Insight: MF Global puts harsh light on self-regulation

Former MF Global CEO Jon Corzine testifies about the firm's bankruptcy during a hearing before the U.S. House Agriculture Committee on Capitol Hill in Washington, December 8, 2011.

Credit: Reuters/Jonathan Ernst

By Philip Shishkin

WASHINGTON | Wed Dec 14, 2011 2:35pm EST

WASHINGTON (Reuters) - Two weeks after MF Global's collapse, officials from the Commodity Futures Trading Commission briefed Senate staff on the brokerage firm's final days. When asked about reports that the brokerage firm had written checks that bounced when customers tried to cash them, the regulators had an admission that surprised the room: they didn't know about the bad checks.

"This seemed like something they should be aware of," a Senate staffer present at the meeting recalled. A CFTC spokesman declined to comment.

Customers still have no explanation of what happened to MF Global and some $1 billion missing from its customer accounts more than a month after the firm's failure. And regulators struggling to solve the mystery are now forced to play catch-up.

That's in part because over the past decade, as trading volume soared, federal regulators eased direct oversight of the industry and handed more regulatory powers to the major exchanges. Now, this self-policing arrangement is prompting concerns about the regulators' and the exchanges' ability to detect and deter suspicious conduct in the rapidly expanding marketplace.

A look at the recent history of self-regulation shows the government repeatedly raised concerns about the resources the major exchanges dedicate to market oversight, while the federal agency also experienced staff cutbacks and retreated from hands-on policing.

Both the federal regulators and the exchange where MF Global operated, the CME Group, maintain they did all they could in the run-up to MF Global's collapse. But calls are growing for a better system of auditing and enforcement to prevent similar crises in the future.

"I think we've gone too far in allowing the exchanges to be so self-regulatory that it's obfuscated the need for the cop to be on the beat all the time," says Bart Chilton, a Democratic commissioner on the CFTC.

Even the industry itself is acknowledging that there will need to be some changes. While defending the self-regulatory system, Dan Roth, president of the National Futures Association, said "we should be able to identify certain frailties of the current structure that will need to be addressed."

THE FUTURES POLICE

Self-regulation is the hallmark of the U.S. futures industry. Proponents argue that by placing oversight in the hands of the people who really understand the industry, the system benefits everyone. Critics point to the recent transformation of the exchange business, away from a non-profit cooperative model, as a reason the exchanges' commercial interests are overshadowing their market-oversight role.

Though it dates back to the middle of the 19th century, the self-regulatory nature of trading futures got a boost in 2000 with the passage of the Commodity Futures Modernization Act. The main thrust of the bill, signed into law by Bill Clinton in the waning days of his presidency, was to exempt the rapidly growing market for certain types of financial and energy derivatives and swaps from federal futures regulation.

The law was lobbied heavily by the financial industry, which argued that too many rules were hindering financial innovation and economic growth. But it became an easy target after the 2008 financial crisis, in which these types of complex financial products played a role. So lawmakers passed the Dodd-Frank financial-reform law, which pulled the swaps back under the federal regulatory umbrella and instructed the CFTC to write new rules to govern them.

Another, less-discussed, purpose of the 2000 deregulation effort was to limit the prescriptive powers of the CFTC and to give more freedom to the exchanges to set their own rules. The goal was "to provide regulatory relief to futures and options exchanges," James Newsome, who was the agency's chairman in 2001, said at the time. The overall U.S. futures and options industry grew nearly five-fold between 2000 and 2010 when 7.12 billion futures and options contracts were traded, according to Futures Industry Association.

Just as futures trading was exploding in volume, the federal agency was taking a step back from direct oversight of the markets both because of the 2000 deregulation and because of agency understaffing. For instance, when the CFTC in 2003 went after a futures trader allegedly operating a foreign currency boiler room, a court told the agency it had no jurisdiction.

Even in areas where the federal agency retained jurisdiction, direct oversight of the markets rested with the futures exchanges themselves. And those exchanges began ripping up their century-old business models and consolidating rapidly.

Ever since a group of brokers formed the Chicago Board of Trade in 1848, the exchange industry was organized into nonprofit cooperatives of brokers setting their own rules.

Technological and competitive pressures began building on the exchanges that forced more change. In 2000, the Chicago Mercantile Exchange shed its old cooperative structure and soon went public. It later bought the Chicago Board of Trade. And then the newly formed CME Group Inc. acquired the owner of New York's mercantile and commodities exchanges. That made CME Group a dominant U.S. exchange, and one of the largest in the world.

OVERSIGHT STAFF CUTS FLAGGED

As CME Group grew, federal regulators were relying on the exchange operator to be their eyes and ears on the ground. But in several recent assessments, the CFTC said that CME failed to adequately staff its oversight arm, while some of its fines lacked the necessary bite to scare repeat offenders. Combined with the rapid growth in trading volume and complexity of financial products, these staff cuts "could impair the effectiveness of an exchange's compliance program and impede enforcement," federal regulators warned in a 2010 audit of the company.

The flurry of mergers that swept the world of commodity exchanges was partly to blame for the alleged shortfalls, the regulators said.

"Prudence suggests that when exchanges merge, they should avoid substantial reductions in their combined compliance staff," federal regulators said in the 2010 audit, urging the company to add employees. In a follow-up audit a year later, the regulators criticized CME Group for the same alleged staffing shortfalls and noted the issue is "of particular concern because of the substantial share of the entire U.S. futures and options marketplace accounted for by the CME Group exchanges."

