CFTC COMMISSIONER CHILTON'S SPEECH TO REGULATORY COMPLIANCE ASSOCIATION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
“Polls, Pols and Poltergeists”

Speech of Commissioner Bart Chilton Before the Regulatory Compliance Association, New York City

October 31, 2013

We Just Don’t Care Polling

“One ringy dingy…two ringy dingies. Goodness gracious (snort) hello, I’m from We Just Don’t Care…Polling. We Just Don’t Care Polling, that’s us.”

Happy Halloween! I’m so jacked up for the opportunity to spend some time with you. We are going to talk about some cha cha changes and imagine—imagine—some neat stuff. Part of that will be through our polling. All of your answers will be kept strictly confidential. The lawyers ask me to say that—your answers will be kept confidential—but in reality, we just don’t care—We Just Don’t Care Polling.

This is a large crowd, I'm told around 1,000 people. That affords us a few “pretty, pretty, pretty good” polling opportunities; things we can't accomplish in smaller focus groups. We’re going to use our size to surmise what we think about a few things.

Halloweeener

Ready go. Let's start with this: the Rock and Roll Hall of Fame will be inducting new members in December. I’m going to give you three of the nominees and ask for a round of applause for each. The loudest response will be our Halloweeener.

Let’s test our applause meter so that our results won’t be skewed. I’d rather not say, “You can do better than that.” Let’s get it right the first time, shall we? Try it now, applause, applause, applause. See, we don’t even need an “applause” sign like the talk show hosts.

I’ll let you know who they, the nominees, are first, and then we’ll find out what our survey says. Here they are: Linda Ronstadt, Yes, or Hall and Oates. Here we go, by applause, who should be inducted into the Rock and Roll Hall of Fame: Linda Ronstadt? Yes? Hall and Oates? Let’s say Yes we have a winner—a Halloweeener, in a Roundabout way.

About now, you might be asking what this has to do with the financial sector or markets, well—“Absolutely nothing, Say it again y'all. War, huh, good God, What is it good for, absolutely nothing.” I’ll say it again, We Just Don’t Care Polling.

Pols: War of Words

Actually, as long as we stumbled upon war, let’s move to the war of words that we’ve been hearing from the Washington “pols”—the politicians. Many seem to think that in order to get a leg up they’ve go to tear others down. We’ve heard that war of words despite a lot of efforts to tune it out—nah, nah, nah, I can’t hear you. But a bit of that made it through to most of us.

Some of the pols have made linguistic gymnastics an art form. For example, many who voted for the government shutdown are now spinning that they didn’t do so. It’s one thing to have a difference of opinion and to stand up for one’s beliefs, but to run from the previous post, claim they fought to keep government open, point their fingers in the opposite direction claiming, “He did it. She did it. Wasn’t me!” To rewrite the facts afterward, treating the people who bankroll government paychecks as dummies? That doesn’t clear even the lowest integrity bar.

This war of words is fueled and fouled by 24/7/365 television, and the inflated rhetoric that seems part and parcel to contemporary programming. The lines between being a policy advocate and a thespian (much less those between news and entertainment) have been so badly blurred, average Americans can’t see through the fuzz. It has turned people off and tuned people out.

Many of those sticking with it, those still tuned in and watching their one-sided network of choice, find themselves altogether intolerant of others. Some see wimpy weasels weakening the fiber and fortitude of the founding fathers. Others see swine swigging from 80 proof bottles of patriotism and behaving badly. Here’s what many have in common: they can’t stand; they can’t stand people on the other side of an issue. It’s a sad shame that so many Americans have zero tolerance for those with differing points of view.

The result of the current circumstance, including the war of words, is that Washington can’t complete the most basic of responsibilities—such as passing an annual budget or paying our bills. Its dysfunction junction and it can’t function.

The American people understand that much. An NBC News/Wall Street Journal poll a few weeks ago found that 60 percent of Americans say every Member of Congress should be fired. Who said we don’t need Donald Trump? “You’re fired!”

Tip, Gipper & Nixon

By the way, if you want to know how things should work, get the new Chris Matthews book, Tip and the Gipper: When Politics Worked. Those gentlemen leaders, Speaker O’Neill and President Reagan, got along even though they disagreed on more than they agreed. I’ve been fortunate to witness a lot of great bipartisan work over the last few decades. During the Clinton Administration, landmark bipartisan legislative collaboration produced accomplishments, like on welfare reform. Despite the impeachment proceedings, some modicum of bipartisanship carried on into the first few years of the Bush Administration, but since then, well…not so much.

Let’s do a lightning round pol poll for the heck of it. Which US president signed the Endangered Species Act into law—Kennedy, Nixon or LBJ? Kennedy? Nixon? LBJ? Ah, President Nixon. Despite the intense times and political divide, Nixon was able to work with Democrats on that and several other initiatives. It was good for the country, and very good for some Livin’ On The Edge critters, including the snail darters! We need that sort of attitude again in DC (the working together attitude, not the creepy impeachable stuff).

Pickers & Ethics

Back to polling. How about a reality television question? Three choices for which reality television show you like most: American Pickers, you know with Mike and Frank searching for rusty gold; Storage Wars, the original; or Duck Dynasty…happy, happy, happy. Let’s go: American Pickers? Storage Wars? Duck Dynasty? And, Duck Dynasty is the number one show on television.

Most of the people on those reality shows seem to have fairly decent standards and above average ethics. I recall Mike Wolf on American Pickers giving a fellow twice what the guy had asked for on an item because it was worth more than the seller knew. Trustworthy. That’s integrity. He often times pays a bit more than he’d like to on a first buy, just to break the ice and get the negotiations going. Fair. Honest. Smart. Successful.

