Exclusive: CFTC insiders blow whistle on position limit rule
WASHINGTON (Reuters) - Internal strife at the U.S. Commodity Futures Trading Commission over how to craft a workable rule to crack down on speculation in oil markets has prompted two internal whistleblowers to ask the agency's inspector general to step in.
The whistleblowers say the CFTC team working on the politically charged "position limits" rule has suffered staffing setbacks.
It has also struggled to harmonize the proposal with another rule, potentially forcing commissioners to vote in coming weeks on a doomed-to-fail measure.
Last year's Dodd-Frank financial oversight law gave the CFTC the ability to prevent excessive speculation in the commodity markets by clamping down on how many total contracts any one larger speculative trader, such as Goldman Sachs or Morgan Stanley, can control.
Some lawmakers have pressed the CFTC to rush out position limit rules, turning up the heat this summer as U.S. oil prices hovered around $100 a barrel and consumers paid nearly $4 a gallon for gasoline.
But market participants have argued there is no reliable economic analysis proving that position limits curb excessive speculation.
The CFTC has already missed a deadline in the Dodd-Frank law to finalize position limits. Three of the five commissioners at the CFTC, including one Democrat, have expressed skepticism that position limits can prevent large run-ups in prices.
CFTC Chairman Gary Gensler had hoped to get the measure approved in September, but now it is expected to be pushed into early October.
The complaints suggest there is strong internal dissent over the position limits policy -- something the derivatives industry could seize on as it tries to fight back against the plan.
CFTC Inspector General A. Roy Lavik confirmed receiving both complaints. They mark the first time his office has received complaints concerning a Dodd-Frank rulemaking.
CFTC spokesman Steve Adamske declined to discuss the complaints or their allegations.
Vermont Senator Bernie Sanders, a staunch supporter of strict position limits, said he was concerned on hearing about the whistleblower complaints, and he urged the agency to craft a workable rule.
"If true, this is outrageous and it has to stop," he said after learning about the complaints from Reuters. "For eight months, the CFTC has thumbed its nose at this law and the American people have been paying the price."
In an email to Reuters, an individual writing under a pseudonym said that the CFTC inspector general has received anonymous e-mails and letters slipped under the door in recent days to complain that the CFTC's final position limits rule cannot be implemented.
The whistleblowers say a recent version would require the use of over-the-counter derivatives data that the agency does not collect.
The complaint emailed to Reuters discusses the reasons why the position limits rule is flawed and also accuses the position limits rulemaking team leader of kicking senior employees off the team, and replacing them with staffers who have very little experience, either at the CFTC, or in the industry.
"Gutting out the intent of the position limits as required by Dodd-Frank, wasting taxpayer monies, steamrolling over other staff, proposing a rule that cannot be implemented, is wasteful," said the anonymous complaint, which was e-mailed to the inspector general's office on August 31. "I hope you investigate before it is too late."
Another similar complaint, that mostly focused on problems in the rulemaking process, was slipped under the inspector general's door about the same time.
The author of the emailed complaint, who purports to be a CFTC employee, declined to reveal his or her identity to Reuters for fear of retaliation. In an interview, the author of the complaint slipped under the door also declined to be named publicly, but confirmed that the two complaints are from separate people.
"The whole way it's progressed has been less than ideal," said this second whistleblower. "When the team first started, it was a lot of people with broad and deep institutional knowledge," this person said. "There are people on the team now that have been in the futures business less than a year and been at the CFTC even less than that."
Lavik, the inspector general, told Reuters in an interview that the two complaints are too "vague" and "unconvincing" to merit any investigations at this point.
However, his office is in communication with at least one of the whistleblowers to get more information.
RULES FEARED INCOMPATIBLE
The emailed complaint in particular hinges on discrepancies between the draft of the final position limits plan and a separate but critically related large swaps trader reporting rule that is tentatively scheduled to become effective on September 20.
The large swaps trader reporting rule, which was approved with little fanfare, will allow the CFTC to begin collecting the data it will need in order to gauge the size of the over-the-counter market and set the position limits.
But internal critics, including the whistleblowers, say there have been ongoing concerns that the kind of data that will be collected by the new large swaps trader reporting rule is inconsistent with the draft of the final position limits rule. A partial draft of the final position limits plan is now sitting on commissioners' desks, awaiting their review.
Unless the two rules are reconciled before the position limit rule faces a final vote in the coming weeks, critics say the agency will not be able to adequately measure and set limits.
"The (position limits) team lead chose to forge ahead with a plan that required a completely different information set and is thus planning to propose something that cannot possibly be implemented," the emailed complaint said.
The position limit rule is already considered by many experts to be vulnerable to court challenges, especially after the Securities and Exchange Commission in July had a federal appeals court reject a rule on proxy access because of an inadequate economic analysis.
Craig Pirrong, a professor and a director for the Global Energy Management Institute at the University of Houston, said concerns by internal CFTC staff about the rule-making process could make it even easier for companies to challenge the rule.
"To the extent that there are hints that there are procedural failings in the way that the rule was drafted and adopted, that would provide some potential additional basis for lawsuits," he said.
(Reporting by Sarah N. Lynch, with additional reporting by Christopher Doering; Editing by Tim Dobbyn)