A CME official said that merger synergies "didn't reveal themselves quite as quickly" but noted that CME's exchanges have always conducted effective internal oversight. Since those audits, CME says it increased its market oversight staff to about 150 employees and has been increasingly relying on technology to keep tabs on the market amid large growth in the trading volume.

FINES A SLAP ON THE WRIST

In their recent audits, federal regulators also said that fine amounts for some types of trading-related violations "may be low enough that traders could view them as merely a cost of doing business." The regulators urged the CME Group to have a fine schedule that would penalize repeat offenders with progressively higher fines. The issue has prompted federal regulators to step in with their own penalties in cases where they thought the CME was merely slapping traders on the wrist.

Consider the track record of Edward Sarvey and David Sklena, two longtime Chicago Board of Trade brokers who traded U.S. government debt. By 2004, Sarvey had already drawn five penalties for trading violations, with exchange fines ranging from $100 to $25,000 and short bans from the trading floor. Sklena had been sanctioned twice, according to records from the National Futures Association.

In 2004, the two traders engaged in what amounted to insider trading on futures pegged to five-year Treasury notes, according to court documents. The trades netted Sarvey $357,000, while Sklena earned $1.65 million in a single morning. Their customers lost about $2 million, court documents say.

In 2007, the Chicago exchange fined Sarvey and Sklena $125,000 and $175,000 respectively, and banned them from trading for about two months. But federal regulators deemed the penalties insufficient and brought their own civil case against the pair in 2008. That complaint morphed into a federal criminal indictment. Sklena was found guilty of fraud last year and sentenced to five years in prison. Sarvey died before the trial. His former lawyer, John Legutki, says he is "surprised and saddened" by the escalation of the case from "relatively minor" exchange penalties to a full-blown criminal prosecution. "This all weighed on him very heavily," he says of Sarvey.

The case also weighed on federal futures regulators who say it is indicative of soft exchange penalties that fail to deter unscrupulous brokers. "It is not an isolated case," a CFTC official told Reuters. The agency declined to provide numbers on how many times it intervened to correct what it thought were insufficient exchange sanctions.

A CME official said that it was the exchange that first caught Sarvey and Sklena, and that the subsequent federal case was built on "all the good work that the exchange did." He said that "maybe with some exceptions, (federal regulators) find the fines and the penalties that we issue are appropriate." CME also says that the number of enforcement actions brought by its subsidiary exchanges grew from 83 in 2000 to 132 so far in 2011.

During his congressional testimony on MF Global's collapse on December 8, CME Group's executive chairman Terrence Duffy said one way to deter future abuses would be to have "stricter penalties." Duffy said the exchange had conducted its audits and spot checks of MF Global "at the highest professional level" and that the alleged misappropriation of customer funds by the firm was "disguised from all regulators."

In a common refrain, many market participants have accused CME Group of not doing enough to supervise large brokerages whose business and trading volume are key to the company's bottom line. "I've had more than one person say to me that all CME wants is volume, volume, volume, and they don't necessarily care about the integrity of the marketplace," says Jerod Leman, an account executive at Wellington Commodities, a Carmel, Ind.-based broker that works with farmers who lost money in the MF Global collapse. In 2010, CME reported that its average daily trading volume grew to 12.2 million contracts, up 19 percent from the year before.

"DON'T FIX WHAT AIN'T BROKE"

This is not new territory for commodity exchanges. A prominent farmer advocate in 1932 complained that the members of the Chicago Board of Trade "have set up a little government of their own, in which trials are held like a secret lodge," according to Jerry Markham's 2001 book "The Financial History of The United States."

Since those days, the futures business has grown to include hedge funds and other investors, large and small, trading at high volume and using increasingly esoteric financial products, which makes oversight more challenging.

For its part, CME argues it has an obvious self-interest in policing its trading floors because if traders lose faith in the integrity of the exchange, CME Group will lose business. In a 2006 hearing on the matter, CME's chief executive Craig Donohue dismissed assertions of a conflict between the company's profit-making and regulatory missions as "conjecture" and said "don't fix what ain't broke."

Ted Butler, a veteran silver trader, has been pushing Comex, the New York metals exchange owned by CME Group, to investigate allegations of price manipulation on the silver futures market by a handful of large brokerages. But, he says, the exchange hasn't shown much interest. "It is a continuing mystery how the conflicted CME could be responsible for any regulatory oversight given their inherent clear conflict of interest," Butler, who himself had drawn a CFTC sanction in the 1980s, wrote in a recent newsletter.

The federal agency is conducting its own investigation into the silver market, having found no evidence of wrongdoing in an earlier probe. A CME official declined to comment, citing the ongoing federal inquiry, with which the exchange is cooperating.

CME SIDING WITH BUSINESS

In a rapidly growing futures industry, CME Group often has to wade into policy debates between federal regulators and the businesses they oversee. In several of those debates, CME sided with the firms in opposing disclosure rules and trading curbs that could cut into those firms', and the CME's, bottom line.

The CME, for instance, opposed registration requirements for high-frequency traders. CFTC officials hoped the registration would force the traders, some based overseas, to disclose more about themselves and their trading software, and allow regulators to step in quickly in case of trouble that was seen in the so-called "flash crash" of 2010.