So, let’s move on to ethics. Which profession has the highest ethics? Three choices: politicians, the pols we just spoke about; those working on Wall Street like many of you, or…wait for it: sanitation? Let’s go. Politicians? Okay, how about Wall Streeters? And, finally, sanitation workers?

Ah, “my, my, hey, hey” sanitation workers win the day.

Wall Streeters

So let’s move to the other also-rans, the Wall Streeters.

First, “OMG”, we are blasted almost daily with this firm or that individual doing something illegal. Here’s a data point for you that gives an idea of how bad it is out there: the CFTC collected about $1.5 billion in civil monetary penalties from those who broke the law last year. Our annual budget is roughly $200 million. Who knew? We are a profit center!

Another survey question: Which profession has generated more profits than all others since the fall of 2008: food services, internet technology, or the financial sector? Here we go: Food services? Internet technology? The financial sector?

Yep, it’s the financial sector. They’ve been killing it, but good, for a good long time.

“And isn’t it ironic…don’t you think” that those who helped create the economic calamity have made more than all others. At the same time, we’ve seen unprecedented malfeasance by the same lot. “Who would’ve thought…it figures.” (Alanis [Morissette] isn’t eligible for the Rock and Roll Hall of Fame until 2016.)

The Remedy

The remedy to all the malfeasance in the financial sector is three-fold. First, we need serious and significant penalties that aren’t just considered a cost of doing business. Next, if folks do the crime, they should do the time, not just pay the fine. And third, this is going to take a culture shift which starts with the firm executives and boards of directors.

The first thing firms should do, and perhaps some of you can help in this regard, if they or you haven’t already, is take a step back and look at it from the average person’s viewpoint; from the perspective of all stakeholders, not only financial investors and shareholders.

The scandals and greed driven improprieties have been plastered on the pages of the papers and our screens. I spoke with someone last week who said one of their colleagues couldn’t “look her relatives in the eye and tell them she worked for the financial sector.” Wow. That’s tough stuff.

Terry Duffy, the Chairman at the CME Group wrote an excellent opinion editorial a few weeks ago in the Wall Street Journal. He worried about the decrease in the number of college students turning to the financial sector and how he’s concerned that trend will continue. Here’s just a little bit of what he wrote:

“…Wall Street has suffered reputational damage, thanks to a few bad actors, that can't be undone simply by waiting for memories to fade and an economic boom to kick in. I'm concerned that those of us in financial services have forgotten who we serve—and that the public knows it…For instance, no matter how much you hear about ‘institutional money,’ there is no such thing. Those funds belong to individuals, and regardless of how many zeros are on the ledger, it is money that real people have entrusted to others for savings, retirement or education. That is a reality too often ignored, and when it is ignored, some Wall Streeters can too easily slip into regarding their work as a kind of money-making game divorced from the concerns of Main Street.”

It is vital for Mr. Duffy’s message to be heard and to be acted upon.

With regard to what else can be done at the firms, instead of rewarding the aggressive “Hey! Hey! Hey, hey, hey! Macho, macho men” traders (many of whom have perverse bonus incentives) how about incentivizing credit and risk managers? How about making those credit and risk professionals a top recruitment priority?

The bottom line is that the financial sector has been somewhat of a scary hot mess for the last few several years. Fortunately, that seems to be on the verge of changing.

Scary Movies—The Blob

Okay, speaking of scary, since it’s Halloween we have a polling question on the scariest movie. Three choices: Carrie (the new or the old one, “If I concentrate hard enough, I can move things.”); Poltergeist (“Carol Anne…Do not go into the light.”); or The Shining (“Here’s Johnny”). Ready? Here we go: Carrie? Poltergeist? The Shining? We have another Halloweeener?

There’s another scary movie. Its way old, so many of you may not have seen it. Anyone remember The Blob?

The Blob was made in 1958 and starred Steve McQueen. A meteorite crashes near a small town and when it’s examined, there’s this oozing jello-like substance, the Blob, which starts coming out. It gets larger and larger and begins to goo through the town. When touched, it’s agonizingly painful and it kills people. As it kills, the Blob keeps getting bigger and bigger and starts to devour the entire populace.

The point here—and I actually have one—is that we’ve seen a few threatening Blob-like changes going on in markets for the last few years.

Markets have morphed from what they once were. We’ve seen institutional investors diversify their portfolios into derivatives and park money in markets like never before. I term these folks Massive Passives because they are very large and fairly price-insensitive in their strategy. I’m not suggesting the Massive Passives are ghouls or anything. They have every right to be in markets and they provide liquidity.

So, what’s the prob, Bob? Well, at times, the Massive Passives have helped put a kind of thumb on the scale when they get in and go long. Generally, they aren’t getting into the crude oil market for a few days or even the summer driving season. They are getting in for a few years. Again, nothing wrong with that, but it has impacted prices. Like the Blob, the Massive Passives are oozing into different markets and when they touch things, it can be painful. (I’m not saying it’s always painful. They aren’t exactly like a 1958 movie, but you guys get the concept.)

Fast

The other Blob-like morphing of markets has taken place with technology. Another quick lightening round polling question: Which has more glitches, financial market exchanges, your laptop, or the ObamaCare website? Okay, that’s rhetorical. We aren’t going to poll that one.

Technology in markets has been a great thing, but not always so. We’ve seen dozens of tech glitches. Even the Geek Squad is awed at how flawed these systems have become.

Then we have our fine furry friends, the high frequency trading Cheetahs. Just like the cheetahs in the wild, these HFT Cheetahs are junglizing markets. Wait, but they are also Blob-like. Let’s just say they are really scary due to how they feed and they are fast.

