Streetwise Professor

February 10, 2008

Run Away! Run Away!

Filed under: Commodities,Derivatives,Economics,Exchanges,Politics — The Professor @ 10:10 am

Apparently having confronted the Beltway equivalent of catapulted cows or killer rabbits, the DOJ has beat a hasty retreat from its bold condemnation of exchange control of clearing in financial futures. (Dunno if any armor was soiled.)

As would befit Eric Idle’s Robin of Loxley, DOJ denies that they were ever itching for a fight. Oh no. They were just calling for a study:

The U.S. Department of Justice said its opinion this week that financial futures exchanges are anti-competitive took no stand on how the issue should be addressed.

The division’s comments did not take a position on what action, if any, that should result from such a study and contemplated that Treasury would take into account a range of consideration, the department said.

Sure, Brave Sir Robin. Here are the first couple of paragraphs from the DOJ Comments:

[T]he department believes that certain regulatory policies governing financial futures may have inhibited competition among financial futures exhanges, potentially discouraging innovation and perpetuating high prices for exchange services.

More specifically, the Department believes that the control exercised by futures exchanges over clearing services . . . has made it difficult for exchanges to enter and compete in the trading of financial futures contracts. If greater head-to-head competition for the exchange of futures contracts could develop, we would expect it to result in greater innovation in exchange systems, lower trading fees, reduced tick size, and tighter spreads, leading to increased trading volume.

And from the conclusion:

The Department believes that current rules and policies related to clearing futures contracts may be unnecessarily inhibiting competition among futures exchanges . . . to the detriment of the economy and consumers. Unnecessary restraints on competition threaten the viability of the US financial markets to adapt to changing dynamics . . . .

The Department believes that significant benefits might be achieved if regulatory policy were changed so as to foster exchange competition by, inter alia, ending exchange control of clearing.

Now, although the DOJ “recommends that Treasury undertake a careful and objective review of exchange controlled clearing of financial futures” the quoted language makes it abundantly clear that it is extremely disingenuous to say that the Department “took no stand on how the issue should be addressed.” Justice obviously cannot tell Treasury what to do, but it is crystal clear–even given the Loxleyesque “mights” and “mays”– that DOJ was taking a very clear stand on what it thought Treasury (or was Congress the real audience?) should do. So, rather than stand by the courage of its convictions (flawed though they are) that clearing be wrested from exchange control, as expressed in 22 single spaced pages, DOJ hid behind the the two sentences in the Comments calling on Treasury to study the issue.

Who you gonna believe, the DOJ press release, or your lyin’ eyes?

One other curious, curious thing. Dennis Carlton, former Deputy Assistant Attorney General for Economic Analysis, the individual who oversees the Competition Policy Section, rejoined Lexecon on 30 January, 2008. The Comments were dated 31 January, 2008. Assistant Attorney General (and head of the Antitrust Division) Thomas Barnett has stated that the Comment was not something prepared hastily, but was instead the product of long study and work, as evidenced by its 22 page length. As I noted two days ago, moreover, the Comment was submitted two months late. Dennis did not sign the Comment.

I don’t know exactly when Dennis resigned from DOJ, but it is possible that his resignation was effective on or about 30 January, 2008 given that FTI Lexecon announced his return to the firm on that date. If this is the case, the comment was written while Dennis was still at DOJ. It is my understanding that Dennis recused himself from the CME-CBT case because Lexecon was working for CME on the case. Therefore, perhaps Dennis did not sign the letter because of the same perceived conflict.

But that is hard to square with the Comment’s release the very day after Dennis rejoined Lexecon. Another possibility that is more compatible with the timeline–and this is clearly just speculation on my part–is that Dennis did not agree with the substance of the analysis, and that as a result its release was delayed until after his departure from the Antitrust Division and his return to Lexecon. This would explain the otherwise inexplicable submission of the Comment two months after the deadline had passed. Moreover, I would be greatly surprised if Dennis agreed/agrees with the substance of the Comment. Regardless, the credibility of the Comment would have been enhanced if an economist of Dennis’s stature had signed it–if they could find one who would do so.

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