“Boarding All Rows”

Speech of Commissioner Bart Chilton Before the 5th Annual Risk Management in Energy Trading Conference, Houston, Texas

November 8, 2012


It’s a real delight to be here—a delight. This job provides many opportunities to meet and speak with folks. Hopefully, that communication, like right now, allows for your government to do a better job. I'm actually going to be doing six different events in the next week and I look forward to hearing from people. But, that starts here. So, thank you all, seriously, for being here and providing an opportunity to spend some time together. On days like today, it is a delight to be a financial regulator.

Absent from that introduction was any mention of the job title “acting gate agent.” That’s just another service, along with sarcasm, that I provide as your government employee. We do what we can—from the dad-gum guv’ment and here ta help—time to get my gate agent on.

DF OU812—Boarding

Good morning and welcome to DF Flight OU812. That’s Delta Foxtrot—DF—OU812 . Actually, make that DF, Dodd-Frank, as in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. If your ticket says DF OU812, this one’s for you.

At this time, we’re ready to start the boarding process. Yeah, it’s a process—you must acquiesce to the process, no less. Any uniformed member of the military or anyone needing a little extra time, that’s fine, you may board now.

I’d also like to invite our various boarding groups, zones and those with airline credit card loans. We’ll board our Precious Metals Members: Platinum, Silver and Gold, you’ve now been told. And next our Gem Members: Diamond, Ruby and Sapphire. Any of them Gems?

Boarding for DF OU812, this is your cattle call…moo. Whew! That takes a little Peter Piper practice and in reciting it the other day it reminded me of that Pink Floyd tune, Learning To Fly:

“Can’t keep my eyes from the circling skies

Tongue-tied and twisted; just an earth-bound misfit, I”.

We’re boarding all rows for DF OU812.

DF Regulatory Take Off

In fact, the message in the metaphor is that we really are boarding, implementing that is, and ready for regulatory take-off of Dodd-Frank. We’ve been waiting around the gate area, eating Cinnabons and watching cable news since July of 2010. That’s when the bill was passed by Congress and signed into law by President Obama. Many firms have been in a holding pattern waiting to find out what the new rules and regs will look like. With few exceptions, most of the Dodd-Frank rules and regulations should have been ready for departure in July of 2011. Talk about an Airbus A380-sized flight delay!

You could say there has been “a major maintenance problem” in that we couldn’t maintain the pace that Congress and the President sought. There are approximately 400 Dodd-Frank rules or regulations to be concluded by the various Federal agencies. The number is actually 398. Of those 398, merely 133 are complete—a paltry 33 percent.

The CFTC, for our part, has made more progress on our heading. Don’t think we haven’t had our share of headwinds. We’ve had them, incessantly. But, we’ve completed about 65 percent of our work with finalizing 39 rules of approximately 60 on our flight plan.

Rather than go through all 60 rules and regulations, we’ll summarize the types of things we are going to do and put them into three groups: Transparency, Market Integrity and Accountability. By the way, after these remarks during the break, there will be a one-pager that provides some more information on my view of specific dates for compliance.

Group 1—Transparency:  There’s a term used by pilots, “severe clear,” when visibility is unlimited. When there is no visibility, pilots use instrument flight rules or IFRs—flying by using their electronic instruments and radio navigation, since that’s all they have. For years in financial markets, there has been hundreds of trillions of dollars’ worth of trading taking place totally off regulator’s radar. It’s been the converse of severe clear, and financial regulators didn’t even have IFRs. We had zippo instruments to tell us what was going on. 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.

This stealthy OTC trading reaches to the stratosphere. Try this as a visual. The CFTC currently regulates around $5 trillion in annualized trading on registered exchanges.  The off the radar OTC trading, however, accounts for upwards of $650 trillion! Now, to be fair, that is a little bit misleading since our trading is all in the United States and the $650 trillion figure is global. But, nonetheless, we at the CFTC will have hundreds-of-trillions in trading on our new radar. That’s a monumental task that will require a bunch of financial market air traffic controller types at our Agency.

With Dodd-Frank, that OTC trading will be conducted on regulated exchanges.  Data will be collected by Swap Data Repositories—or SDRs.  Those SDRs will afford the transparency—the severe clear—in the particular markets that got us into that troublesome 2008 tailspin.

Group 2—Market Integrity:  We also want to guarantee that people don’t take risks that undermine the integrity of markets or the entire financial system.

