CFTC PROPOSES RULE REGARDING MEMBERSHIP IN REGISTERED FUTURES ASSOCIATION

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION

CFTC Issues Proposed Rule to Require All Registered Introducing Brokers, Commodity Pool Operators, and Commodity Trading Advisors to Become and Remain Members of a Registered Futures Association

Washington, DC —The Commodity Futures Trading Commission (CFTC or Commission) proposed a rule today to amend its regulations to require that all persons registered with the Commission as introducing brokers (IBs), commodity pool operators (CPOs), and commodity trading advisors (CTAs) become and remain members of at least one registered futures association (RFA). Currently, the National Futures Association (NFA) is the only RFA.

The Commission is proposing new Section 170.17 to address recent changes to the Commodity Exchange Act (CEA) by the Dodd-Frank Wall Street Reform and Consumer Protection Act and the Commission’s authority to regulate swaps. Currently, under Sections 170.15 and 170.16 of the Commission’s regulations, all registered futures commission merchants (FCMs), swap dealers (SDs) and major swap participants (MSPs) are required to become members of NFA. However, there is no mandatory membership requirement for other registrants. Through the interaction of the Commission’s rules and NFA Bylaw 1101, any IB, CPO or CTA required to be registered with the Commission that desires to conduct business directly with an FCM, SD, or MSP must become a member of NFA, and derivatively, must ensure that it conducts business only with those IBs, CPOs or CTAs that also are NFA members. However, due to the unique nature of swap transactions, it may be possible for certain IBs, CPOs or CTAs to not be captured by the intersection of Sections 170.15 or 170.16 and NFA Bylaw 1101, and therefore, it may be possible for these Commission registrants to serve clients without becoming members of NFA. The Commission intends the proposed rule to avoid this possibility.

The comment period for the proposed rule will remain open for 60 days after publication in the Federal Register.

CFTC COMMISSIONER CHILTON'S STATEMENT ON POSITION LIMITS MEETING

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
“At Last”

Statement of Commissioner Bart Chilton, Dodd-Frank Meeting on Position Limits

November 5, 2013

For two reasons, this is a significant day for me.  I am reminded of that great Etta James song, At Last.

The first reason is that, at last, we are considering what I believe to be the signal rule of my tenure here at the Commission; I’ve been working on speculative position limits since 2008. The second reason today is noteworthy is that this will be my last Dodd-Frank meeting.  Early this morning, I sent a letter to the President expressing my intent to leave the Agency in the near future. I’ve waited until now—today—to get this proposed rule out the door, and now—at last—with the process coming nearly full circle, I can leave. It’s with incredible excitement and enthusiasm that I look forward to being able to move on to other endeavors.

With that, here is a bit of history on the position limits journey that has led us, and me, to this day.  The early spring of 2008 was a peculiar time at the Commission.  None of my current colleagues were here.  I and my colleagues at that time watched Bear Stearns fail. We had watched commodity prices rise as investors sought diversified financial havens.  When I asked Commission staff about the influence of speculation on prices, some said speculative positions couldn’t impact prices.  It didn’t ring true, and as numerous independent studies have confirmed since, it was not true.

I began urging the Commission to implement speculative position limits under our then-existing authority.  And I was, at that time, the only Commissioner to support position limits.  Given the concerns, I urged Congress to mandate limits in legislation. A Senate bill was blocked on a cloture vote that summer, but late in the session, the House actually passed legislation.  Finally, in 2010, as part of the Dodd-Frank law, Congress mandated the Commission to implement position limits by early in 2011.

Within the Commission, I supported passing a rule that would have complied with the time-frame established by Congress—by any other name—federal law. A position limits rule was proposed in January of 2011 and finally approved in November.

In September 2012, literally days before limits were to be effective, a federal district court ruling tossed the rule out, claiming the CFTC had not sufficiently provided rationale for imposing the rule.  We appealed and I urged us to address the concerns of the court by proposing and quickly passing another new and improved rule.  I thought and hoped that we could move rapidly.  After months of delay and deferral, it became clear: we could not.

But today—at last—more than three years since Dodd-Frank’s passage, we are here to take it to the limits one more time.

