Restoring Trust in the Futures Market

James E. Oliff is a member of the board of FFastFill and of the CME Group, where he previously served as vice chairman. Neal L. Wolkoff was formerly the chairman and chief executive of the American Stock Exchange, chief operating officer of the New York Mercantile Exchange and chief executive of ELX Futures.

The recent failures of MF Global and Peregrine Financial, and the reported manipulation of the Libor benchmark for interest rates, could not have come at a worse time for the risk management industry. Severe weather problems in our major agricultural areas, uncertainty in the European and United States financial systems, a stubborn low-growth economic environment, instability in the Middle East that threatens energy supplies, and slower growth in China and Asia all spell the pressing need for a reliable and trustworthy risk management industry.

Lack of public confidence in our market structure and its oversight, however, have made firms wary of using risk management tools. The erosion of the public’s trust in how the futures and derivatives markets work is more extreme than at any time in our long careers.

Things can be made better – much better.

There is an immediate need to restore public confidence in the safety of customer funds. We must make it very clear that any breach of trust with client funds — whether intentional, reckless or even inadvertent — will not be tolerated and will be prosecuted. Corporate executives must be held personally responsible for the sanctity of customer funds.

At the same time, we have to look at the system as a whole — not only laws and regulations, but also our underlying values and the incentives for public service.

There is clearly a crisis of confidence in the financial industry. Winning at all costs, short-termism and materialism have become the new normal. The financial industry is not unique; indeed, our society values immediate gratification, and we worship material things. We demand solutions that make things go faster and with less effort. We look to operate on the edge and then try to avoid responsibility when we go over it.

At one time, we placed a high value on government service that encouraged the best and the brightest to enter public service. Unfortunately, our system discourages these people from service as a result of low pay and the intrusiveness of our confirmation demands. To enhance the quality of our regulatory structure, we need to attract gifted individuals coming out of our schools as well as experienced professionals in the workplace.

We propose three immediate changes with long-term benefits:

1. Integrate ethics education into the core curriculum at colleges and graduate schools and in each licensed profession. You can never have too much. Encourage a culture of service as a value; allow crucial agencies to take a page from the military handbook and offer school loan forgiveness, education benefits or income exclusions from taxes to top candidates for a significant commitment to government service. And we must provide incentives to practicing professionals to enter the public arena.

2. Strengthen the regulatory system by bringing an intelligent, skillful and willing army of dedicated market professionals and investor advocates into the regulatory process to frame rules with a simple, single-minded focus on transparency and integrity, as exemplified by the terms of the recent settlement with Barclays over the London interbank offered rate.

3. Encourage long-term thinking and investment. Identify the unintended incentives that have found their way into the tax and regulatory system over the years that make us less productive and the markets less safe. Prod long-term thinking with tax policy that encourages corporate investment and rewards individual long-term investments.

We have had many failures that have harmed confidence in the financial system. Firms have looked at customers as sources of profit instead of in the fiduciary capacity that our system intended.

To restore that confidence, we need to demand greater transparency, real-time monitoring and certainty of individual and corporate responsibility.

No solutions require a wholesale restructuring of the regulatory system. Instead, we need new thinking and clarification of the laws already on the books.

Restoring trust will take time and involve a concerted effort by the clergy and academia to correct a misguided value system. That may really be a generational solution, but we believe the best time to start is now.