WASHINGTON--After the alleged fraud at Peregrine Financial Group Inc. regulators are reconsidering the system of industry regulators that oversee the futures market, Commodity Futures Trading Commission Chairman Gary Gensler said.
"The recent events at Peregrine highlight the necessity of looking at the decades-old system of [self-regulatory organizations] as first-line regulators," Mr. Gensler said in testimony prepared for a Senate Agriculture Committee hearing Tuesday.
Mr. Gensler said the CFTC "implemented a significant restructuring" of the commission's oversight of industry regulators and futures brokers.
In addition to Peregrine, Mr. Gensler is expected to be asked about the commission's investigation into the manipulation of Libor, the London interbank offered rate, which serves as a benchmark rate on trillions of dollars of loans and derivatives.
Mr. Gensler said the CFTC looked at "a voluminous number of documents and audio recordings' and found that manipulation and false reporting "occurred regularly and was pervasive."
In light of Peregrine, Mr. Gensler also said the commission needs to consider new requirements for the examinations and audits that are done by industry regulators.
The CFTC delegates most of the oversight of futures brokers to industry-funded regulators or "self-regulatory organizations." The National Futures Association is responsible for smaller firms like Peregrine and exchanges oversee their members, which are mostly larger firms. The CFTC in turn oversees the NFA and the exchanges, such as CME Group (CME).
Mr. Gensler also cautioned that what he called the "deliberate dishonesty and deception" of Peregrine founder and Chairman Russell Wasendorf Sr. can't necessarily be prevented by regulators.
"In short, the charges against him are that he took customers' funds right out of the bank, and lied about it for years," he said.
Under new derivatives rules, the NFA will have more responsibility to oversee firms and banks operating in the market of complex derivatives called "swaps."
The CFTC is in the process of writing rules for this market to fulfill the 2010 Dodd-Frank financial regulatory overhaul that Congress passed in the wake of the financial crisis.
The new rules for swaps are based on the futures market and will require most deals to be traded on open platforms or exchanges and to be routed through clearinghouses that collect margin from both sides and guarantee the trade.
Mr. Gensler said that commissioners are considering which types of swaps should be required to go through clearinghouses and could name the first products "later this month."
Commissioners are considering products that are already accepted by clearinghouses such as standard interest rate swaps and some indices of credit default swaps.
Mr. Gensler also said the CFTC is working on an exemption for swaps cleared by affiliates of the same company.
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