It’s been a hell of a day on Twitter, what between @ZeroHedge, et al quoting The Bernank (that never gets old);@ReformedBroker livetweeting the delivering alpha conference as only he can, and the futures industry’s own @JamesKoutoulas and @JohnLRoe live tweeting the senate hearings on the CFTC reauthorization under the CEA (Commodity Exchange Act).

Now, Senate hearings are notoriously boring – where nobody outside of Daily Show interns really watch CSPAN, and while today was  a little too much info on how the sausage is made for your regular futures market investor – we’re not going to lie – we sure enjoyed futures getting the spotlight in D.C. in a way not directly related to PFG or MF Global (although those subjects surely came up).

Some of the best commentary came from Terry Duffy, executive chairman of uber futures exchange: CME, talking swap rules, the proposed residual interest rules, customer account insurance, and the CFTC being self funded. Duffy highlights per Mr. Koutoulas:

“CFTC swap rules often overstep their bounds & undermine swaps market ability to do biz.”

“subordination [of all FCM debt to customers] could hurt small FCMs ability to get financing”

“customers should have option to pay for insurance, but mandating it would crush the industry”

“oil’s been $90-$110 for 3 years. You got the wrong panel if you want to blame futures for price spikes

“self-funding would result in higher food prices, market being less competitive”

“[HFT mini flash crashes] only happen on securities markets since they don’t have a central liquidity pool”

But the elephant in the room is the proposed customer protection rule which has become known as the ‘residual interest’ rule. This rule would in effect shift the model from the FCM’s having 5 days to get the necessary margin amount from a customer on margin call (and able to bridge those 5 days with their own funds and the collective funds of all other customers on their books), to a model where the FCM has to have a sort of ‘bad debt’ allowance set aside in real time for any margin amount taken on by any customer.  The FCM’s say this has the implications of shattering the 50+ year system in place, and require them to have much larger margin requirements for each customer (essentially making it so no customers go on call), creating a much more expensive market  for FCM’s and customers alike.

Duffy hit the point in his prepared comments, saying according to Bloomberg:

“if a proposed ‘protective’ measure is so expensive or its impact on market structure is so severe that customers cannot effectively use futures markets to mitigate risk or discover prices, the reason to implement that measure needs to be re-examined,”

Would this really protect customers?  We’re not so sure. In theory, it improves the stability of segregated funds account by keeping closer tabs on the risk other clients bring to the collective segregated funds structure, but we don’t think the rule would have prevented MF Global or PFG.  As far as FCM’s are concerned – Mr. Duffy may have said it best:

“we don’t need any additional changes, we’ve done a ton to improve protections already. Just do a 1 line CFTC reauthorization”