Font Size: AAA // Print // Bookmark


  • "Whose Markets Are These Anyway? Can Ya Dig It?”

    Keynote Address of Commissioner Bart Chilton Before the Consumer Federation of America 2012 Financial Services Conference, Washington, DC

    November 29, 2012


    Good afternoon. It’s a great pleasure to be with you at your 2012 Financial Services Conference. CFA does great work. It is a pleasure to work with Barbara Roper. And, you all—each of you here—are to be commended for your sacrifices. It isn’t easy to take time to travel to D.C. and be away from your business or family. It is a sacrifice, but it does make a difference. You are needed. I, for one, greatly appreciate your contributions. In all seriousness, thank you.

    Okay, let’s talk some policy and have some fun at the same time. It can sort of be your dessert.

    Nobody Will Recall This

    First of all, and nobody will recall this was said when we are done here, but it needs to be said regardless: we have an impressive and important financial sector. We have exceedingly smart people working on Wall Street and on LaSalle Street and throughout the financial industry. We should all be thankful for them. When you see a banker, stop and just say, “Thank you for your service to our country.” Well, perhaps not—you do what you want. But seriously, we wouldn’t be the nation we are without those folks and their predecessors. We wouldn’t have our airports, roads, rail or bridges—our infrastructure. We wouldn’t have our businesses. We wouldn’t have the jobs that go along with those businesses. People wouldn’t own their own homes without lending. A healthy and well-functioning financial sector goes part and parcel with the health of our nation and it has always been so. It needs to continue in that fashion. The financial sector and those that work in it fuel the very economic engine of our democracy. There: said it and mean it. But, there’s a “but”—hasta be a “but.” But…something has gone horribly wrong.

    Whose Line Anyway?

    Anyone remember the show Drew Carey hosted, “Whose Line Is It Anyway?” It was originally a British radio show, then made the move to U.K. television before finally coming to the states. For people like me that like a little levity, it was a pretty addicting show—all improvisation, all the time.

    Where’s he going with this, you ask? Well, whose markets are these anyway? For me, and a lot of you guys, they’re for the benefit of consumers.

    In just about every speech, statement or thing I do, I make it a point to talk about consumers. If I’ve missed mentioning consumers someplace, it was a mistake. They are my true north. Consumers are the folks, after all, most impacted by the markets we regulate. Think about it: these markets were originally established to provide end users of commodities a vehicle to hedge their business risk and for consumers. When I say “for consumers” I mean that the markets had the goal of ensuring that the prices people were paying were fair. We call that “price discovery.” It is critical to our mission and to consumers that price discovery in these markets always remains front and center in all that we do. These markets impact just about everything from a gallon of milk or gas to a home mortgage.

    Furthermore, when things go haywire in markets, or when something sneaky occurs, who gets hurt? Yup, consumers usually get the sort end of the stick, or perhaps the shaft—“Shaft…Can ya dig it?...Right on.” That’s why financial reforms are something we feel so strongly about, right?

    These are ever-changing, morphing markets. We need to ensure that our regulatory realm keeps up. That means ensuring that we know who is benefitting. These markets aren’t jungle gyms for speculators; they are serious price discovery markets. And again, whose markets are these anyway? They are consumers’ markets!


    Let’s “Take a little trip/Take a little trip/ Take a little trip and see/Take a little trip/Take a little trip/Take a little trip with me,” anyone? Yep, War: Low Rider. “All my friends know the low rider.” Our trip is only back to 2008, about this time of year, when the economy looked like a victim of war. The financial world had come crashing down, imperiling our economy. The Financial Crisis Inquiry Commission (FCIC), in assessing the circumstances, determined there were two culprits to the economic calamity: (1) regulators and regulations, or a lack thereof; and, (2) the captains of Wall Street that took advantage of the conditions. They created exotic financial products, were over-leveraged, and traded off-the-grid. The resultant economic warfare left nine million people out of work in the ensuing months, and many more lost their homes or found themselves upside-down on their mortgages. Something had to be done. It occurred in the form of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, otherwise known as Dodd-Frank. I thank CFA for your strong support of Dodd-Frank.

    That’s part of what let’s discuss now. There are 398 Dodd-Frank rules or regulations to be concluded by the various Federal agencies—most of which, by the way—were to be completed by July of last year! Of those 398, only 133 are complete—only 33%.  We at CFTC have made more progress, finishing about 65 percent of our work by completing 39 of roughly 60 rules.

