This week, the inspector general of the Commodity Futures Trading Commission released his report on the CFTC's regulatory oversight of MF Global, the financial firm that collapsed in October 2011 and had a shortfall of approximately $1.6 billion of customer funds in the process. The report, which came in response to a request by Senator Richard Shelby looked at (i) the CFTC's oversight leading up to MF Global's collapse, and (ii) CFTC Chairman Gensler's initial involvement in MF Global matters and subsequent recusal because of his prior working relationship with MF Global head Jon Corzine. The report provides a number of lessons for the CFTC as it begins to wield its massive new Dodd-Frank powers.
First, the CFTC needs to take a more rigorous approach to examinations. The CFTC did not have formal procedures in place to guide its examinations of MF Global and other similar firms. Second, the CFTC should be more deliberate about its regulatory coordination. MF Global, like many other large financial firms, had many regulators. Before and during the collapse of MF Global, these regulators seem to have coordinated mostly by happenstance. Third, the CFTC, as it upgrades its technological capabilities to handle its Dodd-Frank responsibilities, should also take steps to enable employees to access their official email remotely and securely. Among the emails reviewed by the inspector general were 7,000 from Chairman Gensler's personal email addresses. Mr. Gensler explained this trove of private emails, in part, by citing his inability to access his official email from home.
The final--and most important--lesson for the CFTC is that it cannot allow its new, high-profile regulatory responsibilities for swaps to distract it from its legacy mission of watching over the futures markets. Chairman Gensler, in the days before MF Global's failure, appears to have been keenly aware of the danger faced by the firm and concerned about the safety of its customers' funds. The thousands of emails, many late-night telephone calls, and emergency meetings in which he actively participated during the demise of MF Global indicated the chairman's appreciation of the importance of MF Global. Yet, after this early, intense involvement, Mr. Gensler decided to stop participating in MF Global matters because--in his words--he did "not want [his] participation to be in any way a distraction in this important matter."
One wonders if Mr. Gensler, having seen how much time MF Global would absorb, was worried that it would be a distraction to him as he tried to create a new swaps regulatory regime. Mr. Gensler was advised by his general counsel and designated ethics official that he could participate in MF Global matters, but instead he handed the issue to Commissioner Sommers. She was forced to juggle that responsibility with a very intense and controversial Dodd-Frank rulemaking agenda, much of which she opposed. As the inspector general noted, the chairman's late recusal "was not the most desirable course" and may have "disadvantaged" Ms. Sommers, "who now had to take on this work at a late stage . . ." At a minimum, Mr. Gensler's decision to drop out of MF Global matters sent an unfortunate signal that rushing through swaps reforms was more important than spearheading the agency's work in connection with a matter of utmost importance to the futures markets.