WASHINGTON, March 24 The U.S. Commodity Futures Trading Commission may have broken the law when it suspended its outside academic research program in response to a 2012 complaint filed by the CME Group futures exchange, the agency's internal watchdog determined.
But the CFTC, which regulates the futures, options and swaps markets, sharply challenged many of the findings by its inspector general's office and said it did not violate the law.
The agency suspended publication of outside research in December 2012 after CME Group alleged that the CFTC's outside researchers were illegally accessing sensitive market data to publish academic papers on high-frequency trading.
The CFTC conducted an internal probe and asked the inspector general's office to investigate whether laws were broken by letting outside researchers access proprietary market data.
In its report released late last week, the watchdog wrote that the CME's allegations were unsubstantiated and that no laws governing the protection of sensitive market data were broken.
However, the report criticized the CFTC for how it reacted to CME's complaint. It said the agency's decision to shut down its research program was inappropriate and may have violated a federal law that requires the CFTC to maintain a research program.
The commission's 2012 decision to halt publication of outside research and restrict some economists' access to private market data came at a crucial time for the agency.
The 2010 Dodd-Frank law vastly expanded its powers to police the over-the-counter derivatives market, a move that has greatly increased the amount of confidential market data the CFTC must collect. That has raised some concerns in the industry about how the data will be protected from public disclosure.
The inspector general's office further found fault with the CFTC's handling of research. It said it was concerned that a special agency-led committee formed in February 2013 to review academic papers before they can be published has been taking far too long to issue approvals.
As a result, the report said, the delays are stifling the program and may even raise free speech concerns.
As one example, the report pointed to three papers on economic theory without any reference to confidential data that were held up from being published for nearly a year.
"We are puzzled why such seemingly simple papers required 10 months of review," the watchdog wrote.
"We therefore recommend that the agency restart the ... research program ... as soon as feasible," the report added.
A copy of the report can be found at: here@freedomofinformationact/documents/file/oigreportredacted.pdf.
In a strongly worded response released along with the report by the inspector general's office, CFTC management challenged its watchdog's findings.
The response disagreed with the notion that the research program was even shut down, saying all full-time economists still had access to data and still completed commission work.
It also strongly pushed back against the assertion that shutting down the program may have broken commission or free-speech laws. Agency management said the CFTC does maintain a research and information program by issuing news releases, staff advisories and publicly aggregated data about the swaps market, among other things.
"Nothing in the commission's review process threatens to violate, much less violates" the law, the CFTC management wrote in response to the investigation.
"The agency, and the Inspector General, found no improper use of confidential data, and after administrative changes to strengthen the clearance process, the agency began clearing papers for publication again," CFTC spokesman Steve Adamske said in a statement.
HIGH-SPEED TRADING RESEARCH
The controversy surrounding the CFTC's research program began in December 2012 after the agency's former chief economist, Andrei Kirilenko, and two outside researchers presented a paper which found that high-frequency traders make money off the back of smaller investors without taking much risk themselves.
CME's lawyers said that this paper, as well as a few others, raised concerns because they relied upon non-public information to reach their conclusions.
The CFTC has strict rules governing the protection of non-public information, such as contract position holdings by banks and other major players in the futures and over-the-counter derivatives market.
Agency employees are prohibited from releasing confidential information that identifies traders or their positions, and breaking the law could result in fines or prison time.
In a statement on Monday, a CME spokesman said the exchange operator was reviewing the report to determine whether any steps should be taken to protect customers' data from being disclosed to unauthorized CFTC personnel.
The inspector general's report did find administrative flaws in how the CFTC provided security clearances to outside researchers, but said that since then the agency has improved its badge and security clearance processes.
In addition, the CFTC last December took steps to start hiring back some of the economists it had lost and has begun to permit more papers to be published. (Reporting by Sarah N. Lynch; Editing by Jonathan Oatis)