International fora

Geoffrey Heffernan ·

On Wednesday, Jan. 21, 2015, the Commodity Futures Trading Commission ("CFTC") Commissioner Sharon Bowen issued a statement1 regarding the prior week's activity in the retail foreign exchange markets (i.e., the wild surge in the value of the Swiss franc following the Swiss central bank's surprise decision to remove the cap on its currency exchange rate).2 She expressed concern about risks that low standards of regulation pose to the retail foreign exchange industry and to retail foreign exchange investors. She suggested that the CFTC should consider enhancing regulations.

Should existing regulations that protect retail investors and day and night traders from themselves (and from those that they trade with) be enhanced? It makes me think of an old Jerry Seinfeld line about maximum strength pain reliever--find out how much will kill me, and give me a little less. Similar to maximum strength over-the-counter (i.e., OTC) medicine, maximum strength OTC rulemaking could find out how much trading credit will bankrupt me, and give me a little less. Without considering what constitutes the appropriate strength of regulation (and without choosing sides among any of the views expressed by a regulator or by any commenter  in any of the 9000+ comments submitted to the CFTC in 20103 regarding its Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries), it would be helpful to understand more about the regulatory view as to what actually caused the problem--Switzerland's central bank, the Swiss National Bank ("SNB"). 

Unlike the 2008 financial crisis, where the causes have not been fully determined (blame has been attributed to credit rating agencies, failures by regulators, excessive risk taking, concealed conflicts of interest, and derivatives and complex financial products), last week's market damage was caused by the central bank in Switzerland. We know what happened. It changed its monetary policy. It could happen again4 with another central bank.

Does this knowledge of a discrete cause and of a persistent risk (of foreign exchange market damage following another central bank's policy change) not present a new path for preparing for another similar occurrence? Should the response (rule writing) to a problem when one knows its cause (SNB currency peg removal) be similar to the response (lots of rule writing) to a problem when one is not sure about its cause (maybe market participants, rules, rule makers, bad faith, and/or bad luck)? Could anything have been done to prevent the problem created by the SNB or mitigate its impact (other than putting more limitations on trading business)? Is there an opinion about the SNB' s action? What if the CFTC knew in advance about the SNB's action? What if another regulator knew and it told the CFTC? What would it want to do with this information?

An IMF Working Paper from April of last year on international monetary policy coordination among central banks indicates that there is a renewed debate on the merits of central bank coordination.5 (As a non-economist who listens to economists joke on Bloomberg radio and elsewhere as to how often economists are wrong, I am going to presume that international coordination among central banks is not particularly desirable, except in certain emergencies, such as on October 8, 2008, where there was a coordinated reduction in interest rates by 6 countries' central banks following the collapse of Lehman.)6 Referring to a limited coordination among central banks, the IMF Working Paper states "Although there is no regular coordination among the major central banks on monetary policy actions, a great deal of discussion does occur among leading central banks at various international fora."7

The Financial Stability Board ("FSB"), according to its website,8 promotes international financial stability by coordinating national financial authorities and international standard-setting bodies. The SNB is a member of the FSB, as are the United States' Board of Governors of the Federal Reserve System (“FRB”),  Securities & Exchange Commission (“SEC”), and the Department of Treasury (“TREAS”). Can the CFTC increase its exposure to the FSB? If membership is not available to the CFTC, can the CFTC make a point of talking more with the FRB, SEC, and/or TREAS, who are FSB members (according to the U.S. Governmental Accountability Office ("GAO") they do talk some,9 but maybe they could talk more--specifically about central bank risk in the foreign exchange markets)? Is there anything to explore in the area of IMF-FSB Early Warning Exercises? Is there anything else to explore outside of the collateral-increasing-investment-discouraging-rule-writing box?

  1. Statement of U.S. Commodity Futures Trading Commissioner Sharon Bowen Regarding Last Week’s Activity in the Retail Foreign Exchange Markets, http://www.cftc.gov/PressRoom/SpeechesTestimony/bowenstatement012115 (Jan. 21, 2015).

  2. Jill Treanor and Patrick Collinson, Swiss currency crisis claims casualties across the world, The Guardian (Jan. 16, 2015), available at http://www.theguardian.com/business/2015/jan/16/west-ham-sponsor-alpari-swiss-currency-crisis
  3. Comments filed in response to CFTC's Proposed Rule entitled Regulation of Off-Exchange Retail Foreign Exchange Transactions and Intermediaries, 75  Fed. Reg. 3282 (Jan. 20, 2010), available at http://comments.cftc.gov/PublicComments/CommentList.aspx?id=748
  4. Ralph Atkins, Why ECB action is likely to stoke global currency wars, Financial Times (Jan. 22, 2015), available at http://www.ft.com/intl/cms/s/0/10083c7e-a187-11e4-bd03-00144feab7de.html#axzz3Pf4uUul6
  5. Rakesh Mohan and Muneesh Kapur, Monetary Policy Coordination and the Role of Central Banks, 3 (Int'l Monetary Fund, Working Paper WP/14/70, April 2014), available at https://www.imf.org/external/pubs/ft/wp/2014/wp1470.pdf#page=4
  6. Id. at 6.
  7. Id. at 5.
  8. The Financial Stability Board, About the FSB, http://www.financialstabilityboard.org/about/ (last visited Jan. 23, 2014).
  9. U.S. Gov't. Accountability Office, GAO-15-81, DODD-FRANK REGULATIONS: Regulators' Analytical and Coordination Efforts (Dec. 2014), available at http://www.gao.gov/assets/670/667633.pdf