Risk is part of markets, sure. Remember Captain Renault in Casablanca? There is that scene where he says, “I’m shocked, shocked to find that gambling is going on in here!”? Well, we all know folks in financial markets are taking risks. Nobody’s shocked. And, they should be able to take as much risk as they’re comfortable with.  Conversely, if they make a Mayday, Mayday, Mayday mistake, our economy shouldn’t go into a nose dive. Therefore, we’re instituting new capital and margin requirements.  We will also require clearing. That will avoid the over-leveraging problem that we witnessed in 2008 and led to the crash of Bear Stearns and Lehman Brothers.

Most of us want markets to perform the functions originally-envisioned: to manage risk and discover prices. That’s good for commercial producers like many of you, and it is good for consumers. Let's staunchly preserve those central core values and market integrity, regardless of which participants are in the markets. Can we get a “Roger” on that?

I see two significant challenges before us in ensuring that we do preserve those original fundamental purposes of these markets. They are: excessive speculation and high frequency trading.


Just like pilots, there should be limit levels. In Aviation they are for the well-being of the flying public. They are meant to keep some order. Pilots receive their limit altitude levels from the air traffic controllers and that makes air travel safer.

In 2008, the massive influx of long-side speculation levels coincided precisely, exactly with the highest-ever crude oil and gasoline prices in our country—the highest prices ever. Although hundreds of people have been queried in the last four years, no one has ever provided a supply and demand fundamentals-only explanation to support this price movement. That’s because it does not exist.

So, Congress and the President charged the CFTC with setting speculative trading limits to avoid excessive speculation and preserve market integrity. Like air traffic controllers, the job has the primary purpose of protecting the public. And let me be clear, Dodd-Frank explicitly and unambiguously mandates these limits. That said, there is a group of the largest speculators on the planet who have questioned the law and want to be able to have unrestricted airspace limit levels. They won a recent court ruling, but I expect our Agency will appeal later this month, and then we will also promulgate yet another position limits rule.

This is a significant market integrity concern. Remember why these markets were created: hedging risk and price discovery. Sure we need speculators. There are no markets without them. However, once markets are dominated by and vulnerable to the wind shears of excessive speculation, we have lost our way and the very basic flight fundamentals of these markets are in jeopardy.

This is a serious and significant problem for the millions of American businesses, households, and our economy. Delta Airlines estimates that for every dollar rise in the price of a barrel of oil, it cost them $100 million per year for jet fuel. My office estimated that the speculative premium earlier this year was costing the aviation industry nearly $10 billion per year. No wonder they charge for bags nowadays. And consumers can be, at times, paying a “speculative premium,” directly or indirectly, for virtually every good or service they purchase.

That’s why position limits are so imperative to well-functioning markets.


The other market integrity challenge has to do with technology and high frequency traders (HFTs) that I’ve termed cheetahs because of their incredible speed. They are out there all the time trying to scoop up micro dollars in milliseconds. That’s right—milliseconds—one-one thousandth of a second. It is on the internet, so you know it is true that if you are travelling at 100 miles per hour, a millisecond is the time it takes you to go two inches—two inches. That’s like rocket plane fast.

Look, these cats have some true attributes and they shouldn’t become an endangered species. At the same time, if we don’t have some rules, we run a market risk that some cheetah-related occurrence that harms markets, could put them on an endangered list, and rapidly.

We all know that technology isn’t always what it woulda, coulda or shoulda been. We see market technology SNAFUs with regularity. That’s why in order to safeguard market integrity, it makes common sense to have some basic precautions in place to avoid market-threatening actions from taking place.

One: They need to be registered—many people can’t fathom that they aren’t all required to be registered now. That's sort of a pedestrian first step.

Two: They should be required to test their programs before they are put into the live market production environment, have wash blocker technology to avoid cross trading, and be required to have kill switches in case their cheetah program goes feral.  And,

Three: We should ensure that our penalties, our fines for violations of the rules and regulations that seek to protect market integrity make sense in today’s fast-paced trading world. Let me explain.