    The good news is that all of that time we’ve been listening to people, like CFA and others, trying to get these rules correct. I think, by and large, we have done so. But, it hasn’t been without some trouble and difficulty.

    100 Visits

    I’m pleased to do meetings with people who want to visit with me on issues. It’s my job. It might, however, interest you to learn that it is my guess that for about every 100 visits to my office, only one of them is from an organization representing consumers. That isn’t a poor reflection on CFA or other consumer-oriented organizations. It is a reflection of how powerful, ever-present, persistent and well-financed the financial sector is in today’s legislative and regulatory endeavors. That’s their right, of course. I want to hear from them.

    It is interesting to note, however, that the financial sector has ten lobbyists for each of the 535 members of the House and Senate—for each of them! For good measure, the financial service sector also contributes more to political campaigns than any other sector of the economy—to the tune of $573 million in this last cycle, according to the Center for Responsive Politics. While I’m at it, I’ll give you a third data point. Think about all of the sectors of our economy: manufacturing, utilities, transportation and warehousing, information, non-durable goods, retail or wholesale trade. Since Wall Street helped create that war zone on our economy, guess which sector has done better than all others? Anyone, anyone, Bueller? Ah, you guys—you guys are so smart. Since the 2008 crash, and continuing as the undisputed champeens—the financial sector has had the largest profits relative to any sector of the economy. And they were way out front: they accounted for $441.9 billion in profits (second quarter 2012) versus the next most profitable sector, the manufacturing sector, at $372.8 billion.

    So, there ya go. That is what consumers are up against. They are out-numbered, out-gunned, and outright outspent. The financial sector will try to kill stuff on the Hill. If they fail, they’ll work the regulators. When all else fails, their deep pockets will allow them to litigate. That might seem fairly depressing for you consumer advocates, right? Well, perhaps, but remember whose markets these are anyway—consumers, “Can ya dig it?” You guys have the best interest of consumers in mind. You have the most just cause. You should have the best arguments. That overcomes a lot.

    So, that sets the stage. Let’s summarize what we are going to be doing with our Dodd-Frank rules. I’ll make it as easy as one, two three.

    One: Transparency: We will add needed transparency. It may surprise you that in financial markets, there have been hundreds of trillions-of-dollars of trading taking place totally off regulators’ radar. We had nothing to determine what was out there in the over-the-counter (OTC) market space. That was a major part of the problem that caused the economy to crash. Right now, the CFTC regulates about $5 trillion in annualized, on-exchange trading.  The OTC trading, however, accounts for $639 trillion! That’s a global number, but much of that trading is here in the U.S. Under Dodd-Frank, those traded trillions will be put on exchanges and will finally see the light of day.

    Two: Market Integrity:  We also want to guarantee that people don’t take risks that undermine the integrity of markets or the entire financial system.

    There’s no question that risk is part of markets—nothing wrong with that. Folks should be able to take the risks that they want.  Nevertheless, if they make a bad move, they shouldn’t take the whole economy down with them. That’s systemic risk, or perhaps “too big to fail” is a more common term. Accordingly, we’re establishing new capital and margin requirements.  We will also require clearing. Those will avoid the over-leveraging problem that we witnessed in 2008 that led to the crash of Bear Stearns and Lehman Brothers. Did you know that Lehman was leveraged 30-1 according to the last, its’ final financial statement? It’ll also help us avoid another taxpayer bailout of many of the firms that survived.

    We want markets to perform their original functions: risk management and price discovery that benefits consumers—as we’ve discussed. That’s why commercial producers like farmers, fuel companies, trucking companies and airlines got involved in the first place. And, it was good for consumers and our economy because it eased price volatility.

    However, market participants are changing all the time. The financialization of commodity markets has happened—big time—but let's be careful to vehemently preserve those central core values of market integrity, no matter which participants are in the markets.

    This is important stuff. So, before we go further to number three, let’s spendaspot on market integrity.


    There was a county song out awhile back by Ronnie Dunn—who I’ve come to really appreciate—called “Cost of Living.” The chorus goes like this, “Three dollars and change at the pump, the cost of living’s high and going up.” But, here’s what’s interesting: The original lyrics said, “Two dollars and change at the pump, the cost of living’s high and going up.” So, he changed it to “three” to keep up with the times. And, just this year, he changed it again—this time from three dollars to four dollars. Anyway, the song took off since real people heard it, felt it, and were moved by it.