Because of the sheer volume and the number of transactions, high-frequency traders provide an attractive business to the exchange. CME Group balked at efforts to saddle them with additional requirements. A CME official says there's no uniform definition of what constitutes high-frequency trading, and that CME's internal systems already provide the exchange with "incredibly granular information that allows us to look at trading activity."

Last year, for instance, CME Group fined a high-frequency trader called Infinium Capital Management $850,000 for glitches in its algorithm that unleashed rapid-fire trading orders and caused a brief spike in oil prices.

UNDERFUNDING OVERSIGHT

Over the past decade, the federal agency has tried to address potential conflicts of interest within the exchanges by insisting they appoint independent directors to their boards and increase the funding and independence of their regulatory oversight committees.

"There was a concern about underfunding the regulatory function of the exchange," recalls Sharon Brown-Hruska who served as a CFTC commissioner between 2002 and 2006. Major exchanges going public only heightened concerns about self-regulation, she says.

CME Group, and other exchange operators, resisted what they saw as the federal agency's unwarranted meddling. But the CFTC prevailed and decreed the exchange boards should be more than one-third independent and that regulatory oversight committees should be properly funded.

Ever since the passage of the Dodd-Frank law, the CFTC has been consumed with writing new rules to prevent future abuses in the derivatives industry. As a result, the resources the agency can devote to enforcing the existing rules may have suffered.

"Unfortunately, in response to the financial crisis, the CFTC has been off on a series of tangents, proposing one regulation after another," Senator Pat Roberts, a Republican, said at a recent hearing. "Meanwhile, back at the ranch for the first time ever, we have a major problem.

The agency says it is being asked to effectively walk and chew gum at the same time, in an era when Congress is in no mood to increase the size of the federal government. CFTC now has about 700 employees, a 10% increase since the 1990s. In the same time period, the futures market has grown five-fold, CFTC Chairman Gary Gensler said in recent congressional testimony.

Two weeks after MF Global's bankruptcy, Congress denied the Obama administration's request for a CFTC budget increase despite the agency's insistence that it needs more money to do its job. "The CFTC just doesn't have the staffing and the resources to audit the brokerages," says a former senior agency official.

That means the CFTC will likely continue to rely on the exchanges to police themselves, although the agency may choose to take a closer look at the markets in some cases. Shortly after the MF Global bankruptcy, for instance, federal regulators said they would conduct a review of the major futures brokerages to make sure their customer accounts are intact.

(Reporting by Philip Shishkin; Editing by Tim Dobbyn)

View the original article here

Insight: MF Global puts harsh light on self-regulation

Former MF Global CEO Jon Corzine testifies about the firm's bankruptcy during a hearing before the U.S. House Agriculture Committee on Capitol Hill in Washington, December 8, 2011.

Credit: Reuters/Jonathan Ernst

By Philip Shishkin

WASHINGTON | Wed Dec 14, 2011 2:35pm EST

WASHINGTON (Reuters) - Two weeks after MF Global's collapse, officials from the Commodity Futures Trading Commission briefed Senate staff on the brokerage firm's final days. When asked about reports that the brokerage firm had written checks that bounced when customers tried to cash them, the regulators had an admission that surprised the room: they didn't know about the bad checks.

"This seemed like something they should be aware of," a Senate staffer present at the meeting recalled. A CFTC spokesman declined to comment.

Customers still have no explanation of what happened to MF Global and some $1 billion missing from its customer accounts more than a month after the firm's failure. And regulators struggling to solve the mystery are now forced to play catch-up.

That's in part because over the past decade, as trading volume soared, federal regulators eased direct oversight of the industry and handed more regulatory powers to the major exchanges. Now, this self-policing arrangement is prompting concerns about the regulators' and the exchanges' ability to detect and deter suspicious conduct in the rapidly expanding marketplace.

A look at the recent history of self-regulation shows the government repeatedly raised concerns about the resources the major exchanges dedicate to market oversight, while the federal agency also experienced staff cutbacks and retreated from hands-on policing.

Both the federal regulators and the exchange where MF Global operated, the CME Group, maintain they did all they could in the run-up to MF Global's collapse. But calls are growing for a better system of auditing and enforcement to prevent similar crises in the future.

"I think we've gone too far in allowing the exchanges to be so self-regulatory that it's obfuscated the need for the cop to be on the beat all the time," says Bart Chilton, a Democratic commissioner on the CFTC.

Even the industry itself is acknowledging that there will need to be some changes. While defending the self-regulatory system, Dan Roth, president of the National Futures Association, said "we should be able to identify certain frailties of the current structure that will need to be addressed."

THE FUTURES POLICE

Self-regulation is the hallmark of the U.S. futures industry. Proponents argue that by placing oversight in the hands of the people who really understand the industry, the system benefits everyone. Critics point to the recent transformation of the exchange business, away from a non-profit cooperative model, as a reason the exchanges' commercial interests are overshadowing their market-oversight role.

Though it dates back to the middle of the 19th century, the self-regulatory nature of trading futures got a boost in 2000 with the passage of the Commodity Futures Modernization Act. The main thrust of the bill, signed into law by Bill Clinton in the waning days of his presidency, was to exempt the rapidly growing market for certain types of financial and energy derivatives and swaps from federal futures regulation.

The law was lobbied heavily by the financial industry, which argued that too many rules were hindering financial innovation and economic growth. But it became an easy target after the 2008 financial crisis, in which these types of complex financial products played a role. So lawmakers passed the Dodd-Frank financial-reform law, which pulled the swaps back under the federal regulatory umbrella and instructed the CFTC to write new rules to govern them.

