undoubtedly be a non-zero number.
Where the regulatory lines are drawn, and how they are adjusted with experience, will certainly be a matter of intense debate and unavoidable experimentation; much of this is unexplored territory. But regulators and Congress must keep the broader picture in mind. Futures and swaps are often, rightly, analogized to insurance policies. It is less common to recognize the costs of regulation as part of the premium, as real as that cost is. Dodd-Frank and its implementing regulations are intended to be insurance against catastrophic failure of the national and international financial system. The "regulatory premium" for that policy will never exactly reflect the corresponding risk in such a complex and dynamic system, but burdens, fair and unfair, must be borne to provide a better system than the one that exploded five years ago.
On January 31, 2013, the CFTC held a public roundtable to solicit input on the benefits and burdens of this migration. Written comments can be retrieved from the agency website and a video of the day-long session will be available there soon. The trade press is also providing extensive coverage of the views of scholars and partisans on this matter.
Certain basic principals can easily be agreed upon, regardless of where one's interests may lie. Opportunities for "regulatory arbitrage" between the swaps and futures systems should, naturally, be eliminated or at least minimized. The increased burden on "end users" who use swaps to hedge their actual risks in the marketplace should also be held to a minimum, although that will undoubtedly be a non-zero number.
Where the regulatory lines are drawn, and how they are adjusted with experience, will certainly be a matter of intense debate and unavoidable experimentation; much of this is unexplored territory. But regulators and Congress must keep the broader picture in mind. Futures and swaps are often, rightly, analogized to insurance policies. It is less common to recognize the costs of regulation as part of the premium, as real as that cost is. Dodd-Frank and its implementing regulations are intended to be insurance against catastrophic failure of the national and international financial system. The "regulatory premium" for that policy will never exactly reflect the corresponding risk in such a complex and dynamic system, but burdens, fair and unfair, must be borne to provide a better system than the one that exploded five years ago.
Tuesday, January 29, 2013
March madness -- the fiscal cliff and continuing resolution
Yesterday, the Washington Post carried a front-page article on the costs of preparing to "shut down" the government (something that actually can't be done; instead it just becomes even less efficient and responsive than usual). The obvious costs are those associated with diverting slender staff resources from mission responsibilities toward shutdown preparations. In the derivatives arena, those disappointed with the pace of regulation and the lack of "regulatory certainty" should be prepared for more of the same, as Congress buckles under its basic responsibility to "keep the lights on."
Operating under a continuing resolution -- which permits spending only at levels of the prior year -- for six months has been an effective across the board budget cut for federal agencies. Even if Congress were to provide funding at levels near those requested by the agencies during the regular budget cycle -- something unlikely to occur at the end of March when the current CR expires -- the agencies could not possibly spend that funding in a rational and efficient way in the last six months of the fiscal year. And, if funding above the CR level is not enacted in March, are we facing a full year of flat-lined appropriations?
A more subtle cost of CRs is that they are often "resolved" through passage of massive "omnibus" appropriations bills -- behemoth bills so large that nobody can read them critically before they are passed. They therefore become laden with pork and bad initiatives that individually are not significant enough to justify delaying the omnibus bill but that are still bad law and collectively inflict a thousand wounds on the public.
The second look over the fiscal cliff arrives earlier than the March 27 expiration of the CR -- on March 1, thus bracketing the month with a set of legislative spasms. (The debt ceiling fiasco has been rescheduled for May.) The ill effects of the cliff controversy are largely the same as those of the CR, only translated into areas of tax policy and other segments of the government not directly associated with the appropriations process.
Having seen Congress injure each foot with a fiscal bullet makes one shudder to think where the debt ceiling bullet may lodge.
Operating under a continuing resolution -- which permits spending only at levels of the prior year -- for six months has been an effective across the board budget cut for federal agencies. Even if Congress were to provide funding at levels near those requested by the agencies during the regular budget cycle -- something unlikely to occur at the end of March when the current CR expires -- the agencies could not possibly spend that funding in a rational and efficient way in the last six months of the fiscal year. And, if funding above the CR level is not enacted in March, are we facing a full year of flat-lined appropriations?
A more subtle cost of CRs is that they are often "resolved" through passage of massive "omnibus" appropriations bills -- behemoth bills so large that nobody can read them critically before they are passed. They therefore become laden with pork and bad initiatives that individually are not significant enough to justify delaying the omnibus bill but that are still bad law and collectively inflict a thousand wounds on the public.
