US Rep Barney Frank Calls For CME To Spin Off Regulation

The top Democrat on the House Financial Services Committee on Thursday said that CME Group Inc. (CME), the biggest U.S. futures exchange, should no longer be responsible for supervising its own customers to eliminate any potential conflicts of interest.

Spinning off CME's regulatory functions into a separate entity would help restore investors' lost confidence in domestic futures markets, said Rep. Barney Frank (D., Mass.) in an interview.

"I have no doubt about the CME's integrity, but nobody should be in the position of having a dual role," Frank said. "We should make sure [a conflict of interest] doesn't arise, that the temptation isn't there, that people are not unconsciously influenced."

CME owns the Chicago Mercantile Exchange, the Chicago Board of Trade and the New York Mercantile Exchange, presiding over more than 90% of U.S. trade in futures on the price of grains, crude oil and key interest rates.

The firm also serves as the main regulator at the exchange level for nearly 100 futures clearing firms in the U.S., which process the trading of customers like asset managers, grain elevators and power companies. Its role involves auditing such firms, checking customer fund balances and verifying that the money is invested in permitted securities.

CME employs about 150 people in its market regulation division, plus about 60 more who perform regulatory audits for CME's clearinghouse division.

A spokesman for CME said in a statement that the company believes that its current model "still makes sense and that the CME Group is in the best position to be the first-line of regulation for these firms."

Frank pointed to the separation of the Nasdaq Stock Market, now owned by Nasdaq OMX Group Inc. (NDAQ), from the National Association of Securities Dealers. That process began in 2000 and saw the NASD become a full-time regulatory body now known as the Financial Industry Regulatory Authority, or Finra. Part of the rationale of that move was to separate the regulatory function from a for-profit exchange operation.

"I think it would be better if they did what NASD did," Frank said Thursday.

The U.S. futures industry has rallied to defend its self-regulatory model in the wake of the MF Global (MFGLQ) bankruptcy, which revealed a shortfall in customer funds that has yet to be fully accounted for and could range higher than $1.2 billion, according to a court-appointed trustee unwinding the firm's brokerage.

CME and the Commodity Futures Trading Commission have drawn criticism for their oversight of MF Global, and lawmakers have suggested more frequent audits and other measures may be needed to tighten up practices in the industry. Terry Duffy, executive chairman of the CME, has said that no amount of regulations can stop someone who is set on breaking the law.

"MF Global violated the government regulations designed to protect customer funds," the CME spokesman said Thursday. "That said, CME is eager to explore all proposals for improvements that would increase the security of customer funds at the firm level and restore confidence in the futures industry, and we plan to be very active participants in that process."

-By Jacob Bunge, Dow Jones Newswires; 312-750-4117; jacob.bunge@dowjones.com

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