Another, less-discussed, purpose of the 2000 deregulation effort was to limit the prescriptive powers of the CFTC and to give more freedom to the exchanges to set their own rules. The goal was "to provide regulatory relief to futures and options exchanges," James Newsome, who was the agency's chairman in 2001, said at the time. The overall U.S. futures and options industry grew nearly five-fold between 2000 and 2010 when 7.12 billion futures and options contracts were traded, according to Futures Industry Association.

Just as futures trading was exploding in volume, the federal agency was taking a step back from direct oversight of the markets both because of the 2000 deregulation and because of agency understaffing. For instance, when the CFTC in 2003 went after a futures trader allegedly operating a foreign currency boiler room, a court told the agency it had no jurisdiction.

Even in areas where the federal agency retained jurisdiction, direct oversight of the markets rested with the futures exchanges themselves. And those exchanges began ripping up their century-old business models and consolidating rapidly.

Ever since a group of brokers formed the Chicago Board of Trade in 1848, the exchange industry was organized into nonprofit cooperatives of brokers setting their own rules.

Technological and competitive pressures began building on the exchanges that forced more change. In 2000, the Chicago Mercantile Exchange shed its old cooperative structure and soon went public. It later bought the Chicago Board of Trade. And then the newly formed CME Group Inc. acquired the owner of New York's mercantile and commodities exchanges. That made CME Group a dominant U.S. exchange, and one of the largest in the world.

OVERSIGHT STAFF CUTS FLAGGED

As CME Group grew, federal regulators were relying on the exchange operator to be their eyes and ears on the ground. But in several recent assessments, the CFTC said that CME failed to adequately staff its oversight arm, while some of its fines lacked the necessary bite to scare repeat offenders. Combined with the rapid growth in trading volume and complexity of financial products, these staff cuts "could impair the effectiveness of an exchange's compliance program and impede enforcement," federal regulators warned in a 2010 audit of the company.

The flurry of mergers that swept the world of commodity exchanges was partly to blame for the alleged shortfalls, the regulators said.

"Prudence suggests that when exchanges merge, they should avoid substantial reductions in their combined compliance staff," federal regulators said in the 2010 audit, urging the company to add employees. In a follow-up audit a year later, the regulators criticized CME Group for the same alleged staffing shortfalls and noted the issue is "of particular concern because of the substantial share of the entire U.S. futures and options marketplace accounted for by the CME Group exchanges."

A CME official said that merger synergies "didn't reveal themselves quite as quickly" but noted that CME's exchanges have always conducted effective internal oversight. Since those audits, CME says it increased its market oversight staff to about 150 employees and has been increasingly relying on technology to keep tabs on the market amid large growth in the trading volume.

FINES A SLAP ON THE WRIST

In their recent audits, federal regulators also said that fine amounts for some types of trading-related violations "may be low enough that traders could view them as merely a cost of doing business." The regulators urged the CME Group to have a fine schedule that would penalize repeat offenders with progressively higher fines. The issue has prompted federal regulators to step in with their own penalties in cases where they thought the CME was merely slapping traders on the wrist.

Consider the track record of Edward Sarvey and David Sklena, two longtime Chicago Board of Trade brokers who traded U.S. government debt. By 2004, Sarvey had already drawn five penalties for trading violations, with exchange fines ranging from $100 to $25,000 and short bans from the trading floor. Sklena had been sanctioned twice, according to records from the National Futures Association.

In 2004, the two traders engaged in what amounted to insider trading on futures pegged to five-year Treasury notes, according to court documents. The trades netted Sarvey $357,000, while Sklena earned $1.65 million in a single morning. Their customers lost about $2 million, court documents say.

In 2007, the Chicago exchange fined Sarvey and Sklena $125,000 and $175,000 respectively, and banned them from trading for about two months. But federal regulators deemed the penalties insufficient and brought their own civil case against the pair in 2008. That complaint morphed into a federal criminal indictment. Sklena was found guilty of fraud last year and sentenced to five years in prison. Sarvey died before the trial. His former lawyer, John Legutki, says he is "surprised and saddened" by the escalation of the case from "relatively minor" exchange penalties to a full-blown criminal prosecution. "This all weighed on him very heavily," he says of Sarvey.

The case also weighed on federal futures regulators who say it is indicative of soft exchange penalties that fail to deter unscrupulous brokers. "It is not an isolated case," a CFTC official told Reuters. The agency declined to provide numbers on how many times it intervened to correct what it thought were insufficient exchange sanctions.

A CME official said that it was the exchange that first caught Sarvey and Sklena, and that the subsequent federal case was built on "all the good work that the exchange did." He said that "maybe with some exceptions, (federal regulators) find the fines and the penalties that we issue are appropriate." CME also says that the number of enforcement actions brought by its subsidiary exchanges grew from 83 in 2000 to 132 so far in 2011.

During his congressional testimony on MF Global's collapse on December 8, CME Group's executive chairman Terrence Duffy said one way to deter future abuses would be to have "stricter penalties." Duffy said the exchange had conducted its audits and spot checks of MF Global "at the highest professional level" and that the alleged misappropriation of customer funds by the firm was "disguised from all regulators."