Thankfully, we have it right in the text before us. The Commission staff has ultimately done an admirable job of devising a proposed regulation that should be unassailable in court, good for markets and good for consumers.

I thank everyone who has worked upon the rule: Steve Sherrod, Riva Adriance, Ajay Sutaria, Scott Mixon, Mary Connelly, and many others for their good work.

In addition, I especially thank Elizabeth Ritter, my Chief of Staff, Nancy Doyle, and also Salman Banaei who has left the Agency for greener pastures. I thank them for their tireless efforts on the single most important, and perhaps to me the most frustrating, policy issue of my tenure with the Commission. I have had the true honor of working with Elizabeth since prior to my confirmation. I would be remiss if I did not reiterate here what I have often said; nowhere do I believe there is a brighter, smarter, more knowledgeable and hard-working derivatives counsel. She has served the public and me phenomenally well. Thank you, Elizabeth.

And finally to my colleagues, past and present, my respect to those whom we have been unable to persuade to vote with us on this issue, and my thanks to those who will vote in support of this needed and mandated rule. At last!

Thank you.

ADDRESS OF CFTC CHAIRMAN GENSLER AT 5TH ANNUAL FINANCIAL REGULATORY REFORM SYMPOSIUM

FROM:  U.S. COMMODITY FUTURES TRADING COMMISSION 
A New Marketplace

Keynote Address of Chairman Gary Gensler at the 5th Annual Financial Regulatory Reform Symposium at George Washington University

October 31, 2013

Thank you, Art, for that kind introduction. I also would like to thank George Washington University for the invitation to speak today.

Five years ago, the U.S. economy was in a free fall.

Five years ago, the swaps market was at the center of the crisis.

Five years ago, middle-class Americans lost their jobs, their pensions and their homes in the worst crisis since the Great Depression.

Five years ago, the swaps market contributed to the financial system failing the real economy. Thousands of businesses closed their doors.

President Obama gathered the G-20 leaders in Pittsburgh in 2009. They committed to bringing the swaps market into the light through transparency and oversight.

The President and Congress in 2010 gave the task of implementing swaps market reform to the Commodity Futures Trading Commission (CFTC) and security-based swaps market reform to the Securities and Exchange Commission.

Congress essentially mandated a complete overhaul of the derivatives market – to a New Marketplace.

Now, through the CFTC’s 65 final rules, orders and guidances this New Marketplace is a reality – benefitting investors, consumers and businesses.

Today’s New Marketplace means there are bright lights of transparency shining though this $400 trillion market.

Today’s New Marketplace means there are robust safety measures in place that didn’t exist in 2008.

These reforms are based on time-tested ideas.

Since Adam Smith and the Wealth of Nations, economists have consistently written about how the broad public benefits from the access and competition transparency brings to a market.

As we have since Adam Smith’s days, we prosper from our market-based economy.

But it is only through a standard set of common-sense rules of the road that we lower uncertainty, level the playing field and protect against abuses.

Transparency

Significant new transparency is the foremost change in this New Marketplace.

There has been a real paradigm shift.

Since early this year, the public can see the price and volume of each swap transaction as it occurs. This is across the entire market, regardless of product, counterparty, or whether it’s a standardized or customized transaction.

This information is free of charge and available on the Internet, like a modern-day tickertape.

Also beginning earlier this year, regulators are able to see the details on each of the transactions and positions that are in this $400 trillion swaps marketplace. We’re able to see those details for each of the 1.8 million transactions in the data repositories. We can filter this information and see what individual financial institutions are doing in the marketplace.

This new window into the market is an enormous change since 2008.

Further, starting this month, the public – for the first time – is benefitting from new transparency, access and competition on swap trading platforms.

Once fully phased in, market participants will benefit from seeing competitive prices before they enter into a transaction.

This is because swap execution facilities (SEFs) are required to provide all market participants – dealers and non-dealers alike – with impartial access, once again following Adam Smith’s observations on how to benefit the economy.

Requiring trading platforms to be registered and overseen by regulators was central to the New Marketplace reforms President Obama and Congress included in the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). They expressly repealed exemptions, such as the so-called “Enron Loophole,” for unregistered, multilateral swap trading platforms.

