Is the Futures Market Ready for Self-Regulation?

With market abuse wider than ever before, can exchanges and entities be trusted to police themselves?

The US has served as the poster child for regulation, viewed as an overregulated market that stifles business by some, and a bastion against the abuse that is prevalent elsewhere by others.

With foreign exchange (FX) rigging and LIBOR scandals plaguing the financial services industry, many insiders and individuals have looked to the futures market as the next area of focus that is in need of some changes. Presently, the futures market is overseen by a variety of entities, including the two paramount organizations, the National Futures Association (NFA), and the Commodity and Futures Trading Commission (CFTC).

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While both organizations have had their roles and fingerprints on most regulation over the past few years, some wonder whether the futures market would not be better served by self-regulation. However, self-regulation in practice is a conundrum for organizations seeking profit as the adequate mechanism or incentive for regulation does not exist in tandem with for-profit groups.

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The futures market presently boasts a face value of $30 trillion, making it one of the largest in the world – the market itself is a pillar in the US financial industry, and in global capitalism. At its heart are products such as soft and hard commodities, interest rate benchmarks, and stock indices. Whether it is the United States or New Zealand, futures markets constitute significant portions of the financial industry.

Wishful Thinking?

Like any other avenue in finance, there exist a variety of loopholes and tactics that make self-regulation seem implausible however. Take the example of spoofing, which amounts to computer-driven manipulation that regularly goes unchecked – in essence the market is flooded with fake orders to fool other traders into thinking the market is poised to rise or fall. Since most traders peg their strategies to volumes, this can easily spark moves.

However, under the current framework of Dodd-Frank legislation in 2010, it is illegal to place orders with no intention of executing them. Absent this mechanism, its not unreasonable to imagine most entities or individuals from having an incentive to embark on these strategies. Greed aside, investing is about profit and gain, making the impetus for self-regulation even more diluted.

Its unlikely the market will exist without bellwether regulators in place for the foreseeable future. Though with a number of cases cropping up that draw differing views or enforcement measures, the call for self-regulation could heat up. Unfortunately, an uptick in market abuse and manipulation seldom portends a departure from existing legal frameworks, at least in the interim.

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