    Here’s really what that song was about. In the summer of 2008, the great influx of what I call Massive Passive trading in oil markets helped push prices skyward—to $147 in crude oil and to $4.10 a gallon at the pump. They were never that high before that and they haven’t been since. These Massive Passives, i.e. index funds, hedge funds or other types of managed money, are huge and they have a predominately one-sided trading strategy—they park it in a market. Nothing wrong with that, but that type of trading strategy is fairly different than traditional speculators. Markets are morphing and we need to keep an eye on them, “Can ya dig it?”

    So does more concentration in markets influence prices? Goldman Sachs researchers say it does. So does the St. Louis Federal Reserve, Rice University where I was earlier this month, not to mention MIT (the Massachusetts Institute of Technology), or myriad other studies that show a nexus between price and excessive speculation. Remember, the effect of the Massive Passives was so deep and so widespread and so continuing, that it made a country songwriter change his lyrics.

    That’s why I’ve been such a strong supporter and proponent of speculative position limits. After all, Congress told us to put them in place as part of Dodd-Frank. So far, however, they’re not in place. De-funding bullying, cost-benefit analysis paralysis, and, oh yes, lawsuits have provided some setbacks. But, these have only made me more insistent that we implement speculative position limits to ensure consumers are paying fair prices. “Hear me now and believe me later…” Hans and Franz, we will have speculative position limits, ya.


    The other market integrity challenge—more morphing market stuff—has to do with technology. High frequency traders (HFTs) scoop up micro dollars in milliseconds. That’s one-one thousandth of a second. If you’re going 100 miles an hour, a millisecond is the time it takes you to go two inches. I know that to be true because it is on the Internet! I call HFTs “cheetahs” because that’s how fast they move—0 to 60 in just a couple seconds in the case of the animal—even faster for these cats with their HFT programs.

    There are some good things about them. I’ll be among the first to say that. But at the same time, if we don’t have some rules, we run the risk that some cheetah-related occurrence will genuinely harm markets.

    We see technology SNAFUs—situation normal, all fouled up—all the time. The Flash Crash was the big one. But, there was also the Facebook IPO, an oil trader who lost a million bucks in one second and most recently Knight Trading, which lost a boatload-o-bucks because of a geek glitch. SNAFUs happen with some regularity, and there’s plenty more we could list. That’s why in order to safeguard market integrity, it makes sense to have some basic precautions in place to avoid market-threatening actions from happening. And today, I’m calling on Congress to provide enhanced HFT regulation. We haven’t done it, even though we have the authority to do some things. Therefore, I think Congress, as part of the reauthorization of our Act, should instruct us to do several things related to the cheetahs, to HFTs.

    By the way, HFTs aren’t even mentioned in Dodd-Frank. The Flash Crash happened after the bill was pretty much done—it was in conference. Here’s the gist of what I’m asking Congress to consider to partially cage the cheetahs:

    One: Cheetahs need to be registered. They don’t have to be now. Isn’t that cracked? They need to be registered.

    Two: They should be required to test their programs before they are put into the live production environment. Some do that already, but it’s sort of on the honor system. We need to know they’ve been thoroughly tested.

    Three: These programs also need to have built-in kill switches that shut them down when something goes amiss. They need to have the technology to avoid trades with themselves. It happens all too frequently and it’s illegal.

    Okay, so that’s one and two of Dodd-Frank: Transparency and Market Integrity. Three is Accountability.

    Three: Accountability:  Here’s a question: Why is it that nobody went to jail for what happened in 2008? After all, remember what I said about the Financial Crisis Inquiry Commission (FCIC) laying blame on the Captains of Wall Street that created the economic mess. Perhaps sadly, the answer is pretty straightforward. The things that brought down the economy were not violations of the law. That is changing with our 60 Dodd-Frank rules and, hopefully, with some of the other things we have discussed.

    At the same time, that doesn’t mean that there have not been many financial sector failures—things did go horribly wrong. Just think about a partial list of the troublesome indiscretions: MF Global and Peregrine; Wells Fargo discriminating—outright discriminating—against 30,000 minority mortgage customers; Bank of America and a dozen others ripping off folks with crooked debit and overdraft fees. A couple of banks pushed their own customers into certain funds, and then took the opposite positions. That’s funny, not!

    Updating Our Penalty Regime

    Part of the problem is that our current level of fines are taken by many to be just a simple cost of doing business—they’re so low, they often don’t have any real punitive or deterrent effect. Certainly, fines don’t appear, in the aggregate, to be stopping this troublesome pattern of financial failures. Therefore, we need to re-think our penalty regime. That’s why today, I’m urgently urging Congress to update our fining authority. The sooner the better from my perspective, but perhaps they will consider doing this as part of our reauthorization legislation next year.