Under our statute, we can fine a trader $140,000 per “violation.” So, in the past we’ve said that, for example, each day a trader broke the law, and for each single day, we have counted that as one violation.  That dollar amount made sense in yesterday’s human-to-human trading environment.  It doesn’t work when a trader can make a million dollars in a few seconds. A $140,000 fine could simply be a cost of doing business. And quite frankly, we have seen way too many cost of doing business fines. We gotta toughen up. So, what I’ve proposed is that we define a “violation” by the second. That’s right, we could fine a cheetah who messes with market integrity $140,000 per second. That would be a deterrent.

So, that’s the first two of our Dodd-Frank groups: Transparency—our severe clear regulatory regime with Swaps Data Repositories; and the Market Integrity Group which will avoid systemic risks with capital, margin and clearing requirements. And we have the two related market integrity challenges of excessive speculation and our crafty cheetah friends.

Group 3—Accountability:  The third and final leg of Dodd-Frank is the accountability group. The question is often asked: Why is it that nobody went to prison for what took place in 2008? After all, according to the Financial Crisis Inquiry Commission (FCIC), the Captains of Wall Street took advantage of lax, or non-existent, rules and regulations that created the chaos.

The answer is direct. Nobody violated the law. Strange, but true—what was done wasn’t illegal. That’s changing with Dodd-Frank. There will now be financial firm accountability, and not a moment too soon.

Just recently, two weeks ago in fact, we proposed many accountability and customer protection rules. What we proposed, and what I will support as part of a final rule is pretty much three-fold:

    1. Electronic access to bank records.

    2. Standardized auditing procedures, and

    3. Liquidity alerts and action steps. When a firm has a problematic liquidity issue, like a credit downgrading, they will be required to notify us. If they have a liquidity issue that may not be resolved, they are required to transfer customer funds to a solvent firm in good standing. And, if the troubled firm does not transfer the customer funds, we can make it so. Make it so, Number One.

Those three things—and there are others as discussed regarding fines that are appropriate to the crime—but those are key provisions. They also have the added benefit of being things that we can and are doing.

However, there remains a gaping hole that we cannot fill. It’s a hole that we don’t have the authority to fill, and which only Congress may remedy. That is: a futures insurance fund.

How unfair is it that MF Global security customers were paid first compared to the futures customers? How unfair is it that banking and security customers both have insurance funds, yet no such fund exists for futures customers?

Up until MF Global and Peregrine, people could argue there has never been a problem and that the remedy—an insurance fund—was not needed. Today, however, we have ample evidence that one is needed. People were really harmed and it is irresponsible that there is not such an insurance fund for futures customers.

I started calling for such a fund about a year ago. For a long time, I carried this letter with a deeply dismal story about a family that lost a lot of money due to MF Global. This is what was written:

    “I am 75 years old and my husband is 76 years old. We take care of our brain injured son who is 55 years old. All of our money—over $900 thousand—was invested in commodities with MF Global. We have no income except for a small Social Security check for both of us and some for my son. We will be losing our home we have lived in for 30 years if these funds aren’t returned to us soon. We really made a mistake by trusting too much. We are too old to work anymore. All of our strength we have goes to caring for our son. Can someone please help? We are desperate!”

Now, when the letter came to the office, I wanted to be able to refer to in public, so I tried to call the woman. Unfortunately, the phone number had been disconnected. I’m not sure of their circumstance, but for a fact: had a futures insurance fund been in place, that family would be in better shape than they were, or may be, today.


So, that’s what we are occupied with pretty much every day. As we go forward, however, once Dodd-Frank has lifted off and well on its way, we regulators need to not sit back and take a snooze like we are on a red eye. We need to be awake and not rely on what the aviation community terms Tombstone Mentality. That’s where rules and regulations for safety are only instituted after some catastrophe. We need to be more nimble and quick and try to look over the horizon for how these markets are morphing. As we do that, if we keep our eyes level and remember our True North—hedging risk and price discovery—we will be fine.

That should provide you with a clearer visual on our heading and flight plan. We are essentially trying to put in place our own version of an air travel collision avoidance system. It’s otherwise known as Dodd-Frank—or for each of you still hanging with me here in the gate area: DF OU812.

On the flight down here, I sat next to a commercial airline pilot and asked him, “What is the coolest thing about your job?” He said that “Breaking through the clouds and seeing the sun coming up in the mornings was the best. There isn’t much time to enjoy it,” he said, “but for a little while I’m really delighted to be a pilot.” And, I’m delighted to be your financial regulator and spend some time with you.

Last call for DF OU812, boarding all rows.


Last Updated: November 8, 2012