In a common refrain, many market participants have accused CME Group of not doing enough to supervise large brokerages whose business and trading volume are key to the company's bottom line. "I've had more than one person say to me that all CME wants is volume, volume, volume, and they don't necessarily care about the integrity of the marketplace," says Jerod Leman, an account executive at Wellington Commodities, a Carmel, Ind.-based broker that works with farmers who lost money in the MF Global collapse. In 2010, CME reported that its average daily trading volume grew to 12.2 million contracts, up 19 percent from the year before.

"DON'T FIX WHAT AIN'T BROKE"

This is not new territory for commodity exchanges. A prominent farmer advocate in 1932 complained that the members of the Chicago Board of Trade "have set up a little government of their own, in which trials are held like a secret lodge," according to Jerry Markham's 2001 book "The Financial History of The United States."

Since those days, the futures business has grown to include hedge funds and other investors, large and small, trading at high volume and using increasingly esoteric financial products, which makes oversight more challenging.

For its part, CME argues it has an obvious self-interest in policing its trading floors because if traders lose faith in the integrity of the exchange, CME Group will lose business. In a 2006 hearing on the matter, CME's chief executive Craig Donohue dismissed assertions of a conflict between the company's profit-making and regulatory missions as "conjecture" and said "don't fix what ain't broke."

Ted Butler, a veteran silver trader, has been pushing Comex, the New York metals exchange owned by CME Group, to investigate allegations of price manipulation on the silver futures market by a handful of large brokerages. But, he says, the exchange hasn't shown much interest. "It is a continuing mystery how the conflicted CME could be responsible for any regulatory oversight given their inherent clear conflict of interest," Butler, who himself had drawn a CFTC sanction in the 1980s, wrote in a recent newsletter.

The federal agency is conducting its own investigation into the silver market, having found no evidence of wrongdoing in an earlier probe. A CME official declined to comment, citing the ongoing federal inquiry, with which the exchange is cooperating.

CME SIDING WITH BUSINESS

In a rapidly growing futures industry, CME Group often has to wade into policy debates between federal regulators and the businesses they oversee. In several of those debates, CME sided with the firms in opposing disclosure rules and trading curbs that could cut into those firms', and the CME's, bottom line.

The CME, for instance, opposed registration requirements for high-frequency traders. CFTC officials hoped the registration would force the traders, some based overseas, to disclose more about themselves and their trading software, and allow regulators to step in quickly in case of trouble that was seen in the so-called "flash crash" of 2010.

Because of the sheer volume and the number of transactions, high-frequency traders provide an attractive business to the exchange. CME Group balked at efforts to saddle them with additional requirements. A CME official says there's no uniform definition of what constitutes high-frequency trading, and that CME's internal systems already provide the exchange with "incredibly granular information that allows us to look at trading activity."

Last year, for instance, CME Group fined a high-frequency trader called Infinium Capital Management $850,000 for glitches in its algorithm that unleashed rapid-fire trading orders and caused a brief spike in oil prices.

UNDERFUNDING OVERSIGHT

Over the past decade, the federal agency has tried to address potential conflicts of interest within the exchanges by insisting they appoint independent directors to their boards and increase the funding and independence of their regulatory oversight committees.

"There was a concern about underfunding the regulatory function of the exchange," recalls Sharon Brown-Hruska who served as a CFTC commissioner between 2002 and 2006. Major exchanges going public only heightened concerns about self-regulation, she says.

CME Group, and other exchange operators, resisted what they saw as the federal agency's unwarranted meddling. But the CFTC prevailed and decreed the exchange boards should be more than one-third independent and that regulatory oversight committees should be properly funded.

Ever since the passage of the Dodd-Frank law, the CFTC has been consumed with writing new rules to prevent future abuses in the derivatives industry. As a result, the resources the agency can devote to enforcing the existing rules may have suffered.

"Unfortunately, in response to the financial crisis, the CFTC has been off on a series of tangents, proposing one regulation after another," Senator Pat Roberts, a Republican, said at a recent hearing. "Meanwhile, back at the ranch for the first time ever, we have a major problem.

The agency says it is being asked to effectively walk and chew gum at the same time, in an era when Congress is in no mood to increase the size of the federal government. CFTC now has about 700 employees, a 10% increase since the 1990s. In the same time period, the futures market has grown five-fold, CFTC Chairman Gary Gensler said in recent congressional testimony.

Two weeks after MF Global's bankruptcy, Congress denied the Obama administration's request for a CFTC budget increase despite the agency's insistence that it needs more money to do its job. "The CFTC just doesn't have the staffing and the resources to audit the brokerages," says a former senior agency official.

That means the CFTC will likely continue to rely on the exchanges to police themselves, although the agency may choose to take a closer look at the markets in some cases. Shortly after the MF Global bankruptcy, for instance, federal regulators said they would conduct a review of the major futures brokerages to make sure their customer accounts are intact.

(Reporting by Philip Shishkin; Editing by Tim Dobbyn)

View the original article here

GLOBAL MARKETS-Stocks, euro fall after Fed skips fresh stimulus

* Nikkei falls 0.6 pct, MSCI Asia ex-Japan down 0.4 pct

* Euro falls to 11-month low at $1.30090

* U.S. crude dips back below $100 a barrel

* Gold steady around $1,635 an ounce

By Alex Richardson

SINGAPORE, Dec 14 (Reuters) - Asian shares drifted lower and the euro floundered near an 11-month low on Wednesday after the Federal Reserve failed to take any new steps to stimulate growth and offset the chilling effects of Europe's still-unresolved debt crisis.

