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Gensler: CFTC will review self-regulatory groups

The Commodity Futures Trading Commission will review the role of the National Futures Association and other self-regulatory groups that are the first-line regulators of the commodities and futures industry, in light of their failure to detect problems at Peregrine Financial Group and MF Global, CFTC Chairman Gary Gensler told the Senate Agriculture Committee.

When Peregrine, an Iowa firm, and MF Global, based on Wall Street, collapsed, it became clear they had not segregated the funds in customer accounts, including those of many farmers involved in futures and hedging.

Gary Gensler
Gary Gensler
By statute, Gensler noted, the CFTC has to work with self-regulatory groups that are the “front line” regulators of financial firms. Due to the development of electronic banking, the NFA and the Chicago Mercantile Exchange, another self-regulatory group, have direct access to the bank accounts of the firms they are overseeing, and it was in the switch from paper banking records to electronic that the problems at Peregrine came to light, Gensler noted.

The CFTC will “review the relationships” and “examine the examiners,” he said.

Whether NFA is up to the task of serving as a front-line regulator is “an excellent question,” Gensler said, adding that when the regulations under the Dodd-Frank financial services bill are complete, NFA is also supposed to be responsible for the regulation of swaps.

Gensler added that at Peregrine “there was deliberately dishonesty and forged bank statements” and that it will always be difficult for regulators to protect against investors against such criminal fraud. But he added that the regulators do have to try to harder to protect consumers.

Sen. Tom Harkin, D-Iowa, said that he is “losing faith” in the self-regulators, particularly when Congress does not want to give the CFTC the money it needs to oversee them.

Gensler agreed that if a budget cut proposed by the House Appropriations Committee goes through “there will be more mayhem in the markets.”

Senate Agriculture Committee Chairman Debbie Stabenow, D-Mich., noted that as she travels around Michigan, she is often asked by farmers and grain elevator operators whether they should use the futures markets.

She urged Gensler to implement the Dodd-Frank rules.

“Many derivatives are still trading in the dark and some financial institutions are still taking risks that threaten our economy,” Stabenow said.

“We need these markets to have integrity and market participants need certainty so they can plan for compliance and make business decisions for the coming months and years,” she said. “Businesses, farmers and ranchers need to know these markets are safe for trading and hedging risk.”

Senate Agriculture Committee ranking member Pat Roberts, R-Kan., expressed frustration that the CFTC has not yet finalized the rules for the two-year-old Dodd-Frank law, and said that all stakeholders affected by the rules are frustrated too.

Gensler noted that Congress had given the CFTC more than 60 rules to write, that more than half are done and all but a few will be complete by Dec. 31. He also noted that grain elevators will not have to be registered as swaps dealers.