    Here is why we need to seriously re-think our fines. First of all, the dollar amounts are antiquated, many times pretty much meaningless, and certainly not equal to the violation. This example isn’t a CFTC case, but it makes a point. Merrill Lynch profited $32.2 million from charging its’ own customers excessive fees. They were fined—get this—$2.8 million. Cost of doing business, right? That’s a no brainer for Merrill, and certainly not a deterrent. This happens in our area too. Quite frankly, I’m tired of seeing our Agency settlements be so meager when we see all of the malfeasance in the financial sector. In that regard, here is my suggestion to Congress:

    • First, we need unambiguous statutory flexibility in determining what “per violation” means; this will allow the Agency to adjust requested fines (and to negotiate appropriate settlements) to be meaningful deterrents to violative conduct. Let me explain why we need this: currently, we usually think about “per violation” as one day—but, in the case of HFTs, executing thousands of transactions in one second, a “per day” violation scheme is just kinda ridiculous. If you can lose a million dollars in a second (and I’m not making that up—it’s really happened), then we need to have the clear statutory flexibility to determine what “per violation” means, be it one second, five seconds, one hour, one day. And Congress needs to give us that certainty so that our determinations will hold up in court.
    • Second, our penalty levels are—literally—from another century. Currently, we can assess $140,000 per violation of the Commodity Exchange Act (CEA), and $1,000,000 per violation for manipulation, and there’s no distinction in the law whether we’re suing one individual, or whether we’re suing a huge multinational corporation. So like I said, if MegaBank International thinks that it’s only risk is a measly couple hundred thousand dollar fine, for bad acts on which it might make millions, or even billions, well, I guess they might just say, heck, no problem. Go ahead and violate the law. That’s why I’m saying today we need some fines with teeth. Specifically, I think fine minimums should be increased to at least $250,000 per individual for a violation of the CEA, and at least $1,000,000 per entity for CEA violations. Moreover, because manipulation is such a poisonous threat, they get higher fines—currently $1,000,000. But again, there’s no distinction in the law between fining an individual and fining a corporation. $1,000,000 may be an appropriate level for an individual, but not for MegaBank International. So today I’m suggesting manipulation fine minimums for corporations be upped to at least $10,000,000 per entity for each violation involving market manipulation.

    Increasing our penalty regime will add accountability to these markets that is sorely needed.

    Derivatives Market Insurance Fund (DMIF)

    Finally, in the wake of MF Global about a year ago, and then with the fraud of Peregrine in Iowa, I’ve been calling for a Derivatives Market Insurance Fund—or DMIF. I mean, heck, we already have an insurance fund for securities customers. They were covered if they were MF Global customers. We have it in banking. Your deposits are insured. But, in the futures world, nothing, squat.

    It would provide U.S. derivatives market customers with a more efficient and effective method of getting reimbursed when their funds are put at risk in cases of insolvency, and equalize the bankruptcy treatment for derivatives and securities investors. It would provide customers the right to file claims with a bankruptcy trustee for priority treatment.

    When I first brought this up, some folks started saying that it would cost too much. So my staff and I sat down and crunched the numbers using the securities insurance fund as a base. It’s not that much. It doesn’t create a huge government bureaucracy. In fact, I’ve suggested it can be run with a minimum staff of a couple dozen people. Not bad for government work. So, I’m pleased the idea is getting some traction on the Hill. I was just up there yesterday talking to folks about it and will be heading back after we are finished here. It’s high time for a DMIF to be put in place so that there are protections if another MF or Peregrine meltdown occurs. I hope this will also be included in our reauthorization legislation.


    So, that’s it. Whose markets are these anyway? They are yours, mine and your members. They serve a public good and we need to keep a sharp eye on what goes on in them as they are morphing. They need to be about the basics of price discovery and risk management. They need to be fair. They need to be efficient and effective. And, they need to be free of fraud, abuse and manipulation. Why? I’ll ask again: Whose markets are these anyway? Anybody? You got it: consumers. So, keep on doing what you’re doing in this great organization and I’ll keep on doing what I’m doing with the very people in this room in mind. “Can ya dig it?”

    Thanks for your attention, but most importantly for your commitment to consumers.

    Happy holidays.

    Last Updated: November 29, 2012

See Also:

OpenGov Logo

CFTC's Commitment to Open Government

Media Contacts in Office of Public Affairs

  • Steven Adamske
  • 202-418-5080
Orange CFTC Banner

Press Room Email Subscriptions