OCM expressed strong reservations today about the proposed acquisition of the Chicago Board of Trade (CBOT) by the Chicago Mercantile Exchange (CME).  The combined company will have unparalleled power in agricultural and futures markets, lessen trading competition, and will increasingly marginalize its regulator, the Commodity Futures Trading Commission.

“The CBOT and CME can make or break agricultural markets, having real effects on real people,” said OCM President Keith Mudd.  “But they are controlled by large agribusinesses and traders, not producers.  The regulatory oversight of the futures markets is weak in comparison to stock market oversight.”

The combined company, to be called the CME Group, will have a market capitalization of more than $26 billion, compared with the proposed combination of the New York Stock Exchange and Euronext, which would be closer to $20 billion.  The CME Group will oversee average daily trading volume of nearly nine million contracts representing $4.2 trillion potential value.

The Commodity Futures Trading Commission (CFTC) was created in 1974, in response to futures trading scandals, to regulate the futures markets.  In comparison to the Securities and Exchange Commission (SEC), which regulates the stock markets, the CFTC has weak rules, weak staff, and little funding.  The CFTC is perennially compromised by “the revolving door,” where industry players receive leadership and policy appointments at the Commission to regulate their friends on the trading floors.

“The CFTC’s budget is less than one-eighth that of the SEC',”  continued Mudd.  “Stock exchange companies must have new rules approved by the SEC for fairness and legal compliance before implementation.  But futures markets operators can announce rules one day, implement them the next, and the CFTC must decide later whether it wants to spend its few resources challenging the new rules.”

The December 2000 enactment of the Commodity Futures Modernization Act further inhibited oversight of the futures markets.  Industry lobbyists convinced congress to regulate based upon general principles rather than clear rules, a change favorable to traders but not producers.

“OCM is concerned there are no effective rules against insider trading, conflicts of interest, and percentage control of contract trading in each commodity,” said Mudd.  “Cargill and Tyson have too much control of the cash market in livestock, and the futures market.  The companies can trade on inside information, or selectively release information to a chosen few in order to impact the markets they are trading in.  Publicly traded companies must release information to all, must be truthful, and are subject to strict rules preventing them from profiting from strategic information relasse.”

“If this merger goes through, the combined CME Group will further overwhelm and control the futures markets, and the CFTC will be even less effective to protect market integrity,” concluded Mudd.