Seventeen SEFs are temporarily registered. This again is truly a paradigm shift – a transition from a dark to a lit market. It’s a transition from a mostly dealer-dominated market to one where others have a greater chance to compete.

Clearing

The second fundamental change of this New Marketplace is central clearing.

Clearinghouses stand between buyers and sellers of derivative contracts, protecting them in case one of them goes bankrupt. Clearinghouses lower risk and promote access for market participants. They have worked since the 1890s in the futures market but were not widely used in the swaps marketplace – until now.

Last week, 80 percent of new interest rate swaps were brought into central clearing. That compares to only 21 percent in 2008. Going from a 21 percent market share to an 80 percent market share in any business would deserve some attention.

Given that clearing was still being phased in over the course of this year, in total over $190 trillion of the approximately $340 trillion market facing interest rate swaps market, or 57 percent, was cleared as of last week.

Swap Dealer Oversight

The third fundamental change of this New Marketplace is that swap dealers are now being regulated for their swaps activity.

Prior to these reforms – though one needs a license to be a stockbroker – the largest, most sophisticated financial dealers in the world weren’t required to have any special license for their swaps dealing activity. AIG’s downfall was a clear example of what happens with no registration or licensing requirement for such dealers.

Congress understood this and mandated that swap dealer registration was a critical part of this New Marketplace. Today, we have 88 swap dealers registered. This group includes the world’s 16 largest financial institutions in the global swaps market, commonly referred to as the G16 dealers. It also includes a number of energy swap dealers.

All of these registered dealers now have to comply with new business conduct standards for risk management, sales practices, recordkeeping and reporting.

International Coordination on Swap Market Reform

In the New Marketplace, the far-flung operations of U.S. enterprises are covered under reform.

Congress was clear in the Dodd-Frank Act that we had to learn the lessons of the 2008 crisis. Money and risk knows no geographic border.

AIG nearly brought down the U.S. economy because it guaranteed the losses of a Mayfair branch operating under a French bank license in London.

Lehman Brothers had 3,300 legal entities, including a London affiliate that was guaranteed here in the United States, and it had 130,000 outstanding swap transactions.

The nature of modern finance is that financial institutions commonly set up hundreds, or even thousands, of legal entities around the globe. When a run starts on any part of an overseas affiliate or branch of a modern financial institution, risk crosses international borders. Any one of the legal entities can take down the entire company.

The CFTC, coordinating closely with global regulators, completed guidance on the cross-border application of the Dodd-Frank Act in July. Swaps market reform covers transactions between non-U.S. swap dealers and guaranteed affiliates of U.S. persons, as well as swaps between two guaranteed affiliates.

The guidance embraces the concept of substituted compliances, or relying on another country’s rules when they are comparable and comprehensive.

Earlier this month, the guaranteed affiliates and branches of U.S. persons were required to come into central clearing. Further, hedge funds and other funds whose principal place of business is in the United States or that are majority owned by U.S. persons are required to clear as well. No longer will a hedge fund with a P.O. Box in the Cayman Islands for its legal address be able to skirt the important reforms Congress put in place.

Benchmark Interest Rates

The CFTC has changed the way the world thinks about benchmark interest rates.

LIBOR and Euribor are critical reference rates for global futures and swaps markets. In the U.S., LIBOR is the reference rate for 70 percent of the futures market and more than half of the swaps market. It is the reference rate for more than $10 trillion in loans.

Unfortunately, through five settlements against banks, we have seen how the public trust can be violated through bad actors readily manipulating benchmark interest rates.

I wish I could say that this won’t happen again, but I can’t.

LIBOR and Euribor are not sufficiently anchored in observable transactions. Thus, they are basically more akin to fiction than fact. That’s the fundamental challenge so sharply revealed by Rabobank this week and our four prior cases.

These five instances of benchmark manipulative conduct highlight the critical need to find replacements for LIBOR and Euribor – replacements truly anchored in observable transactions.

Though addressing governance and conflicts of interest regarding benchmarks is critical, that will not solve the lack of transactions in the market underlying these benchmarks.

