Global Markets Necessitate Increased Oversight

CFTC Commissioner Chilton provides insight in an exclusive interview with Farm Futures

Producers watched in awe this summer as corn and soybean prices surged to three times their levels of just two years prior. Unfortunately, input costs are following a similar pattern. Capital management requirements continue to escalate at an exponential rate for producers. The opportunity to grow equity in one's operation has rarely been better, but the risks of substantial loss in equity are at historical levels as well, creating a new variety of anxiety on the farm.

The sudden rise in both commodity values and input costs haven't gone unnoticed by consumers, or those that they elect to represent them in Washington. As a result, Congressional clamor for oversight put the Commodity Futures Trading Commission in the hot seat in recent months.

CFTC Commissioner Bart Chilton has been a central figure in the debate, often taking a counterview to the prevailing political winds. Chilton revealed many of the core values that shape his current position in a recent exclusive interview with Farm Futures.

Chilton sees the massive influx of capital and new market participants into the commodity markets as one of the great challenges before the CFTC. These new speculative players create a new asset class for the purpose of capital formation.

"We want speculators," states Chilton. "The markets don't function without them, but the agency (CFTC) needs to have a good view into what they're doing and whether they're causing any non-economic influence on prices. The fundamentals (of supply and demand) should drive the markets by in large and we need to ensure that traders who never take delivery of the commodities aren't having in mass a dramatic influence; that prices aren't being driven beyond what the market will bear."

"I'm not sure people understand the vast impact these markets have on nearly everything people purchase," says Chilton, "whether it be their interest rate on their home or their next meal. It's an important responsibility and it typifies my work in government over the past 20 years.

Much of this year's focus has been on the $5 trillion regulated market that CFTC oversees, but Chilton is concerned about the $9 trillion unregulated market. Much of this trading that takes place on the swap markets may be fine, but Chilton worries about the "look-alike" contracts traded in these venues that may impact the regulated commodity markets.

"We need to systematically look at the OTC (over-the-counter) market to see clearly where the influences are on the futures market," stated Chilton. Otherwise, he fears that we'll be dealing with problems of runaway markets all over again. He conceptually supports calls for swap dealers to provide more information on the trades they facilitate off the exchange if they're going to maintain exempt status from regulation. However, he cautions that such a move puts the swap dealer in the position of regulator; asking them to be responsible for monitoring the offsetting positions in the futures market?

CFTC recently released a report on commodity swap dealers and index traders. The report was requested by Congress to provide insight into regulating what it perceived to be excessive influence from the speculative funds in the commodity markets. Officials hoped that it would define both the problem and the solution.

However, Chilton included dissenting comments in the report, arguing, "I do not believe that the Commission's recommendations go far enough, and I have significant concerns relating to the underlying analysis on which the recommendations are based."

Chilton reiterated his concern that the commission is making recommendations to Congress before having what he considers quality data and adequate analysis. He'd prefer to see Congress provide sufficient time and resources for developing sound recommendations, combined with the authority to act on those recommendations.

He acknowledges that "it's not acceptable to make the consumer wait months and months for action." But, "It's very frustrating as a regulator not to have good data. It's even more frustrating to see government employees come up with data and believe that they're coming up with wrong conclusions."

Farm Futures questioned Chilton about the potential timing of adding regulatory restrictions that might force additional liquidation at a time when the markets are already reeling. Chilton responded that, "You have to do it in a thoughtful way, which is why my preference is to give us (CFTC) authority to move forward with regulatory policy once we have a clearer view of what's going on."

Looking down the road, Chilton believes that the agency needs to be more "nimble and quick; that we need to be looking at potential changes in trading that are still around the corner." The agency needs to have the procedures in place to deal with those changes. "These are constantly evolving markets. If we're not thinking ahead; we can be fooled by those who would take advantage of a light-touch regulator. I'm hopeful to help in that regard and create a forward-thinking regulatory approach that doesn't create burdensome regulation but protects consumers."

Chilton emphasized the massive influential reach of commodity trading that is now globalized; virtually around the clock. "It's almost timeless," states Chilton. "You can trade almost 24/7/365 with a computer, with the exception of about 13 hours on weekends. It increases the importance of working together; sharing information with fellow regulators around the world and hopefully harmonizing regulations while not sacrificing any of our important principles and competitiveness. That's precisely what the major financial firms are doing, which is why the Bear Stearns and Lehman announcements came over the weekend before the Asian markets opened. We've got to be thinking about that and be ready."

Aside from all the rhetoric and political positioning you hear in the news, Chilton believes that we need to be working toward greater transparency. "It's the first prescription for market ills. We need to do a better job at achieving transparency. It's good now, but it needs to be better. Transparency breeds trust and trust breeds confidence in markets that will be reflected in increased volume."

Chilton has a fond affection for agriculture, having worked with it both on Capital Hill and at the USDA. He has served as one of four currently existing commissioners since being sworn in on August 8, 2007. Previous to the appointment, Chilton served as Chief of Staff and Vice President for Government Relations at the National Farmers Union.

In 2005 Chilton was appointed by President Bush to serve as Executive Assistant to the Board at the U.S. Farm Credit Administration. He was Senior Advisor to Senator Tom Daschle from 2001 to 2005, where he worked on a myriad of issues including agriculture and transportation.


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