| WASHINGTON, March 24
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
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
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)