24 November 2011

Warren Pollock: Open Letter to the CME

Wednesday, November 23, 2011

Open Letter to the CME
To: Terrence A Duffy, Chairman CME Group

As illustrated by the failure of MF Global, I am of the opinion that, the CME has not met its basic obligations to the marketplace as a “public fiduciary.”

Our society depends on “basic finance” to provide “utility functions” such as banking, hedging, insurance, and/or capital formation. Presently, we have an “innovative system” that degrades the integrity needed for “basic finance” to perform as required in a well-structured economy.

Worse yet, our “innovative” financial system impedes the effectiveness of the greater “physical economy.” The physical economy is all those individuals and entities tasked with meeting actual need. The physical economy consists of many of your customers including farmers, manufacturers and electric companies.

Our society needs people working in the physical world to create jobs more desperately than it needs the continuity of the CME. Must we endure another market catastrophe to figure this out?

The 2008 bailouts defined “moral hazard,” as the socialization of losses due to over-leverage. MF Global consumers are currently subsidizing losses attributable to over-leverage and “innovation.” Perhaps small percentage moves in speculation rationalized an internal choice between corporate survival and the sanctity of customer funds. Complexity has been specifically designed by “modern finance” to intentionally allow over-leverage leading to out sized profits and reactively-subsidized losses.

The word, “theft,” comes to mind.

I believe that, the products traded by your member firms, at the CME exchange and elsewhere, well exceed the capacity of the monetary system to cover relatively small percentage losses or speculative miscalculations. Clearing OTC derivatives on an exchange does not, and will not, correct the problem.

With repeal of Glass Steagall, and the conversion of mutual companies to publicly traded entities, meaningful regulation has proved to be politically impossible to recapture. The solution therefore resides in simplification from “innovative” towards “basic” finance.

Presently, I would urge you to make MF Global customers whole as a perquisite to market reform towards a “utility function.” More than just the continuity of the CME may be at stake.

Warren E. Pollock