The second look over the fiscal cliff arrives earlier than the March 27 expiration of the CR -- on March 1, thus bracketing the month with a set of legislative spasms. (The debt ceiling fiasco has been rescheduled for May.) The ill effects of the cliff controversy are largely the same as those of the CR, only translated into areas of tax policy and other segments of the government not directly associated with the appropriations process.
Having seen Congress injure each foot with a fiscal bullet makes one shudder to think where the debt ceiling bullet may lodge.
Thursday, January 17, 2013
Is the correlation between results and compensation tightening at big banks?
The announcement on Wednesday that JP Morgan CEO and Chair Jamie Dimon's compensation for 2012 will be $ 11.5 million -- roughly half of his compensation for 2010 -- may provide some hope that the big banks will begin to bring executive compensation into better alignment with results. Although Mr. Dimon will not have to change his lifestyle because of his pay adjustment, it does show that JP Morgan is taking the "London Whale" fiasco and its continuing fall-out seriously.
But some commentators believe that the bank did not go far enough. Slate's Agnes T. Crane argues that Dimon should have been relieved of his Chairmanship. Whether this should have been done as an additional sanction or simply as a matter of sound management restructuring, the benefits of separating the two offices that Ms. Crane point out are real. And Bloomberg's Jonathan Weil faults the Bank's report on the London trading scandal for not analyzing how the Bank's Chief Investment Office morphed from a risk management operation into a speculative powerhouse -- a transformation urged by Mr. Dimon.
Still, a journey of a thousand miles ... . There are many chapters yet to written in this, and the many other, trading scandals that came to light last year. It is difficult, however, for those who maintain even a shred of optimism about whether the US financial sector can be salvaged in its present form not to see this as a ray of hope -- dim and flickering, perhaps -- but still as step in the right direction.
But some commentators believe that the bank did not go far enough. Slate's Agnes T. Crane argues that Dimon should have been relieved of his Chairmanship. Whether this should have been done as an additional sanction or simply as a matter of sound management restructuring, the benefits of separating the two offices that Ms. Crane point out are real. And Bloomberg's Jonathan Weil faults the Bank's report on the London trading scandal for not analyzing how the Bank's Chief Investment Office morphed from a risk management operation into a speculative powerhouse -- a transformation urged by Mr. Dimon.
Still, a journey of a thousand miles ... . There are many chapters yet to written in this, and the many other, trading scandals that came to light last year. It is difficult, however, for those who maintain even a shred of optimism about whether the US financial sector can be salvaged in its present form not to see this as a ray of hope -- dim and flickering, perhaps -- but still as step in the right direction.
Friday, December 14, 2012
CFTC's rule on commodity pool operators upheld by U.S. District Court
On Wednesday, December 12, 2011, the U.S. District Court for the District of Columbia rejected a challenge to the CFTC's new rule governing Commodity Pool Operators. The rule was challenged by the Investment Company Institute and the U.S. Chamber of Commerce, primarily on procedural grounds related to the adequacy of the agency's consideration of the costs and benefits of the new rule, which is required by section 15(a) of the Commodity Exchange Act (CEA).
Judge Beryl A. Howell's comprehensive 92-page opinion, available on the court's website, serves as a virtual blueprint for how agencies should conduct analyses of the costs and benefits of regulations, particularly when the regulations cover areas in which the costs and benefits cannot be reasonably quantified. Numerous regulations implementing the Dodd-Frank Act remain to be finalized and modifications to many of them can be expected as the industry evolves and experience with the new regulations accumulates. Judge Howell's opinion will greatly facilitate this daunting task. And, although the opinion addresses the specific requirements of section 15(a) of the CEA, the analysis illuminates the correct general approach for dealing with costs and benefits that cannot be quantified and should serve as a landmark in administrative law far beyond regulations under the CEA.
Judge Beryl A. Howell's comprehensive 92-page opinion, available on the court's website, serves as a virtual blueprint for how agencies should conduct analyses of the costs and benefits of regulations, particularly when the regulations cover areas in which the costs and benefits cannot be reasonably quantified. Numerous regulations implementing the Dodd-Frank Act remain to be finalized and modifications to many of them can be expected as the industry evolves and experience with the new regulations accumulates. Judge Howell's opinion will greatly facilitate this daunting task. And, although the opinion addresses the specific requirements of section 15(a) of the CEA, the analysis illuminates the correct general approach for dealing with costs and benefits that cannot be quantified and should serve as a landmark in administrative law far beyond regulations under the CEA.
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