Wall Street stocks fell after the U.S. central bank's final policy meeting of the year, at which the Fed noted modest improvement in the U.S. economy but added that market turbulence in the face of Europe's woes posed a big risk.

"Investors continue to avoid risk as they look to possible sovereign debt downgrades in Europe," said Hiroichi Nishi, equity general manager at SMBC Nikko Securities in Tokyo.

Japan's Nikkei share average fell 0.6 percent and MSCI's broadest index of Asia Pacific shares outside Japan eased 0.4 percent.

Asian stocks have underperformed in the second half of the year, partly because European institutions and money managers are repatriating funds from Asia Pacific markets.

MSCI's Asia Pacific ex-Japan index is down 18 percent for the year, against a loss of around 11 percent for its All-Country World index.

Fears of mass downgrades by credit rating agencies for European sovereigns have pressured equity markets and the euro this week, pushing up the dollar -- perceived as a safer haven by investors -- and driving up borrowing costs for indebted nations such as Italy and Spain.

A key test will be an Italian bond auction later on Wednesday at which Rome is expected to pay a euro-era record cost, with an auction of Spanish debt to follow on Thursday.

The euro fell as far as $1.30090, its lowest since mid-January and nearly 20 cents below its 2011 high in May, before steadying at around $1.3027.

STILL NOT ENOUGH

European leaders agreed to impose stricter budget discipline on euro zone members at a summit last week, but markets have since hardened to the view that the measures agreed do not go far enough to resolve the two-year-old debt crisis.

That view was further cemented on Tuesday, when German Chancellor Angela Merkel rejected talk of raising the funding limit of a planned permanent bailout fund to backstop the currency bloc above 500 billion euros.

"European institutions continue to hammer the point of what they are not willing to do," said Kit Juckes, head of foreign exchange research at Societe Generale. "The market is driving down the point of how little they are willing to risk in a deleveraged financial system, and this ahead of the holidays."

The dollar consolidated recent gains, rising around 0.1 percent against a basket of major currencies.

The strength of the U.S. currency has played a part in weakness for commodities in recent days, because most are priced in dollars and therefore become more expensive for holders of other currencies when the greenback appreciates.

Copper fell for a third straight day, shedding 0.9 percent on the London Metal Exchange to around $7,530 a tonne. Industrial metals have also been hit by worries that slowing economic growth will crimp demand.

U.S. crude eased a little to fall back below $100 a barrel, after rallying 2 percent in the previous session, and Brent crude was also lower, slipping 0.4 percent to around $109 a barrel.

Oil prices are currently being pulled and pushed between fears of slackening economic growth that would tend to weaken prices and tensions between Iran and the West that have raised concerns about supply disruptions. Such disruptions would drive energy costs higher.

Gold edged up around 0.3 percent to about $1,635 an ounce after falling 2.5 percent on Tuesday.

Having raced to a record above $1,920 in September, partly on fears that the Federal Reserve's monetary easing steps would stoke inflation against which it has traditionally been seen as a hedge, gold has fallen back with other commodities. The precious metal remains up about 15 percent for the year.

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Text-S&P maintains B on Global TEL*LINK upsized term loan

NEW YORK (Standard & Poor's) Nov. 29, 2011--Standard & Poor's Ratings Services said today that its ratings and outlook on Mobile, Ala.-based prison phone provider Global Tel*LinkCorp. (B/Stable/--) are not affected by the increase in the company's proposed term loan to $635 million from $605 million. The 'B' issue-level rating and '3' recovery rating on the term loan and $50 million revolving credit facility remain unchanged. The company intends to use the proceeds from this term loan, along with $389 million of common equity, to fund the buyout of the company's owners Veritas Capital and Goldman Sachs Direct and its affiliates by American Securities LLC. Pro forma for the transaction and including our adjustments for operating leases, we expect leverage to increase to about 6.2x for the 12 months ended Sept. 30, 2011 from the current 5.3x, which is still within the parameters of the current rating. We expect adjusted leverage to improve to around 5.0x by the end of 2012 following a full year's contribution from inmate telephone service provider Value-Added Communications (VAC) (acquired in August 2011) and from achievement of some additional cost savings throughout 2012. We also expect leverage to further improve to the high- to mid-4x area thereafter with the full-year benefits of synergies achieved in 2012, which we have conservatively assumed will be about $10 million, or roughly 50% of those targeted but not yet realized. The 'B' corporate credit rating and stable outlook on the company remain unchanged. (For the complete corporate credit rating rationale, see the research update on Global Tel*Link, published Nov. 11, 2011, on RatingsDirect on the Global Credit Portal.) RELATED CRITERIA AND RESEARCH

-- Industry Report Card: U.S. Telecom And Cable TV Ratings Likely To Be Generally Stable During Slow Recovery, Oct. 13, 2011

-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008

-- Timeliness Of Payments: Grace Periods, Guarantees, And Use Of 'D' And 'SD' Ratings, Dec. 23, 2010 RATINGS LIST Global Tel*Link Corp. Corporate Credit Rating B/Stable/-- Senior Secured $635 mil term loan B

Recovery Rating 3 $50 mil revolver B

Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Primary Credit Analyst: Catherine Cosentino, New York (1) 212-438-7828;

catherine_cosentino@standardandpoors.com Secondary Contact: Allyn Arden, New York (1) 212-438-7832;

allyn_arden@standardandpoors.com

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UK wants global climate pact '"operational" by 2020

Britain's Secretary of State for Energy and Climate Change Chris Huhne speaks during the Liberal Democrats annual autumn conference in Birmingham, central England, September 20, 2011.

