Exclusive: CFTC insiders blow whistle on position limit rule

Sep 15, 2011, 9:57 a.m.

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.


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)

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