Back to the Futures

On the day that customer claims against MF Global were due to the trustee overseeing the brokerage's liquidation, Scott O'Malia had some rather harsh words for the U.S. Commodities Futures Trading Commission. And no, O'Malia isn't one of the frustrated MF Global customers whose funds seemed to have gone missing. He's a CFTC commissioner.

In a well-attended lecture at New York Law School, O'Malia said it was regrettable that Congress had never granted the CFTC the authority to declare trading firms insolvent (in MF Global's case, this task was handled by the Securities Investor Protection Corp.) He also criticized bankruptcy rules that put customers in line behind creditors for recovering claims. But he saved his real upbraiding for the CFTC itself, which he accused of acting "like a little child, abandoning the old toy and swapping [it] out for the new" once the Dodd-Frank Act rolled around.

Ever since Dodd-Frank, he said, the CFTC has spent far too much of its time and resources on swaps rulemaking — deciding what constitutes a swap dealer or a major swap participant, or otherwise involving itself with convoluted swap-market matters — while "averting its gaze from the futures markets and their developments." In other words, neglecting the customer protection and corporate compliance issues brought to the fore by MF Global.

Invoking the broken windows theory of criminology, which in effect says that vandalism begets vandalism, O'Malia, one of two Republican members of the five-member CFTC, called the collapse of MF Global "a huge broken window in the commission's neighborhood."

While he praised the CFTC's work to expedite transfers of customer positions and funds, and spoke admiringly of the agency's willingness to use its subpoena power in the case, he lamented that "instead of taking action to comprehensively identify and address vulnerabilities in futures customer protection, the commission continues its all-consuming fixation on swaps regulation."

O'Malia acknowledged that the big banks that deal heavily in swaps (and have the most to lose from the market's regulation) might claim a victory if the CFTC were to suddenly redirect more of its limited resources to futures customer protection or high-frequency trading, another issue he says the agency has not sufficiently addressed. But he still hopes his fellow commissioners will take his advice.

"Nobody gave us a pass on regulating the futures market while we were doing this," he said. "We've got to figure out how to walk and chew gum at the same time."