A New Era At The CFTC Can Make Commodities Great Again

by: Andrew Hecht


A new honcho.

The record speaks for itself.

Three immediate changes to the agency’s focus.

Bring those commodity merchants back.

A vibrant CFTC supports U.S. national security.

On Friday, January 20, Donald J. Trump will take the oath of office and become the forty-fifth President of the United States. Throughout the campaign, the President-elect pledged to take a more rational approach to regulation in the nation.

The Commodities Futures Trading Commission was born in 1974 with the Commodity Futures Trading Act. Originally formed as an agency to ensure well ordered, transparent and liquid markets for all participants and to safeguard against egregious and collusive practices, the regulatory scope of the agency has evolved over the decades that followed. The advent of financial futures contracts on currencies and indices in the stock and bond markets fell under the auspices of the CFTC. Following the global financial crisis of 2008, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 further expanded the scope of the agencies regulatory oversight to include the swaps market.

Under the outgoing administration, the implementation of new rules inspired by Dodd-Frank caused many changes in the regulatory environment in the United States. Additionally, the Volcker Rule, which prohibits banks involved in trading in a myriad of asset markets from assuming proprietary positions, has caused an expansion of compliance-related issues that currently face financial institutions and other market participants in the financial and commodity markets. Dodd-Frank and the Volcker rule impose constraints, in many cases, on critical liquidity providers when it comes to assuming risks from the many U.S. consumers and producers who seek to mitigate financial risks in both liquid and illiquid assets. The unintended consequences of the legislation and rule has caused increasing costs for American producers and consumers because of capital charges that liquidity providers must set aside to service customers. Additional charges increase the cost of production and consumption which in turn makes American business less competitive on the global stage.

The historical focus of the CFTC has been to protect market participants from bad behavior to foster transparent, competitive, and financially sound markets. Bad behaviors like market manipulation, fraud, and abusive practices related to derivatives and other market products subject to the Commodities Exchange Act. However, Dodd-Frank expanded the purview of the agency to an extent that has caused some businesses in the commodity and foreign exchange markets to leave the shores of the United States for markets with more favorable regulatory frameworks in Switzerland and Asia.

The two Chairmen that have presided over the agency since Dodd Frank, Gary Gensler and Timothy Massad, have been proponents of the legislation and have put in place many new rules and regulations on businesses operating in the futures domain. However, the agency is about to get a new Chairman who has been an opponent of many of the onerous rules that have stifled business by going overboard and creating an environment where business is currently working to satisfy regulators rather than having the regulators support the growth of business in the United States.

A new honcho

The structure of the CFTC calls for five commissioners with no more than three from the same political party. The President appoints Commissioners that are then confirmed by the Senate. Currently, there are only three sitting commissioners because the Senate failed to confirm two appointees the course of 2016. The current Chairman has announced his intention to resign on January 20, Inauguration Day, as the Chairman is from the Democratic Party and he sees the writing on the wall. The only sitting Republican is Commissioner J. Christopher Giancarlo who has been an outspoken protector and champion of free market capitalism and an opponent of many of the onerous initiatives to further perpetuate and strengthen the choke-hold of Dodd-Frank on the futures markets and its participants.

Commissioner Giancarlo will become the interim Chairman of the CFTC upon Timothy Massad's departure but all signs are that he will receive the incoming President's blessing to serve in that role throughout his term which does not end until 2019.

The record speaks for itself

Commissioner Giancarlo has a strong record of dissent since his appointment in 2014 arguing that the agency went too far in its interpretation of Dodd-Frank to placate some of the more progressive Democratic voices in the House and Senate. The commissioner worked at a swaps brokerage company, GFI, before his appointment and often sites his industry experience. In a September 2016 speech he said, " Unbalanced regulation is a major contributor to America's economic doldrums." When the CFTC made a case to obtain proprietary trading source codes from high frequency traders, Commissioner Giancarlo was the dissenting voice arguing that the initiative ran counter to " legal and civil and constitutional rights." The commissioner was also a roadblock that prevented hard and fast position limits dictated by the regulatory agency at the eleventh hour before the change in administrations next week.

Commissioner Giancarlo's commitment to efficient and effective regulation and his experience at the CFTC makes him the perfect choice to lead the agency through a period of change, for the better.