How fast are they? Let’s find out what the survey says. How many milliseconds are there in a second: 10, 100, or 1,000? Here we go: 10? I’m a French model, bonjour.)

Next question: There is a fiber cable that runs from Chicago to here, to New York City. It takes how long for a trading message to travel the entire length. Is it 1.45 seconds; 145 milliseconds; or 14.5 milliseconds? Here we go: 1.45 seconds? 145 milliseconds? How about 14.5 milliseconds? Yes, it’s the last one. It takes 14.5 milliseconds.

Now, this is how valuable that speed is in today’s Blob-like jungle-whatever trading environment. There’s a new fiber being run from Chicago to New York, but this one is traveling a more direct route. It’s costing tens of millions. This new cable will cut the time down from those 14.5 milliseconds to 13.1 milliseconds. It is going to save only 1.4 milliseconds. We are talking about a thousand parts of a second here. It’s hard to even conceive.

What that means is while the Cheetahs may make more money if they are faster (and they do and they will), there are far more opportunities for bad things to happen at lightning speed. Hmm, there’s a frog or a Blob or something caught in my throat…pardon me, um, Flash Crash, um, Knight Capital. Not that there are any examples of that occurring, but theoretically, like in a move, it might be that we could see a technology glitch or even an intentional cyber-attack that could bring a market down and shred investors. (There are other issues with the Cheetahs, but we’ll leave it at that for today.)

Freeze

In the movie, in The Blob, how they ultimately took care of the thing was to freeze it. I think they took a bunch of fire extinguishers, perhaps from the high school, and froze it. The military put it onto a plane (not sure how, since it was so big, but they did) and flew the Blob to the North Pole or someplace cold, maybe near Governor Palin’s place. That was the end of the Blob (until the remake in 1988).

Well, hold on. That was the end of the Blob at least until Vice President Gore gets a hold of the thing given global warming. It could thaw! Uh oh. The Blob, Part II, maybe coming to a theatre near you! The meltdown begins…boom, boom, boom. And then, in the dark with the screen all black, you’d hear that gross slurping sort of sound the Blob made…in Dolby surround-sound. I’m creeping myself out. Don’t do, Mr. Vice President!

But I digress. I am all for innovation. I don’t think we should freeze the HFT Cheetahs, they should be able to continue to operate; but they do need some fairly pedestrian requirements.

First, let’s ensure that they are registered with the CFTC. Not all of them are, and if the Agency needs information, there shouldn’t be a wait for lawyers to get a judge to provide a subpoena. Registration is a very basic, and needed first step.

They should be required to test their programs, and ensure that they have operating kill switches.

Some in the European Union have suggested, and are putting forth legislation to slow the Cheetahs down. I’m not sure that’s the right answer, but it is worthy of consideration. At this point, we need more information.

These two Blob-like market morphing matters—the Massive Passives and the Cheetahs—are things we need to not only be cognizant of, but things that deserve thoughtful policy provisions which ensure that traders, markets and consumers are protected as best we can, without inhibiting legitimate trading.

Imagineer

It’s that legitimate trading and our financial sector as a whole with which I want to conclude.

Oscar Wilde, the flamboyant and quick-witted cultural commentator said, “To expect the unexpected shows a thoroughly modern intellect”. He made the statement in the late 1800’s. Back then, people tooled around in buggies and homes didn’t have electricity. At the same time, there were some things being invented that really caught people by surprise: typewriters, seismographs, escalators, contact lenses, dishwashers and washing machines, cash registers, and even radars and metal detectors.

Just think for a moment what it must have been like with all of these changes! Think about computers and smart phones and the internet and how we have been dealing with our own technology change. Then think about all those changes from the late 1800s. It was a whirlwind and a blur then as well.

It was within that context and timeframe that Wilde made his comment about the thoroughly modern intellect. Expect the unexpected.

Expecting the unexpected readies us for adapting to change, whether it’s a change in government funding through a shutdown, a change in political office holders and administrations, a change in product offerings or players, like the Cheetahs and the Massive Passives, a change in regulations or business environments like those emerging from Dodd-Frank and related financial regulations around the world.

Change is challenging and most of us resist it in one way or another. Some of the naysayers complained that Dodd-Frank would slow the economic recovery. Guess what? The reverse is happening: new businesses are being created. New market products are being offered. New technologies are being used. Take for example Swaps Execution Facilities, SEFs, they are just up and running now, earlier this month. These are the regulated venues where previously unregulated swaps are being traded. They are doing gangbusters. They are taking off.

To effectively drive change requires more than merely “expecting the unexpected”. It requires arguably more than adaptation and change management…though shared goals and expectations among all stakeholders—lawmakers, regulators, business, investors and consumers—would be a great starting point.

In today’s global economy—and I will spare you the Halloween headless horseman analogies—the world, not simply your employers and the United States, but the world, is looking for leadership. Character. Ethics. Trust. Creativity coupled with solutions.

I deeply believe that the financial sector, if it can respond to the best and most noble in us, can and will do more than expect the unexpected. You can be Imagineers.

It’s an interesting word, isn’t it? Imagineers. Growing our isolated local economies dependent on wagons, buggies and telegraphs to a global one utilizing high speed rail and iPhones required thousands of Imagineers—people who combined imagination with engineering. It’s a phrase popularized not in the 1950s and 60s by Walt Disney, but a decade earlier in the 40’s by Alcoa to describe their own innovation process. Alcoa described is as “letting your imagination soar, and then engineering it down to earth”; Letting our imaginations soar, and then engineering them down to earth. Reengineering the way we move forward, and redefining the markets and the way in which we function in them. Driving change.