Credit: Reuters/Darren Staples

LONDON | Thu Nov 24, 2011 12:20pm EST

LONDON (Reuters) - Britain wants a new globally binding climate deal to be "operational" by 2020 to reduce greenhouse gas emissions enough to keep world temperature rises to a limit of 2 degrees Celsius, the UK's minister for energy and climate change said.

"The key thing is to have a deal to reduce emissions by 2020. As long as it is operating by then, that's fine," Chris Huhne told reporters on Thursday.

Negotiators from around the world will meet in Durban, South Africa, next Monday for two weeks to work on a new globally binding United Nations deal toward cutting emissions.

The aim is to keep within a global temperature rise limit of 2 degrees Celsius this century, a threshold scientists advise in order to avert wilder weather, crop failures, melting ice caps and major floods.

But only modest steps are expected despite warnings from scientists that extreme weather will likely increase as the planet warms, as rifts between countries on the matter continue.

An OECD report on Thursday warned global emissions will double in the next 40 years, resulting in a 3 to 6 degree increase in the average global temperature by the end of the century unless governments take decisive action.

"We have to be guided by science. Emissions have to peak and then come down by 2020 if we have a realistic chance of holding the 2 degree Celsius (temperature rise) limit," Huhne said.

"We think that means we need a global agreement by 2015," he added.

In Durban, the European Union as a whole is seeking a "roadmap" or mandate toward a global agreement being signed by all countries by 2015 or earlier.

Even if countries manage to agree on a deal by then, the time required for over 190 countries to process and ratify international agreements means the pact might not come into force until 2020 or later.

"In some cases, the process may not take that long but it is one of the things we need to get sorted out (in Durban)," Huhne added.

The eventual form of a global agreement might not mean that all countries will have the same type of emission cut commitments in five or 10 years' time, the minister conceded.

"There will still be huge differences between countries then, just as there are now. China is not, and will not be, the same as Chad or India."

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Time running out for deal on global warming at climate talks

A resident walks in front of chimneys billowing smoke near a chemical plant in Yingtan, Jiangxi province December 9, 2010.

Credit: Reuters/Stringer

By Jon Herskovitz

JOHANNESBURG | Fri Nov 25, 2011 11:33am EST

JOHANNESBURG (Reuters) - Time is quickly running out to strike a deal at global climate talks to save a Kyoto Protocol in its death throes and make major cuts in the greenhouse gas emissions that scientists blame for rising temperatures, wilder weather and crop failures.

Major parties have been at loggerheads for years, warnings of climate disaster are becoming more dire and diplomats worry whether host South Africa is up to the challenge of brokering the tough discussions among nearly 200 countries that run from November 28 to December 9 in the coastal city of Durban.

There are glimmers of hope a deal can be reached on a fund to finance projects for developing countries hardest hit by climate change, and that advanced economies responsible for most global emissions will take it on their own to make deeper cuts at the talks known as the Conference of the Parties, or COP 17.

There is also a chance of a political deal to keep Kyoto alive with a new set of binding targets, but only the European Union, New Zealand, Australia, Norway and Switzerland are likely to sign up at best. Any accord depends on China and the United States, the world's top emitters, agreeing binding action under a wider deal by 2015, something both have resisted for years.

"Expectations are already at rock bottom regarding an international climate change architecture at the summit, and there is no reason to expect any upside," said Divya Reddy of the political risk consultancy Eurasia Group.

The Kyoto Protocol, adopted in 1997 and entered into force in 2005, commits most developed states to binding targets on greenhouse gas emissions. The talks in the South African city of Durban offer delegates their last chance to set another round of fixed targets before the first period commitment ends in 2012.

The major players are at each other's throats on extending Kyoto. The United States still has not ratified the accord, the world's biggest emitter of greenhouse gases China is unwilling to make any commitments until Washington does, and Russia, Japan and Canada say they will not sign up for a second commitment period unless the biggest emitters do too.

Emerging countries insist Kyoto must be extended and that rich nations, which have historically emitted most greenhouse gas pollution, should take on tougher targets to ensure they do their fair share in the fight against climate change.

Developing nations say carbon caps could hurt their growth and programs to lift millions out of poverty.

On top of the acrimony, the global financial crisis, with mounting debt woes in the euro zone and the United States, makes it even more difficult to find financing and for states to take on emissions cuts that could hurt their growth prospects.

PLANET UNDER THREAT

The stakes are growing increasingly high, with many experts calling for immediate action.

This month, two separate U.N. reports said greenhouse gases have reached record levels in the atmosphere while a warming climate is expected to lead to heavier rainfall, more floods, stronger cyclones and more intense droughts.

Despite individual emissions-cut pledges from countries and the terms of the Kyoto pact, the United Nations, International Energy Agency and others say this is not enough to prevent the planet heating up beyond 2 degrees Celsius.

Global average temperatures could rise by 3-6 degrees by the end of the century if governments fail to contain greenhouse gas emissions, bringing unprecedented destruction as glaciers melt and sea levels rise, the OECD said on Thursday.

The warning from the OECD, whose main paymasters are the United States and other developed economies, underscored fears that the commitment to curb climate-heating gases could falter at a time when much of the world is deep in debt.