That is why the work of the Financial Stability Board to find alternatives and consider potential transitions to these alternatives is so important. The CFTC looks forward to continuing to work with the international community on much-needed reforms.

Resources

The CFTC is basically done with rulewriting, the first significant compliance dates have passed and the New Marketplace is here. We’ve brought the largest and most significant enforcement cases in the Commission’s history.

These successes, however, should not be confused with the agency having sufficient people and technology to oversee these markets.

One of the greatest threats to well-functioning, open, and competitive swaps and futures markets is that the agency tasked with overseeing them is not sized to the task at hand.

At 674 people, we are only slightly larger than we were 20 years ago. Since then though, Congress gave us the job of overseeing the $400 trillion swaps market, which is more than 10 times the size of the futures market we oversaw just four years ago. Further, the futures market itself has grown fivefold since the 1990s.

We need people to examine the clearinghouses, trading platforms, clearing members and dealers.

We need surveillance staff to actually swim in the new data pouring into the data repositories.

We need lawyers and analysts to answer the many hundreds of questions that are coming in from market participants about implementation.

We need sufficient funding to ensure this agency can closely monitor for the protection of customer funds.

And we need more enforcement staff to ensure this vast market actually comes into compliance, and to go after bad actors in the futures and swaps markets.

The President has asked for $315 million for the CFTC. This year we’ve been operating with only $195 million.

Worse yet, as a result of continued funding challenges, sequestration and a required minimum level Congress set for the CFTC’s outside technology spending, the CFTC already has shrunk 5 percent, and just last week, was forced to notify employees that they would be put on administrative furlough for up to 14 days this year.

I recognize that Congress and the President have real challenges with regard to our federal budget. I believe, though, that the CFTC is a good investment for the American public. It’s a good investment to ensure the country has transparent and well-functioning markets.

Conclusion

Thank you again for inviting me to speak today; I’m pleased to say it’s my fifth time speaking at GW. In the past, I’ve spoken about the need for swaps market reform. Today, I’m glad to tell you that the New Marketplace is a reality.

This marketplace also has significant new protections for customer funds, as well as significantly more transparency for asset managers, known as commodity pool operators.

I’ll close with this: swaps market reform also is a key component in ensuring that when the next financial firm fails, that the financial system is not too interconnected, too complex or too in the shadows to prevent the firm from having the freedom to fail.

After World War II, my dad took his $300 mustering-out pay and started what became the family business. He knew that if he didn’t make payroll, nobody was going to bail him out.

If he were alive, he would say it shouldn’t be any different for banks and other large financial institutions. That’s what Congress said, as well, in passing Dodd-Frank financial reform. Companies, large and small, should be free to innovate, to grow, and, yes, to fail without taxpayer support.

Thank you, and I look forward to answering your questions.

SEC ANNOUNCES FRAUD CHARGES, EMERGENCY ASSET FREEZE RELATED TO ALLEGED REAL ESTATE INVESTMENT SCHEME

FROM:  U.S. SECURITIES AND EXCHANGE COMMISSION 

The Securities and Exchange Commission today announced fraud charges and an emergency asset freeze against a group of Pasadena, Calif.-based companies at the center of an ongoing real estate investment scheme.

The SEC alleges that Yin Nan (Michael) Wang and Wendy Ko have raised more than $150 million from approximately 2,000 investors by selling promissory notes issued through Velocity Investment Group, which manages a series of investment funds entitled the Bio Profit Series.  Each of the Bio Profit Series funds purports to be primarily in the business of making real estate-related loans in California, but in reality Wang and Ko have used money received from newer investors to make the promised quarterly interest payments to earlier investors in Ponzi-like fashion.

“The SEC sought emergency action to prevent the further dissipation of investor assets through an expected set of upcoming Ponzi-like payments,” said Michele Wein Layne, director of the SEC’s Los Angeles Regional Office.  “Wang falsified financial records and used another company to create the illusion of legitimate economic activity.”

According to the SEC’s complaint unsealed today in U.S. District Court for the Central District of California, Wang and Velocity Investment Group have been raising money since at least 2005.  Wang is the sole owner of Velocity Investment Group, and the Bio Profits Series fund accounts are controlled by Wang and Ko, who transferred some investor funds to make quarterly interest payments to other investors. The SEC’s complaint says Wang has admitted that Velocity was using new investor money to pay earlier investors.