(Incidentally, I met with Klaus Kleinfeld, the Chairman and CEO of Alcoa earlier this month. We didn’t discuss the word, but they are still Imagineering. He said when they look at building a plant; they look at it over 50 years and 100 years. Wow, that’s visionary.)

Contemplate

So, no polling question, contemplate this one. Ask yourself this: Is your professional field—the financial sector—and each of you as individual professionals within it—on the cusp of imagining the markets as they can be? Or, are you waiting to find what will come your way? Are you thinking about engineering the products, the services and parameters of the marketplace in a way that energizes your firm, our nation and the global economy?

Here’s why that’s an important to consider, and why I’m so high on the future. The financial sector has always been a change agent our economy needed throughout history. Some say the railroads built the nation, and there is no denying they played a pivotal role. But the banks and the financial sector built the businesses, the homes and the communities on those rail lines and everywhere else in the nation. They helped fuel the economic engine of our democracy.

It’s not like a few very bad years with some horrible consequences are going to take away the need for a vibrant financial sector. We need it. We want it. We gotta have it. As change agents and Imagineers, you are each in a position to step up and help get us back to where we need to be.

Five Years and the Future

The next five years will set the stage for how the financial sector operates for the next 20 or 30 years. That’s because the entire world is going through regulatory reforms. We in the United States are ahead of others in this endeavor. That’s a competitive advantage for you. Take it!

I head our Global Markets Advisory Committee for the CFTC. Last week in Chicago I met with a group of international regulators to talk about how to harmonize rules and regulations. The work is going on now and it will be done over the next few years. Once those are in place, and harmonized to the greatest extent practicable, those will be the rules.

What that means is the changes that are taking place now, just like in the 1800s and in the post-war 1940s, will have a monumental impact upon our financial sector and upon markets. Instead of being scared or spooked by the changes, let’s embrace the change, define and drive the change for the better. Let’s be Imagineers.

What that means for individual firms is that you need more than a compliance officer reacting to final rules, “expecting the expected.” You need visionary folks expecting Oscar Wilde’s unexpected, helping to manage the change in a way that makes and takes that competitive advantage of the rules and regulations here and around the globe. You need corporate cultures, like those of Alcoa in the 1940s and Disney back as early as the 1950s and still today, that encourage ethics, trust, integrity, interdisciplinary collaboration, social responsibility and Imagineering.

Final Question

So, here’s our final polling question: who thinks American’s best days are ahead of us and who thinks they are behind us. Only two choices. Ready, go: America’s best days ahead of us? And, behind us? Bravo for the optimists, the Imagineers!

In a Rasmussen Reports national telephone survey two weeks ago, only 31 percent of U.S. voters think American’s best days are still to come, down from a high of 47 percent a year ago September. I think you guys, newly enlisted Imagineers, are actually more positive than average Americans, and props to you.

So, keep on being positive. I love it.

The Analysis

Alright, after all of this polling I’ve come to a conclusion that I wouldn’t normally share, since we just don’t care, but here’s the two part takeaway, the thoughtful analysis. One, it’s clear from our research that we’re all here, but we’re not always all there. Let’s blame it on Halloween. Two, for those who do dare to care, the Imagineers, there are a lot of positive opportunities out there. We just need to be nimble and quick and keep looking around the corner.

The financial sector is on the threshold of a very, very exciting change. I encourage each of you here to be there, to expect the unexpected, and dare to create stronger, more ethical, more sustainable markets and a flourishing financial sector for the future. You easily can transcend the war of words of the pol, as well as the pitiful polls. You can manage the occasional poltergeist, Blob and Cheetah. You can Imagineer and help grow healthier economies around the globe. Why would you not?

I thank you for those efforts that you are, and will be, making. I appreciate your time, attention and your participation in our polls. I’m told we have some lovely parting gifts. Oh, what? We don’t? Sorry, forget that. You have my appreciation.

It’s been a scream. Thanks all y’all.

Last Updated: October 31, 2013

CFTC COMMISSIONER CHILTON'S CONCURRENCE WITH ORDER REGARDING JPMORGAN MARKET MANIPULATION CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Concurrence of Commissioner Bart Chilton in the Matter of JPMorgan Chase, N.A. (JPMorgan)
October 16, 2013

I concur with this Order. For too long, our manipulation standard under the Commodity Exchange Act has been too high a hurdle.  Here's the proof: we've only successfully litigated one case in the Agency's 38-year history.

The authority being used in this instance—Section 6(c)(1) of the Act and our Rule 180.1—is the result of a new Dodd-Frank provision which provides the Commission with more flexibility to go after reckless manipulation in markets. It is a provision I supported and one championed by Senator Maria Cantwell.

I've continually sought appropriate penalties for violations of the Commodity Exchange Act.  I still seek a statutory change from our current puny penalty regime. That said, the $100 million JPMorgan sanction, along with the banks’ admission of deploying a recklessly aggressive trading strategy, seems an appropriate amount for the egregious manipulative conduct that took place on February 29, 2012.

Admitting to these findings of fact needs to be something part and parcel to these types of settlements.  All too often, a firm will neither admit nor deny any wrong doing. That needs to stop. I've been calling for the Agency to ensure that this occurs and commend the enforcement professional involved in this matter for their work.  I would not have supported the Order unless JPMorgan had admitted to such findings of fact.  Going to court on the matter would have been an acceptable avenue from my perspective.

Our Division of Enforcement has done an exemplary job on this case.  Doing so under normal circumstances is challenging, but concluding this matter during the government shutdown is extraordinary. I commend our Director of the Division of Enforcement, David Meister, and the team that has worked on this: Joan Manley and Paul Hayek, Saadeh Al-Jurf, Traci Rodriguez, Allison Shealy and Dan Ullman.