RINGING HOLLOW

"It is inevitable that a lot of the key players are both distracted and cautious about taking actions they would see as costly," said Jennifer Haverkamp, director of the international climate program of the Environmental Defense Fund.

Support for the fund could ring hollow because the United Nations says it remains an empty shell awaiting new pledges from cash-strapped governments. Rich nations have committed to a goal of providing $100 billion a year in climate cash by 2020, which the Green Climate Fund will help manage. But the United States and Saudi Arabia have objected to some aspect of its design.

South Africa has said it wants to advance an African agenda at the conference but is seen by many diplomats as not having the diplomatic muscle or prestige to broker complex talks.

As the world's poorest continent, Africa is also the most vulnerable to the extreme weather conditions and rising sea levels brought by climate change. In the Horn of Africa, some 13 million people are going hungry due to prolonged drought. In Somalia, the crisis is compounded by conflict.

"Agriculture is the most threatened of all sectors. It's likely that yields in Africa will fall between 20 and 30 percent absent very large adaptation investments," said World Bank Climate envoy Andrew Steer.

Todd Stern, the U.S. envoy for climate change, said in a teleconference with journalists this week that Washington was committed to funding climate initiatives but it saw aspect of the U.N. plans as "problematic."

Stern also said despite the differences heading into Durban, deliberations and deadlines were powerful forces, which should help bring about a positive outcome.

But Ian Fry, negotiator for the tiny island state of Tuvalu that is threatened with being wiped out by rising sea levels, said he felt COP would deliver little, with major powers to blame.

"For small island states this is a total disaster and will have serious implications. They are playing Russian roulette with us with all the chambers loaded with bullets," Fry said.

(Additional reporting by David Fogarty in Singapore, Nina Chestney in London and Brian Love in Paris; Editing by Jon Boyle)

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Former FBI director appointed MF Global trustee

n" readability="41">Nov 25 (Reuters) - Former FBI director Louis Freeh was appointed trustee in the MF Global bankruptcy case on Friday, days after he was hired to lead an independent probe into a sex abuse scandal at Penn State University.

Freeh, also a former judge, was appointed by the United States trustee for the region, according to a court document. The move is subject to court approval.

MF Global filed for bankruptcy protection on Oct. 31, after $6.3 billion in risky bets on European sovereign debt spooked investors and an attempt to sell the firm failed.

U.S. regulators and Justice Department officials have been investigating the firm's sudden collapse and trying to locate around $1.2 billion in customer funds.

Former MF Global Chief Executive Jon Corzine is expected to testify at a congressional hearing next month, a committee aide said Friday.

Freeh was FBI director from 1993 to 2001. Earlier this week, his risk management firm was hired to run a review into Penn State's handling of sex abuse claims against a former football coach. His firm has also in recent months conducted a probe into cheating on the SAT academic exams.

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Weak global economy fails to dampen fine wine sales

Ultra rare magnums of Le Pin 1982 wine are displayed at Sotheby's ahead of a June 2011 auction, in London June 10, 2011.

Credit: Reuters/Olivia Harris

By Leslie Gevirtz

NEW YORK | Wed Nov 23, 2011 6:01am EST

NEW YORK (Reuters) - In good times collectors buy fine wines and in bad times they buy even more, the latest wine auction figures show.

Leading wine auction houses are reporting bumper results for 2011. Christie's sales have totalled $77.7 million globally, more than last year's $70 million and there are auctions scheduled for Amsterdam, London and Hong Kong before the end of the year.

"Despite the bleak news of the weak economy globally and last week's markets, I have to tell you, I'm still encouraged. There is a lot of interest and a lot of buyers" for wines that can sell for tens of thousands of dollars a bottle, said Robin Kelley O'Connor of Christie's.

The auction house sold $1.2 million of wine in New York on Saturday, including six bottles of Moet & Chandon Grand Vintage 1911 for $66,000, which were auctioned for The Lunchbox Fund, a charity that provides meals for children.

The bottles had been found in the 18 miles (29 kms) of tunnels beneath the chateau's estate.

John Kapon of Acker, Merrall & Condit sold $2.4 million of wines on Saturday including a Salmanazar, a bottle that holds the equivalent of nine litres of wine, for $20,740.

Kapon estimates business is up 15 percent over last year.

"People work hard and drink harder," he said.

With two more auctions still scheduled for December, in New York and Hong Kong, Kapon expects a total of more than $100 million for the year.

Although Sotheby's wine sales of $82,001,258 are slightly behind last year, the auction house has one more auction in London where sales are expected to reach as much as $3.4 million.

"There are two factors: there is less wine coming to market and the prices are a little softer," Sotheby's Jamie Ritchie said.

All of the auction houses said the Asian market, which drove up Bordeaux prices, has shifted its focus to Burgundy, a much smaller region that produces less.

"It's a natural progression to move from Bordeaux to Burgundy, but it's not as if they've abandoned Bordeaux. I think we will see a healthy market with a bit more cautious pricing," Ritchie said.

Richard Harvey, of London-based Bonhams auction house described 2011 as "a fantastic year ... with sales totals well up on 2010.

"Although the market has eased off slightly in the second half of the year for top Bordeaux, particularly Chateau Lafite, this has been more than compensated by the rise in prices of top Burgundy, notably (Domaine de la) Romanee-Conti."

Bonhams sold a case of the 1990 vintage for $198,000 in September. After its final three sales in December it expects to top last year's nearly $13 million in sales.

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