The SEC alleges that Wang directed one of the Bio Profit Series funds to provide its outside accountant with inaccurate financial information that materially overstated its mortgage loans receivable and mortgage income figures.  The more than $9.8 million of mortgage loan income shown in those financial statements included accrued interest that Wang knew that the fund would never actually receive. Wang told Velocity’s accounting manager that investors would flee if they were told the true numbers, and it would be difficult for him to raise money.

The SEC further alleges that Wang and Ko used transactions between the Bio Profit Series funds and another company charged in the complaint – Rockwell Realty Management – with the apparent purpose of concealing the fraud.  These transactions appear to have had no purpose other than to obfuscate the amount of transfers among the various funds.

The SEC’s complaint charges Wang and his companies as well as Ko with violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5.  The Honorable John A. Kronstadt of the U.S. District Court for the Central District of California granted the SEC’s request for a temporary asset freeze against Velocity, Bio Profit Series I, Bio Profit Series II, Bio Profit Series III, Bio Profit Series V, and Rockwell Realty Management.  Judge Kronstadt’s order prohibits the destruction of documents, requires the defendants to provide accountings, and allows expedited discovery.  A court hearing has been scheduled for December 9 on the SEC’s motion for a preliminary injunction.

The SEC’s investigation was conducted by M. Lance Jasper, Peter F. Del Greco, and Dora Zaldivar in the Los Angeles office.  The SEC’s litigation will be led by Lynn M. Dean and David J. Van Havermaat.

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

SEC CHARGES NY MAN WITH INSIDER TRADING

FROM:  U.S. SECURITIES EXCHANGE COMMISSION 
SEC Charges New York Investment Professional with Insider Trading

On October 29, 2013, the Securities and Exchange Commission filed a civil injunctive action in federal court in the Northern District of Georgia against Dennis Rosenberg ("Rosenberg"). The Commission alleges that Rosenberg traded in the securities of Carter's Inc., ("Carter's), the Atlanta-based public issuer and clothing marketer, on the basis of material non-public information provided by a former Carter's executive, and tipped two investment advisers about this information.

The Commission's complaint alleges that, between 2005 and 2010, Rosenberg, a retired hedge fund investment consultant and market analyst who had previously covered the stock of Carter's, traded in advance of market-moving news concerning Carter's anticipated earnings, after having been tipped by a former Carter's executive regarding the substance of the upcoming announcements. Rosenberg also disclosed this information to two investment advisers for two separate hedge funds, according to the complaint, who then also traded on the inside information. Rosenberg's total ill-gotten gains, losses avoided, and consulting fees (based on tips to one hedge fund client) totaled approximately $500,000, according to the complaint, while the combined losses avoided and profits by Rosenberg's tippees totaled approximately $2 million.

The Commission's complaint alleges that Rosenberg violated the antifraud provisions of the federal securities laws, Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5. Without admitting or denying any of the allegations in the complaint, Rosenberg consented to the entry of an order enjoining him from future violations of these provisions, and ordering him to disgorge approximately $500,000 of ill-gotten gains and approximately $108,000 in prejudgment interest. The amount of civil monetary penalties to be imposed, if any, will be decided at a later date.

This is the second insider trading case that the Commission has brought in connection with its ongoing investigation of trading in the securities of Carter's, see SEC v. Eric Martin, et al.,http://www.sec.gov/litigation/litreleases/2012/lr22458.htm, and the Commission's fifth overall case as part of its broader Carter's investigation.See SEC v. Joseph Elles,http://www.sec.gov/litigation/litreleases/2010/lr21784.htm, SEC v. Joseph Pacifico, Http://www.sec.gov/litigation/litreleases/2012/lr22517.htm, SEC v. Michael Johnson,http://www.sec.gov/litigation/litreleases/2012/lr22520.htm.
The SEC acknowledges the assistance of the U.S. Attorney's Office for the Northern District of Georgia and the Federal Bureau of Investigation in this matter.
 SEC Complaint