Walt Lukken started in his new role of president and CEO of the Futures Industry Association (FIA) last week. The former CFTC commissioner and New York Portfolio Clearing CEO spoke with John Lothian News editor-in-chief Jim Kharouf about his new position, MF Global, Dodd Frank rules and prospects for the futures industry.
Q: You are taking the baton from John Damgard. What is your approach to the new role?
A: It’s going to be picking up where John left off. He’s done a very good job of promoting the industry and making sure that whatever regulatory apparatus which oversees the industry makes sense. For me, I’ve always termed it ‘smart regulation.’ We’re supportive of regulation but let’s make sure it’s smart regulation and it addresses the problems you are trying to solve. The Commodity Exchange Act calls for fair competition, making sure there is market integrity free from fraud and manipulation. Those are all things that the FIA supports. So we’re here to educate the public, regulators and policy makers about those issues and make sure the markets are working as intended.
Q: What are some of your priorities for FIA?
A: Certainly MF Global is at the top of the list. I mentioned the fair competition mandate from the CFTC. There are a lot of people who aren’t convinced that the markets are fair right now. So we have to be persistent in making sure customers’ money will be protected and that people can invest in these markets with a degree of confidence. And then certainly Dodd Frank is a close second. We’re about halfway through those rule makings. We need to make sure those rules don’t have unintended consequences.
Q: Anything internally at FIA you would like to address?
A: FIA, thankfully for me, is a well-run organization. But more can be done to add value. I’d like to make sure the educational materials for our members are up to speed and that we are able to communicate key strategic messages to our members and to policy makers and regulators. We’re going to try to build on the theme that FIA has done a very good job during the 30 years that John has run the organization. But we can improve and fine-tune that, and that’s going to be my approach going forward.
Q: The industry is still reeling from the MF Global bankruptcy. FIA’s MF Global task force has recommended more internal controls at FCMs, as well as daily reports on segregated funds. Can you explain how those will be implemented for customers?
A: Remember, this is an interim report. We wanted this to be timely by getting some recommendations out there that make sense, including putting proper controls in place, increasing transparency and getting back to the idea of fair competition. But there is lots more work to be done. We still don’t know exactly what happened at MF Global, so we don’t want to make too many recommendations about what should be left standing and what we need to fix. And as this becomes a final report, we’ll work with policy makers on how best to implement those changes and gain consensus around those policies.
Q: These are part of the solutions to future FCM operations. But how can the industry best address regaining customer confidence in the futures industry?
A: This is one of the rare moments in the history of the futures markets where everyone should come together, put differences aside and come up with what the right solutions should be. That includes exchanges, FCMs, clearing houses, end users and policy makers. This is a moment in time where the very stake of the futures markets may be in jeopardy. We need to come together with consensus solutions that are bold and hopefully regain that confidence from investors.
Q: The futures industry and OTC swaps market are converging. What will those markets look like this year and in coming years?
A: It’s still too early to know what the market structure will look like. I do think there is going to be a bigger buy-in from asset managers and end users in utilizing swaps and swap futures. There is a demand for risk management products and those risk management products will be coming into our world from one direction or another. It could be through SEFs or look-alike swaps listed on DCMs. And I do think our markets are going to get bigger over time due to that transition.
Q: Does this bring in any new participants into the CFTC-regulated space?
A: Absolutely. There’s going to be a lot of new businesses, such as energy companies, that are dealing in swaps that may find themselves registered with the CFTC for the first time. There are a lot of other swap dealers that can potentially be brought in. We are going to be looking at those companies as potential beneficiaries of the FIA’s services.
Q: What are your thoughts about the roll out of Dodd Frank rules? How far do you think we will get and what is your biggest concern about the rules?
A: It’s a Herculean task to tackle all these rule makings. When policy makers were setting timetables, they underestimated how long it would take to implement these rules. You are vastly changing the market structure and how these instruments are traded. It’s going to take time to be operationally ready for people to transition into that world and it’s going to be very difficult. Remember, it took the securities world many years to transition to the national market system and how stocks trade. The concern from me is always around unintended consequences. Often regulations are written in isolation where you are thinking about the 13 other rules that may be impacted by that one. I think there will be a time after Dodd Frank is implemented where we’re untangling unintended consequences.
There also seems to be a consensus forming internationally about concerns around the Volcker Rule, and the extra-territorial nature of Dodd Frank. I know the G20 countries made a commitment in 2009 to have rules in place by Jan. 1, 2013. But there is growing support that says “Let’s make sure we get this right.” So that’s good news.
Q: One of the biggest concerns has to be on the cost front.
A: The Economist recently had an article with Jamie Dimon, [CEO] of JPMorgan Chase saying Dodd Frank compliance would cost the bank somewhere between $400 million to $600 million annually. If you extrapolate that figure to the hundreds of members of the FIA, those are big figures and a big drag on our markets and the economy. In my own experience with NYPC, as a small start-up clearinghouse, we anticipated somewhere around $18 million to get into compliance with Dodd Frank. When you are talking about those kinds of numbers for big and small companies, those are certainly at the forefront of concerns at FIA. And if it is going to be costly, there may be consolidation to accommodate those costs. That will limit competition and choice, which is something we are against.
Q: The industry is facing some strong headwinds – MF Global, Dodd Frank regulation, an FCM model that is damaged, higher costs. What will be the key to overcoming these challenges?
A: It’s going to take persistence. We have a deep and knowledgeable bench at FIA. We just need to tap into those industry resources and make sure policy makers are educated on the impact of some of these regulations.
It’s a very busy time at the regulatory agencies and it’s difficult for them to come up with market structure solutions for problems that they may not be familiar with. We have to educate them on how the market structure works and also provide consensus recommendations on how to address some of these issues, which is why we are doing this task force on MF Global and other issues.
Q: Are you worried about the FCM model? We are in a zero interest rate market, going through the MF Global bankruptcy, and more regulations coming.
A: Yes. FCMs are not going to be making as much money on the collateral investments they have in the past. Rule 1.25 is limiting the types of investments so they are much more conservative. Throw on top of that the costs of regulation that are being imposed. And then with MF Global, some people are saying customers should put funds with third-party custodians and still have the FCMs guarantee these transactions. It’s going to be very difficult for FCMs in the future to make money and survive. That’s going to be one of our challenges – that the FCM model can survive through these very difficult situations.
Q: Despite all this, are you still optimistic about this industry?
A: I’m an optimist. This industry has flourished over time and there is a reason for that. It’s a regulated industry but it adds value to the economy and investors in those markets. I’m glad there are others out there seeing the value in the listed and cleared model. And FIA will welcome those participants as they migrate and transition to that model. Hopefully, we can provide a value-added service for them.