Welcome to Futures Industry
Will Acworth
Published 10/1/2001

The Commodity Futures Trading Commission is always on the lookout for disasters, but nothing quite like this one.

When two airplanes crashed into the World Trade Center on Sept. 11, they not only caused widespread disruption to U.S. futures markets and displaced dozens of firms, they also destroyed the CFTC’s office in the north tower and left its staff scattered in the streets below.

Like the exchanges and firms it regulates, the agency was immediately embroiled in the chaos and confusion surrounding lower Manhattan. As the extent of the damage became clear, the agency shifted operations to offices in Chicago and Washington and set its sights on helping the futures industry get back on its feet.

Recognizing the widespread disruption caused by the attacks, the agency provided timely relief from certain record-keeping requirements and extended certain reporting deadlines. It asked the exchanges in their capacity as self-regulatory organizations to monitor the operational status and financial condition of member firms.

The agency also worked with its fellow regulators to coordinate the market-opening process, and shared its resources with exchanges and firms that had lost important documents. By the same token, the agency also received help from the industry, particularly with respect to the disaster recovery process in New York

One of the many difficult situations that arose for the agency came as the New York Mercantile Exchange prepared to launch the Internet version of its electronic trading system. Although the CFTC had done an extensive review of the system prior to the disaster, it was worried that the system had not been fully tested with live trading. Recognizing the importance of reopening this market, the CFTC let NYMEX go ahead, but made sure that it could monitor the trading online. “From the time it went up, we were on the system, watching live trading,” a CFTC official said.

The agency took a similar approach to the problems encountered by NYBOT. CFTC officials said they sought to strike a balance between maintaining the integrity of the markets and giving exchanges the freedom to make very rapid decisions. The key to the process was constant communication, with both sides freely exchanging information at all levels. Indeed, the biggest headaches came not from the CFTC but rather the intense security around the World Trade Center and local agencies unwilling to cut through red tape despite the emergency nature of the situation.

“Reactions to this horrible tragedy exemplify not only the resilience of the U.S. futures markets but also the strength and determination of the industry leadership and the courage and tenacity of their staffs,” CFTC Acting Chairman Jim Newsome said. “I commend the industry for reacting appropriately to this unique and challenging situation. I am also extremely proud of the CFTC staff, many of who went above and beyond the call of duty, especially our New York colleagues.”

As a member of the President’s Working Group on Financial Markets, Newsome participated in the high-level official discussions that began immediately after the attacks. Several key players were not available—Federal Reserve Chairman Alan Greenspan happened to be out of the country at the time of the attacks and could not immediately return because of the freeze on all international flights—but the regulators quickly decided to coordinate their response to the attacks and concentrate on a smooth reopening of all the markets.

CFTC officials, speaking on the condition that they not be named, said the PWG meetings were invaluable in the sharing of information on the status of markets, particularly with respect to the many problems with connectivity that were encountered by firms and exchanges.

As the immediate crisis fades and attention turns to longer-term issues, the CFTC has begun the process of assessing the industry’s preparations for this disaster. The agency’s technology advisory committee, headed by Commissioner Tom Erickson, plans to hold an open meeting in Chicago on Nov. 27 to review some of the lessons learned in this crisis. The attention most likely will focus on the New York Mercantile Exchange and the New York Board of Trade, the two exchanges most directly impacted by the attacks, but the agency may also look at how individual firms handled the disaster.

“We all owe a debt of gratitude to the public servants at the CFTC, as well as the people in the industry who worked through personal tragedy to bring everything back together and get the markets back on line,” Erickson said.

Crackdown on Terrorist Cash

The CFTC also has been enlisted in the broad crackdown on terrorist activity in the financial markets and the payments system. Together with the Federal Reserve and the Securities and Exchange Commission, the CFTC has asked for information about any relationships or transactions that might be linked to the suspected terrorists named by the Federal Bureau of Investigation.

For now, the cooperation is voluntary, and by every report the firms have been more than willing to support this effort. But Congress has made it clear that it expects the Treasury Department, in consultation with the CFTC, to consider whether the futures industry should be subject to the stringent anti-money laundering rules that it has applied to the banking industry.

Futures firms that are part of large diversified financial groups may already be familiar with these rules, but for stand-alone FCMs the renewed emphasis on money laundering could create a significant regulatory burden. For example, all financial institutions, including FCMs, will have to follow rigorous procedures for verifying the identity of any new customers. The government also has made it mandatory for all broker-dealers to file reports on suspicious customers and transactions, and may extend this requirement to FCMs as well.

Unlike other market emergencies in the past, the terrorist attacks on Sept. 11 had a direct, physical impact on the CFTC. Like every other institution at ground zero, the agency immediately put all of its energies into locating its staff. Fortunately, all 83 employees managed to get out of the New York office before the south tower s llapsed. One reason for the safe evacuation was the promptness of the evacuation, which several sources attributed to memories of the 1993 bombing.

Though the CFTC’s 83 employees in New York survived the terrorist attacks, they did not escape the emotional impact. Like the thousands of other workers in New York’s financial district, they passed through unimaginable horror in the flight to safety, and to this day they are struggling with the images of death and destruction burned into their memories.

One of the most important milestones in the healing process came on Sept. 20, when Newsome and nearly two dozen other people from the Washington office took the train to New York. This was the first occasion that the entire staff had come together since the attacks, and the reunion was highly emotional, according to several staffers present at the meeting.

The CFTC has not yet found a new home for its New York office, but most of the displaced staff have moved into temporary office space generously provided by Burson-Marsteller, the advertising agency. In addition, some of its market surveillance staff have moved into office space provided by the New York Mercantile Exchange, another instance of the unusual spirit of cooperation that arose in the wake of this crisis.

Although all paper records in that office were destroyed, CFTC staff say the damage will not affect any of its major enforcement cases, mainly because those cases are fully backed up in Washington. However, the agency has asked futures firms to help it recover documents. One industry official compared this to “rabbits helping the fox” but added that his firm is quite willing to help the agency, an indication of how much the relationship between regulator and regulated has changed.

Will Acworth is editor of Futures Industry magazine.

Will Acworth is the editor of Futures Industry magazine.
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