Finally, the day before the October 1st government shutdown, the CFTC returned a billion dollars to the Treasury.  These are monies collected from various civil monetary penalties and settlements. The following day, boom boom out went the lights at the CFTC.  Markets aren't being watched by the Agency, and only the most limited of functions are being carried out.  The matter today is a significant exception.

All it would take to keep the Agency open and on the job is for Congress to approve one single sentence to allow the CFTC use of the types of funds we returned. We have at least $100 million sitting there right now, unused, and with this settlement, there will be an additional $100 million.

This is a common sense provision that I, once again, respectfully urge Congress to immediately consider.

CFTC COMMISSIONER CHILTON'S ASSESSMENT OF LOOMING GOVERNMENT SHUTDOWN

FROM:  COMMODITY FUTURES TRADING COMMISSION 
Boom, Boom, Out Go the Lights

Statement of CFTC Commissioner Bart Chilton

September 20, 2013

On September 30th, at the stroke of midnight, our country will face a government shutdown unless a continuing resolution to fund it is adopted.  That would be grave news for consumers.

Under a shutdown scenario, government regulators will be handcuffed in our ability to go after crooks who are trying to evade our oversight and protection of markets.  You can bet the “do-badders” are licking their chops.

The dark markets that Dodd-Frank brought into the light of day will go dark again.  The lights will go out.  Given the huge growth in the derivatives industry and our new oversight of swaps, CFTC’s market oversight functions are more important than ever.  Taking our cops off the beat for even a few days could have disastrous impacts on these markets that consumers depend upon.

In the longer term, I remain concerned about the stagnant budgetary circumstances and am convinced that a targeted transaction fee on trading, like the one the President has proposed to Congress, is needed to fund the agency and keep the markets safe.  But for now, let’s avoid a “Boom, Boom, Out Go the Lights” debacle, and hope a deal can be reached to keep the lights on.

CFTC COMMISSIONER BART CHILTON'S STATEMENT ON CROSS BORDER RULES AND REGULATIONS

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION
“Not the Boss”
Statement of Commissioner Bart Chilton on Cross Border
June 29, 2012
I support the proposed cross interpretive guidance and policy statement and exemptive order. These are global interconnected markets and we need to work with our colleagues around the planet to ensure that we have, to the greatest extent practical, harmonized rules, regulations, surveillance and enforcement. The recent Barclays matter, the JPMorgan loss and many other illustrations make the case for this far better than anything else. As they say in the detective programs: These are real cases with real victims.
I’ve often heard teenagers protest, “You're not the boss of me." Well, we in the U.S. aren’t seeking to be the boss of anyone. Nation’s around the world have their own laws, rules and regulations and they have individual sovereign and idiosyncratic issues that not only should be considered, but are at the very fundamental core of nations’ rights to incorporate into whatever they do. No argument on that. At the same time, we all need to accept that these global financial markets operate all the time and cross borders as a matter of course. Risk is very portable; it can be shifted around like a shell game. Trading for a firm headquartered in one nation can take place in another. Like nations’ sovereignty is a fact, so is it a fact that these markets cross borders and are interconnected. These are facts—evident truths.

So, while we do not seek to be the boss of anyone, we do seek to ensure that our consumers, taxpayers, markets and our economy are protected. I assume other nations not only have this parochial interest as well, but that they will ensure analogous laws that address the matter. If nations do this, as a matter of self-interest and global interest, there should not be any bossing around of anyone—easy peasy.

If for some reason, there are not comparable laws of self-interest in nations, and there is the possibility that the lack thereof would be a potential matter of concern to the U.S., our law requires that we address it in an appropriate fashion, and we will do so.
Here are the key points on what the proposal and exemptive order suggest, and I look forward to comments upon both of these important matters. The proposed interpretive guidance and policy statement proposes to (1) define U.S. persons, (2) provide that foreign SDs and MSPs (swaps dealers and major swaps participants, respectively) and foreign affiliates of U.S. SDs and MSPs may be exempted from entity-level requirements under Dodd-Frank if they are subject to comparable and comprehensive foreign regulations, (3) provide that foreign SDs and MSPs and foreign affiliates of U.S. SDs and MSPs are not exempt generally from transaction-level requirements for swaps facing U.S. persons and foreign persons guaranteed by a U.S. person, and (4) provide that foreign SDs and MSPs and foreign affiliates of U.S. SDs and MSPs are generally exempt from transaction-level requirements for swaps facing non-U.S. persons.

Entity-level requirements include: capital; chief compliance officer; risk management; swap data recordkeeping and reporting; and large trader reporting. Transaction-level requirements include: clearing and swap processing; margin and segregation for uncleared swap transactions; mandatory trade execution requirement; swap trading relationship documentation; portfolio reconciliation and compression; real-time public reporting; trade confirmation; and daily trading records.

The proposed exemptive order regarding compliance with certain swap regulations exempts foreign persons (foreign affiliates of U.S. SDs and MSPs and foreign SDs and MSPs) and foreign branches of U.S. SDs and MSPs from transaction-level requirements for swaps with foreign counterparties for 12 months. Swaps with U.S. persons will still be subject to Dodd-Frank transaction-level requirements also for 12 months. External business conduct standards, however, only apply when both counterparties are U.S. persons. The proposed order also exempts U.S. SDs and MSPs from entity-level requirements, except for swap data reporting, recordkeeping, and large trader reporting requirements until January 1, 2013.

In particular, I am interested in receiving comments about how to prevent gaming through the use of conduits or other globe-trotting structures and under what circumstances foreign entities should be seen as being subject to “comparable and comprehensive” regulations. On the latter point, I think we should take an approach that encourages our sister regulators abroad to make the strong reforms necessary to ensure fair and safe global markets.

