U.S. swaps markets go unpoliced in shutdown, regulator warns
WASHINGTON, Oct 8 (Reuters) - Hundreds of trillions of dollars worth of derivatives are changing hands unsupervised during the U.S. government shutdown, raising the risk that doubtful activity goes by unnoticed, a top regulator warned.
"The cops aren't on the beat looking at the derivatives markets in the United States," Bart Chilton, a member of the Commodity Futures Trading Commission (CFTC) told CNBC television in an interview on Tuesday.
Self-regulatory organizations such as the National Futures Association (NFA) and CME Group Inc. are still monitoring the market and the CFTC could backtrack any nefarious trading activity later, Chilton said.
"But that's not going to help a trader who may have lost money five minutes ago, that we may come across something in two months," he said. "These are millisecond markets."
A spokeswoman for the CME played down the concerns. "These markets are never unpoliced - they are self-regulated," she said. "Our market regulation and surveillance efforts continue despite the shutdown."
The CFTC writes the rules for the futures and the swaps markets for which it is the primary regulator. It has delegated large amounts of the day-to-day policing to the self-regulatory bodies, which it also supervises.
The agency has had to halt its operations almost completely the moment the U.S. government went into lock-down, leaving only a handful of people able to work because - unlike the banking regulators - it is not self-funded.
The hiccup coincides with the launch of more than a dozen new platforms to trade derivatives, part of the Dodd-Frank overhaul of Wall Street designed to prevent a repeat of the 2007-09 financial crisis.
"(The) program to monitor the tips is shuttered, it's not working. I can't even tell you how many tips that we have," Chilton said. "When it comes to looking at the markets that we usually look at, eyeballs on, with 50 people, that's gone. We have just a couple of people there."
The CFTC is best known for the heavy penalties it has imposed on investment banks for manipulating the Libor interest rate benchmark, with swaps broker ICAP the latest to pay a $65 million fine in September.