By Michael V Dunn
As Acting Chairman of the CFTC, I have taken a pragmatic approach to ensure that the critical markets the CFTC regulates remain reliable and well regulated throughout this turmoil, and will continue to do so within any new financial regulatory structure that may emerge.

As an independent regulatory agency, I don’t believe that the CFTC must wait for congress or the administration to tell us to start addressing key issues. I have set five goals at the CFTC to guide the agency during my tenure. These key goals are as follows: Consumer Protection, Oversight of Risk, Interagency Collaboration, Hedge Exemption Review and Increased Market Transparency, and Adequate CFTC Funding.

Consumer protection
A primary mission of the Commission is to protect consumers and the public. The CFTC’s Enforcement Division has been involved in several high profile matters recently, where we have brought cases alleging schemes to defraud investors of sums totaling over a billion dollars.

Every case we bring, regardless of the size of an individual’s lost investment, is critical to our mission of protecting the investing public from fraudulent schemes. An investor who loses a life-savings of $30,000 is as important to me as a pension fund that has lost $300 million. Once aware of potential fraud, we have moved rapidly as an agency, often in collaboration with the NFA, SEC and DOJ, to bring wrongdoers to justice and protect investor funds to the best of our ability.

Off-exchange retail forex markets continue to be significant sources of fraud that both the CFTC and NFA fight against daily. I think Congress should require these retail forex futures markets to trade on-exchange, just as all other retail futures contracts do. It does not make sense that consumers trading forex should have any less protection than consumers trading futures in other commodities. These contracts should be on-exchange so we can effectively monitor and police their sale.

There also remains a real risk that white-collar criminals are escaping our jurisdiction through cleverly drafted futures contracts masquerading as spot contracts – as soon as Congress closed the forex loophole evidence suggests that former forex dealers simply moved into energy and metal sales. Congress should once and for all cut off all avenues for these crooks to perpetuate their fraudulent schemes. While the CFTC reauthorization bill passed last year by Congress clarified the CFTC’s jurisdiction over these contracts for forex, it did not provide a similar fix for other commodities. The evidence is growing that a fix is needed and I implore Congress to act before consumers are further adversely affected by inaction.

In all the concern we have faced regarding the legal certainty of institutionally traded derivatives, I think we sometimes lose sight of the critical importance of legal certainty for the CFTC’s ability to protect consumers. I hope we can change that this year.

Oversight of risk
Oversight of risk in regulated derivatives markets is critical for protecting the public and ensuring the integrity of our markets. The CFTC needs to ensure it is able to identify and manage risks associated with new types of derivative markets and products.

Our current regulatory model has worked well to ensure the financial integrity of exchange traded instruments, but we must be looking ahead for potential trouble spots and risks that may arise in the future. We need to make sure we have plans in place to address significant market events. To do this, I am moving ahead on two fronts and looking internally and externally to make sure we address potential risks. First, staff from all parts of the agency is participating in a lessons learned exercise that looked back at the events of the last year and made specific recommendations to prepare the agency going forward.

I have asked staff to move forward with developing procedures and contingency plans that will ensure the agency is prepared should another crisis present itself.

Second, I am encouraging the Agency to establish a Risk Advisory Committee to assist the CFTC in identifying and addressing areas where improvement in its oversight will be critical to fulfilling the agency’s mission. This Committee will provide a forum for industry and market groups to aid the Commission in reviewing and evaluating its oversight of risk and keeping abreast of changes in the markets and industry that may impact the Commission’s oversight.

I envision that this Risk Advisory Committee would focus on 3 core areas:
1. Agency Risk
2. Systemic Risk; and
3. Product Risk.

Regarding agency risk, it’s axiomatic to say we don’t know what we don’t know, but it is undoubtedly true. The CFTC needs to look at what we are doing and how we can do it better and more efficiently. We need to speak with those we regulate to ensure their needs are being met and that we are aware of what market users believe is required for the market to function properly. This collaboration will ensure that we are protecting market integrity and assessing and quantifying the impact of risk in the market. Perhaps the lesson that we can draw most clearly from our current financial crisis is how inextricably linked markets have become. As such, closely monitoring system-wide risk will be a critically important component of the Risk Advisory Committee. Lastly, we must look generally at product risk. The best example of my concern, and certainly the most referenced, is credit default swaps (CDSs). Determining the next product that poses a similar significant risk to our economy will be a charge of the Risk Advisory Committee as well.

Collaboration with other regulatory agencies
We as regulators must do a far better job of working together to ensure that customers and the markets we regulate are protected while simultaneously avoiding unnecessarily duplicative regulatory regimes. The framework for collaboration already exists at our agency.

CFTC staff is currently participating in 50 intergovernmental domestic and international committees, meetings and task forces. However, meeting participation and a willingness to collaborate in and of itself is not enough. Market conditions move rapidly and when called to do so we must be able to respond quickly. Just last month, we received a referral that was over a year old. In order to stay one step ahead of those who are trying to game the market, we need to perfect our lines of communications and put in place processes to ensure that collaborative efforts lead to efficient actions.

The CFTC has made progress in signing Memorandums of Understanding with several agencies governing the sharing of information, but we need to look for further opportunities to enhance cooperation and collaboration. I’ve asked our enforcement division to implement a formal process for referrals to the Department of Justice. Such a process would help ensure that information doesn’t fall through the cracks and that the proper authorities pursue criminal actions and fraudsters go to jail.

Whether trying to streamline the approval and regulation of hybrid products, or coordinating enforcement actions, U.S. regulators must leverage their resources and expertise to promote innovation, close regulatory gaps, and make sure laws and regulations are enforced.

Instead of fighting over who regulates what, we need a renewed focus on making sure underlying financial and market risks are addressed in the most efficient way possible. We may need to establish interagency task forces to develop new models for cooperative regulation, for instance between the CFTC and the SEC or the CFTC and the FERC.

Shortly after becoming Acting Chairman, I wrote a letter to SEC Chair Mary Schapiro to ensure that staff members at the agencies were meeting the obligations set forth in the March 2008 MOU to coordinate regularly on issues of mutual regulatory concern. Last week, senior staff members held such a meeting.
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