What we are proposing allows for nations to undertake their own protections that can fit into the overall global regulation, supervision and enforcement of markets. This is not about anyone trying to boss anyone around. This is about a balanced and thoughtful approach—a planetary patchwork of harmonized financial and markets rules of the road. That said, I look forward to comments to ensure that we get this correct.

CFTC COMMISSIONER CHILTON AND DOCTORS NO,WHO AND ALL THE REST .

FROM:  COMMODITY FUTURES TRADING COMMISSION
“The Good Doctors”
Keynote Address of Commissioner Bart Chilton to the Mutual Fund Directors Forum, 2012 Policy Conference, Washington, DC
June 19, 2012
 Introduction
Good evening and thanks for that kind introduction.  It’s great to be with you.  I'm always impressed with people like you who take the time and travel away from your businesses and families to visit Washington and make your case on issues. That's an important thing, and it doesn't matter on which side of issues you fall. It’s a privilege to have an opportunity to be with you for some of your time in D.C. Even after 26 years in this town, it is still intriguing to hear that magical word “policy.”  I hope this year’s policy conference goes well for you.

Regulatory Health
Let’s discuss some policy issues, but do it within the construct of financial market regulatory health.

Before I get to it, is there a doctor in the house? The older I get, the nicer it is to know if we are close to a doctor. Any medical doctors, PhDs, doctors of love, as Gene Simmons says, anyone? Okay, great.

The financial health of markets: aren’t these markets astonishing? Aren't you sometimes simply in awe—in awe—of what they do and how they do it. They are pulsing every day and all night around the world to the beat of 160 million transactions a day.  It’s incredible they work as well as they do.  At the same time, though, we all know that once-in-a-while, they need a doctor. There is often a shock associated with that awe. Maybe that’s because of a Flash Crash, a major bankruptcy, a massive trading loss or any number of other problems. And yes, when there’s talk about needing a doctor—or, in this context—needing a little regulatory check-up, some people’s blood pressure starts to rise.  Chill pills are for that stuff, dude. Let’s just review how not taking very good care of our financial markets got us to where we are today.

 Dr. Drew
We don’t need to guzzle ginkgo biloba beverages to recall 2008 and the collapse of Bear Stearns, Lehman Brothers and AIG; the resulting dreadful bailout and the devastating effect on our own and a large part of the global economy.  Thinking about all of that raises a little financial PTSD for some people.
“Doctor my eyes,
Tell me was I wrong.
Was I unwise to leave them open for so long?”

Well, as hard as it is to think about 2008, there is that whole “learning from our experiences” or rather—mistakes—thing.

Who is familiar with CNN's Dr. Drew Pinsky, Dr. Drew—the former Love Line co-host?  If you’ve ever watched the show, he deals a lot with addictions—drug addictions, alcohol addictions, food addictions, sex addictions—you name it.  He is an impressive guy and he's helped a lot of people. One thing he always says is that the first step to recovery is admitting you have issues.

Well, in 2008 and the years leading up to it, we had issues. We had a problem, and we’re still in recovery today.  The point there is that we are recovering.  We are getting better, thank you very much. Congress recognized that we had a problem and passed the Dodd-Frank Wall Street Reform and Consumer Protection Act about two years ago right now.  That’s good, because we clearly needed something: therapy, recovery, whatever. As they often say in this town, "mistakes were made."

 Dr. Seuss
Once you’ve acknowledged the problem, therapists would suggest dissecting it to understand what went wrong. There were a couple of causes to the financial illness—the economic crisis—“Things,” if you will—that led to the system pretty much failing us.
 Thing One—shout out to good Dr. Seuss—were lax or non-existent laws and regulations that allowed the free markets to rock ‘n’ roll so much that they rolled right over our economies—and our citizens.

There is an old saying about how the best things in life are free. Well, the worst things in life are also sometimes free, like disease and famine and, yes, unbridled free markets with zero, zip, zilch oversight.  Of course, it wasn’t just the lax laws, rules and regulations.  Nope, Thing One just allowed for unprotected and risky behavior...and risky business.
CHFT
Thing Two were the active agents:  the captains of Wall Street—that’s how the FCIC, the Financial Crisis Inquiry Commission, described them. They wholly developed these very pioneering products, these innovative investments to be traded and re-traded.

Light markets, dark markets, big markets, small,
Green, red and black markets, they traded them all,
Burning up the fiber and fires on the phones,
And then what they did, was trade bundles of loans,
The markets were rising with new dough, don't you know,
And cheetah technology, that just never went slow,
The risk was so portable, so easy to move,
That sometimes they wondered, just whose risk they might lose Trading and trading is what kept them alive
And they did so, this trading, 24-7...365.
Thing One and Thing Two:  those harmless numskulls, what could go possibly go wrong?

 Dr. No
 Well, go wrong it did. We admitted and acknowledged we had a problem and received some treatment.  The problem, the condition if you will, today is: the recovery—the work—is not complete and there is temptation to do away with the very laws—the recovery program—we were admitted to in reaction to the 2008 financial crisis and the all-to-close-to collapse of national economies.  Let’s call that a near relapse.
There have been moves afoot in Congress to repeal some or all of Dodd-Frank, primarily by some of those who voted against it in the first place.  That's okay; they do and vote the best they see fit. Nobody is suggesting we all have to go about things the same way. Remember the James Bond antagonist, Dr. Julius No? Let’s call these folks Dr. Nos.  Many of this group voted no, or nay—on Dodd-Frank and on full funding for regulators.  The Dr. Nos would defund the precise market health professionals who were given the rather tough task of keeping an eye on Wall Street.  And, still others, including regulated entities themselves, like your group, are choosing to fight the new regulations in court. That’s fine. We are a litigious society. I'm not going to touch that one now. I'll leave that not to the doctors, but the lawyers.

