Exchange Executives Debate Insider Trading In Futures
September 02 2009 - 1:43PM
Dow Jones News
The issue of insider trading in futures markets came up for
debate in Washington Wednesday, as regulators wondered how best to
detect it and some in the industry uncertain whether it exists at
all.
Bart Chilton, a commissioner for the Commodity Futures Trading
Commission, asked exchange operators for their thoughts on whether
derivatives markets could be unfairly gamed by investors trading on
non-public information, admitting that he himself didn't know the
answer.
Jonathan Short, general counsel for Atlanta-based
IntercontinentalExchange Inc. (ICE), said an insider trading regime
probably wouldn't work for commodity futures, highlighting key
differences between futures and securities markets.
"[Commodities] are primarily risk management markets, with
people seeking to hedge price risks," said Short, testifying
Wednesday before a joint hearing of the CFTC and the Securities and
Exchange Commission.
ICE, together with Chicago-based CME Group Inc. (CME),
facilitates nearly all on-exchange trade in energy and agricultural
commodities; the exchanges are facing pressure from the CFTC, which
is considering tougher position limits for speculative
investors.
The CFTC and the SEC on Wednesday held the first in a series of
hearings seeking industry input on how the two regulators can
better coordinate supervisory efforts, eliminate gaps in oversight
and minimize turf battles.
While the SEC has tough rules to catch insider trading, the
CFTC's oversight is looser, as commodities markets move on
information from a wide variety of sources and there is no company
issuing shares in gold, or oil.
However, the majority of futures contracts traded nowadays are
financial futures, a market where the possibility of insider
trading could be a concern, according to Short.
Chicago Board Options Exchange Chief Executive William Brodsky,
who also testified Wednesday, noted past instances of inside
information coming out of the Treasury Department, raising the
possibility of insider trading in Treasury futures markets.
"You shouldn't have a strict standard in one area and zero
standard in another," said Brodsky. "Let's talk about it product by
product."
Chicago-based CME controls nearly all Treasury futures trade,
along with the majority of U.S. equity index futures activity, and
Chief Executive Craig Donohue said applying insider trading rules
designed for securities is not realistic.
"If you're a mutual fund or insurance company that has a large
portfolio of S&P 500 stocks, should you have to expose to the
market what your long-term intentions are before [you] affect
hedging or portfolio margining strategies in the equity derivatives
market?" asked Donohue, who also appeared on the panel
Wednesday.
SEC and CFTC officials plan to hold another round of hearings on
regulatory harmonization Thursday. The agencies are due to submit a
report to the Obama administration by Sept. 30, detailing how they
can work more closely together.
-By Jacob Bunge, Dow Jones Newswires; (312) 750 4117;
jacob.bunge@dowjones.com