Three immediate changes to the agency's focus

One of the most important changes that the next Chairman has highlighted is the need for the regulatory agency to catch up with technology. Commissioner Giancarlo has spoken about the need for the agency to examine and employ twenty-first century technological advances like blockchain, the operational tool which is the child of Bitcoin, the cryptocurrency. In a December 2016 article for CoinDesk, the Commissioner wrote, " I spoke a lot about distributed ledger technology (DLT) this past year because I believe in its promising benefits for the financial marketplace and financial regulators." He went on to explain the five steps that the CFTC should take to encourage DLT and how the agency must avoid the regulatory bureaucracy that has a habit of stifling financial technology.

The CFTC is a big money making agency for the Federal government because of the fines collected from those found to have behaved badly each year. A twenty-first century approach will enhance investigative capabilities and create an even bigger cash cow for the U.S. tax payers. Technological application via DLT is one of the three immediate projects the agency should undertake starting on January 20.

The second most important goal of the agency in a new era of effective and efficient oversight will be to roll back some of the onerous regulations. Over recent years, financial institutions, businesses and other market participants have avoided or limited their activities on futures exchanges because of the prohibitive cost associated with compliance. The CFTC will need to work together with industry, Congress, the Departments of Commerce, Energy and Agriculture to make commodities great again in America. The CFTC needs to shift course from an agency that expects business to work for the regulator to a body that works to support and nurture American business. While investigating and punishing bad behavior is of paramount importance, supporting business growth through efficient and common sense regulatory dictates will help to lift the United States out of those " economic doldrums."

Another critical change in CFTC focus should be an effort to right the some of the wrongs created by an era of onerous, confusing and stifling regulation.

Bring those commodity merchants back

The agency should embark on a campaign to entice businesses that departed the U.S. and now operate outside its borders in the commodities, foreign exchange and other markets to come back home once again. The United States is about to enter an era where regulation and taxation will support business growth and migration to and not away from the richest nation in the world. It is possible that even those commodity-based businesses that never operated from the U.S., or have not in decades, will find the opportunity compelling given an attractive economic and regulatory landscape that supports their endeavors. The CFTC has a special opportunity under the new administration to make even more money for taxpayers by bringing business back to U.S. shores. And, it is not only a question of the benefits from revenue flows via tax receipts, it is an imperative from the perspective of national security.

A vibrant CFTC supports U.S. national security

Commodities are global assets. While consumption is ubiquitous; production is often a local affair. Commodity output comes from regions of the world where the soil and climate supports production or where reserves exist in the crust of the earth. China is the world's leading commodity consumer because of its massive population and economic growth over past decades. China has spent the past thirty-plus years investing in raw material flows around the world to secure supplies. The Chinese have investments right here in the United States, in 2013 they bought the world's leading hog producing company, Smithfield Foods.

Russia is a major producer of many commodities that trade on U.S. futures exchanges. Many of the merchant companies that trade the physical commodities have left the U.S. for Swiss and Asian trading hubs. The flow of commodities around the world is an important piece of the puzzle when it comes to understanding the economic conditions in nations around the globe. The CIA, FBI and other national security agencies depend on information about commodity flows when modeling worldwide economic data. It is far easier to obtain solid data on raw material flows from companies operating within the U.S. as opposed to outside the borders. Therefore, the more commodity businesses migrate to the U.S. over the coming years; increasingly robust data will assist those responsible for the security of the nation.

The Commodities Futures Trading Commission is about to shift gears from foe to friend as a regulatory body when it comes to American business. Under the leadership of Chairman Giancarlo the CFTC can thrive and make commodities great again in the U.S.A.

Author's note: I have introduced a new weekly service through Seeking Alpha Marketplace. Each Wednesday I will provide subscribers with a detailed report on the major commodity sectors covering over 30 individual commodity markets, most of which trade on U.S. futures markets. The report will give an up, down or neutral call on these markets for the coming week and will outline the technical and fundamental state of each market. At times, I will make recommendations for risk positions in the ETF and ETN markets as well as in commodity equities and related options. You can sign up for The Hecht Commodity Report on the Seeking Alpha Marketplace page.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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