The President requested, and the Senate Appropriations Committee passed, a CFTC funding level of $308 million. In the House, the Dr. Nos are proposing only $180 million. In Europe, they’d call that an “austerity measure.” But let’s call it what it is: a seriously substantial and severe budget reduction. Cutting our Agency’s oxygen off so that our nation can’t have market health professionals on the case or the technology we require to monitor those that we are supposed to be overseeing is not putting the financial health of the American people first.

Think about MF Global.  Think about JPMorgan.  Are these markets really any safer and healthier than they were when they did a code blue in 2008?  A little, I’d say.  However, we’re still in recovery mode for sure.  We still require a doctor.  And, it is still essential to pay for it.  There are some folks in this town and on Wall Street who wish Dr. Kevorkian was still around for us regulators. They are doing their best without him to administer a little euthanasia. The financial sector still has 10 lobbyists for every single member of Congress—more than any other sector. They are pretty effective at getting their way.

As regulators, we don't make the laws. If Dodd-Frank went away, I'd think it was a mammoth mistake, but the law is the law and we Commissioners swore an oath to uphold it. That is, however, what we are doing right now—upholding the law—the law. We owe it to taxpayers and consumers to insist that these markets remain healthy.

Dr. Phil
Most folks know TV's Dr. Phil.  He’s forever talking about setting limits, especially in relationships.  If somebody pushes your buttons: be it a parent, child, spouse, co-worker or friend, Dr. Phil will suggest setting some limits.  Don’t get sucked into their world or their drama.  Well, if limits are good enough for Dr. Phil, they’re good enough for me—especially when it seems like an appropriate prescription for a policy I have supported for many years.

 A fundamental part of Dodd-Frank, which only seems to gain public attention when gas prices are high, is speculative position limits.  (And yes, this is another one that’s being challenged in court).

As we all know, oil and gasoline prices were very high earlier this year. The highest prices were actually in the summer of 2008. The average national price of gasoline in July of that year was $4.10 a gallon. There was a lot of attention to the subject then, and there was earlier this year. Today, not so much, although limits are still an essential medication to reduce market manipulation.

Here’s why: numerous studies show a link between speculation and prices. Studies from the International Monetary Fund, the Federal Reserve, and numerous universities all show it.  There was a senior exchange official who a little more than a year ago said there wasn't any evidence that linked speculation to prices. There was even a former colleague of mine who kept saying there was no evidence. Wha wha what? It was amazing. Last year, I put 50 studies, papers and notable quotations from respected individuals on the CFTC web site. They are still there. I talk about them all the time, including right now. I can continue to explain this to people, but I can't comprehend it for them.
Why does a trader need so much concentration that they can push prices around?  I just don’t get it.

 Large concentrations in silver, gold, natural gas, crude oil and orange juice have existed in recent years. I've witnessed it, and at times, I've seen prices react.
In addition to the bankers' lawsuit which seeks to stop our position limits rule from being implemented, regulators have been derelict in not getting them in place sooner.  We keep hearing that imposition of limits is being held up because it's contingent upon our issuance of a swaps definition, and Dodd-Frank requires that we do that as a joint rulemaking with the SEC.  That's correct. Dr. Phil might ask, “How’s that workin’ out for ya?”  Well, I'd say, "Notsamuch, Doc."

I have respect for my regulatory colleagues, but I've gotta say, they’ve moved so slow that I think we need to check their pulse on this one.  Call me an impatient patient, but we have a responsibility to act here, and it's high time we do so to protect markets and consumers.
A man runs into the doctor’s office and says, “Doctor, you need to see me immediately, I think I’m shrinking!” The doctor says, “Calm down and take a seat. You will have to wait your turn and be a ‘little’ patient.” Well, we’ve been a little patient. We’ve been a lot patient.

Earlier this year, in March, I suggested we "consider" using a provision of Dodd-Frank that shifts unresolved jurisdictional disputes to the Financial Stability Oversight Council (FSOC) if an agreement can’t be found. We have been continually reassured we are going to consider this joint rule with the SEC "next month." We've been told that each month since my Agency approved limits. We were told it could happen last December and subsequently almost every month. I see no promise of movement from the SEC on this. We are two years into this new law, and position limits were supposed to be implemented after six months. The FSOC should resolve this.

Dr. Dolittle
Another policy issue I want to spend some time on is the issue of technology in trading.   I was going to call this section “Dr. Strangelove” since he was always fiddling around with technology—in his case nuclear weapons—or maybe “Dr. Leonard McCoy” from Star Trek. “Dammit Jim, I’m a doctor…” not a regulator.

There are a lot of people fiddling around with technology in financial markets today. But instead, I decided on Dr. Dolittle because I call these high frequency computer traders "cheetahs" due to their incredible speed as they travel through the market jungle.  They are out there all the time trying to scoop up micro-dollars in milliseconds. They are wicked smart and clever. I talked to the animals last week. By the way, they really are very agreeable and shrewd folks. I’m just jesting, of course. Nevertheless, I told them very clearly that they need to be regulated.

Here are the problematic symptoms that led to my, umm, diagnosis. The largest futures exchange in the World is in Chicago.  Their third largest trader by volume there has been a cheetah based in Prague.  Bully for the exchange, which has touted this firm in their magazine.

