Supreme Court Could Decide Future of Futures Exchange
Koprowski, Gene, Insight on the News
Banks want to trade currencies - and buy and sell currency options - privately, not just through the Chicago Mercantile Exchange and other regulated markets. Critics say this would rock Wall Street.
When the Commodity Futures Trading Commission, or CFTC, brought charges against William Dunn and Delta Commodities, regulators believed they had a flawless case. Dunn, a trader at Delta, had been selling currency options, or forward contracts, privately, without going through a futures exchange as required by law.
But Dunn and Delta appealed the case to the 2nd U.S. Circuit Court of Appeals in New York, arguing that their actions were not covered by the law due to an oversight in its phrasing. After much debate, the court deferred the case to the U.S. Supreme Court. This fall, the high court will hear arguments that could have dramatic ramifications, possibly eliminating all federal fraud and manipulation provisions from the laws governing currency trading .
The key concern in the Dunn case involves what is known as the interbank foreign-exchange market. American banks, including First National Bank of Chicago, the Bank of New York and Citibank, conduct about $1.3 trillion in "forex" transactions - exchanges of dollars, pounds, marks and yens - daily with counterparts in London, Berlin and Tokyo. These are private transactions conducted by sophisticated professionals.
But some in the industry wonder if these activities should be conducted on a public futures exchange and regulated by the CFTC. Speculative currency options, as opposed to currency trades, are regulated instruments subject to CFTC overview. If the Supreme Court rules in Dunn's favor, however, it will permit traders on the exchanges to buy and sell options on the private markets, away from the futures pits in New York and Chicago.
"Simply put, unless we win that case, we could lose the bulk of our markets," says Patrick Arbor, chairman of the Chicago Board of Trade, or CBOT, one of the largest futures markets in the world. "And if that happens, you won't have to worry about reauthorizing the CFTC, because it will have few viable markets left to regulate. …