As an aside, I’ll note the curious case of the vanishing articles. The story about this Prague cheetah was in the fall of 2010 and it appeared in the exchange magazine. While you can find the issue on their web site, that article about the cheetah disappeared. I was alerted to this by two reporters who were fact-checking my stuff about the cheetah. When they asked the exchange about it, they were told that the story didn't exist. So, I looked into it. After some digging, I found it again. But, what the exchange did was took it off their web site. As it turns out, there is another story missing from that same edition: one about Jon Corzine, in which he talks about taking more risks as the, then, new head of MF Global. I have both stories. Folks have a right to keep whatever they want on their websites. I just think it is curiously peculiar that they'd pull those two stories—strange, but true.

So, bully for the exchange. Bully for the cheetah.  Bully for Prague. Hooray for Prague!
However, if we, the U.S. regulators, simply want to look at books and records, perhaps because we are concerned about trading activities on a U.S. exchange—it could happen—that cheetah in Prague is not required to provide us with anything. Nada.  Furthermore, we don’t even have the ability to command books and records information from domestic cheetahs.  Nada. These cats are not required to provide a thing to U.S. regulators, under the current set of circumstances, unless we get a judge to issue a subpoena.  It is simply loco.  Nada? informaciónnes de los catos es un problemo.

At the very least, the cheetahs need to be registered.  Yet, no place in the Dodd-Frank law are these traders even mentioned.  That is how quickly the markets are metastasizing.

I believe there is some value to the cheetahs. However, their awesomeness isn't too difficult to contemplate. I wrote about these traders in a Financial Times op-ed a long time ago (September of 2010).  In it, I suggested, “There is a good argument to be made that ‘parasitical trading’ does not truly contribute to fundamental market functions.”  I’m not trying to get rid of them—make the cheetahs an endangered species.  There's no opposition to new technology here.  The cheetahs do provide liquidity—albeit what I’ve dubbed as "fleeting liquidity."  If you want someone to hedge your commercial risk for 3-5 seconds, I know just the cats for the job.

I also believe that these cheetahs have a disproportionate influence on markets simply because of their speed.  Their trading volume isn’t traditionally large—although in overnight illiquid trading even smaller size trades can move markets. We’ve seen that many times—but their swiftness as traders can send signals to the market when they’re in pursuit of their prey.  That, in and of itself, is fairly new and presents troublesome issues.
Consequently, I’m suggesting that in addition to the cheetah registration requirement, we require testing of their programs before they are engaged in the market production environment. The programs should have kill switches in case they go feral. We need to require quarterly reports on their wash sales (and that they undertake efforts to stop those from occurring). And finally, cheetah executives, the head of their pride, must be accountable for such reports.

I expect the Agency to issue a concept release related to technology very soon. My colleague, Commissioner O'Malia, has done a lot of good work on these issues as the Chair of our Technology Advisory Committee. I’m hopeful, and expect (certainly if I am to support it), that as part of this concept release, these ideas will be included and we will receive some public comments to facilitate us moving forward.

Dr. Jekyll
A doctor says to her patient, “You have a split personality, a mental disorder—you’re crazy.” To which the patient says, “I want a second opinion.” The doctor says, “Okay, you’re ugly, too.”
Remember Dr. Jekyll from The Strange Case of Dr. Jekyll and Mr. Hyde? It had to do with split personalities, within the same body.

Just like Dr. Jekyll, who had two personalities, we see that the banks themselves have a troublesome duplexity. This split personality was created when the Glass-Steagall Act was repealed in 1999. Currently, banks have two voices in their heads. They have an interest in their proprietary bottom line, and in their customers. When the two distinct personalities are opposed, just like Dr. Jekyll and Mr. Hyde, it can get unpleasant. And, it has. Here's what we know: with the banks, we understand which personality supersedes. They do—the banks. The customers’ interests can become secondary.

Some would argue that the two can exist in the same body, but the evidence doesn't support that—not at all. We saw Goldman Sachs and Citibank both establish what I've termed "fake-out funds," like when a player fakes in a ball game. Only this isn't a game. It involves real money for the bank customers.

The two banks each established these funds, recommended them to their own customers, and then the banks took the opposite position. That's pretty sinister, right? A dreadful mixture of contrasting motives played out in a crooked fashion. The Goldman case was settled with the SEC for $550 million. The Citibank settlement with the SEC, for $285 million, was actually thrown out by U.S. District Judge Jed Rakoff for being too lenient. He called it “a mild and modest cost of doing business.” Soon, he's expected to rule on the matter himself.

“Doctor, doctor, give me the news…” What’s the answer to…these policy blues? No pill is gonna kill this ill, it will take the… Volcker Rule.

Well, the Volker Rule is the law. If regulators are thoughtful and implement it appropriately, it will take the banks’ split personality, their troublesome duplexity, out of the equation. I believe we can, and will. Again, it is our responsibility to do so, under...the law.

Conclusion—Dr. Marcus Welby
Well listen, I should wrap this up.  I know you’ve got another big day tomorrow.  We will leave all of the rest of the doctors alone tonight. Doctor Who? Yeah, him, and the rest: our cowboy Docs Holliday and Scurlock, Docs Severinsen, Hollywood and Watson, Dr. Ruth and Sanjay Gupta, Doctor Frasier Crane and Dr. Laura, Doctors Dre, Evil, Feelgood and Demento. You can play at home. It’s fun for the whole family.
This will really date me, but Dr. Marcus Welby was played by actor Robert Young. He, Young the actor, used to do these television commercials that would start off with him saying something like: “I’m not a doctor, but I play one on TV.” Then, he'd endorse some health-related product, like aspirin. Well, I'm not a doctor. And, I DON'T play one on TV, but I sure have enjoyed speaking about the health of our financial markets and the ongoing need for preventative care by regulators to protect investors, hedgers and yes, most importantly consumers.

I’ve got to run to the ER. Thank you for the opportunity to be with you.  Nurse!