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Democrats join Dodd-Frank position limits policy-making

aburke — Tue, 27 Sep 2011 20:41:19 +0000

Democrats join Dodd-Frank position limits policy-making

Last week, Democrats in the House and Senate introduced matching bills entitled “Anti-Excessive Speculation Act of 2011.” H.R. 3006 and S. 1598 seek to override the position limits rule currently being drafted by the CFTC. Senator Bill Nelson of Florida and Representative Peter Welch of Vermont are spearheading the effort to “bring down the price of oil to bring down the price of gas” by taking “some of the gamblers out of the oil markets.”

The Speculation Act would cap position limits at 5 percent of deliverable supply in the spot month and 5 percent of open interest in the out-months, though it still exempts legitimate hedging transactions. These apply to over-the-counter and on-exchange trades. The bill creates an aggregate speculative position limit for energy contracts, to be applied to speculators as a class of traders. It also codifies a duty to ensure commodity markets “accurately reflect the fundamental supply and demand for commodities” as a fundamental principle of the Commodities Exchange Act.

Altogether, the Speculation Act is much more aggressive than its CFTC counterpart. The Dodd-Frank Act authorized the CFTC to write position limits for the commodity futures market as a way to curb speculation. However, since the bill was passed last year, progress has been frustratingly slow for many advocates of market reform, and the final draft is shaping up to be gentler on market participants than first thought. According to the latest reports, position limits will hover around 25%, and aggregation policies and class limits will be relaxed.

More generally, the position limits debate has been riven with partisan bickering. According to two anonymous whistle-blower complaints, the rule revision process has been poorly managed. “Gutting out the intent of the position limits as required by Dodd-Frank, wasting taxpayer monies, steamrolling over other staff, proposing a rule that cannot be implemented, is wasteful,” said one. At its heart, the controversy is linked to fundamentally different views about the commodity futures market. In one camp are those who insist that the trading of futures contracts encourages speculation and drives up prices for consumers. Conversely, there are those who believe that the unfettered trade of futures contracts counteracts retail price volatility and stabilizes prices. Both point to a host of conflicting studies to support their respective positions.

After the spike in energy prices in 2008, some politicians began to call for increased regulation in the commodity markets, and position limits were included in the Dodd-Frank Act. This year’s rise in energy and food prices brought speculation back to national attention, and Democrats in particular have been eager to impose tough position limits as soon as possible. Across the aisle, many Republicans have derided the CFTC’s position limits proposal (and Dodd-Frank in general) as anti-job and economically unaffordable.

The Speculation Act, at this time endorsed only by a handful of Democratic lawmakers, is unlikely to gain traction. It is in many ways the inverse of several Republican measures to repeal parts of Dodd-Frank earlier this year. Rather, the bill was probably introduced in an attempt to influence the CFTC, as well as a way to grandstand for disgruntled voters at home.

photo credit: VinothChandar

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CFTC relaxes provisions of position limits rule

Felix Shipkevich — Thu, 22 Sep 2011 14:51:10 +0000

CFTC relaxes provisions of position limits rule

The final draft of the CFTC’s position limits rule contains key changes relaxing some provisions most hated by large institutions, according to a report by Reuters. However, the Commission has not yielded ground on sections snagging massive passives, nor will the changes convince all institutions not to move their trading activity overseas.

The two most significant changes appear in the areas of aggregation policy and class limits. In the first draft of the proposed rule, the CFTC initially proposed aggregating positions for entities with common owners, without considering if they share trading strategies or control. Now, Reuters says that the CFTC will not force commonly-owned entities to aggregate, provided that all accounts are independently controlled, and that there are thick firewalls set up between trading desks. “To the extent that such accounts and programs are traded independently and for different purposes, such trading may enhance market liquidity for bona fide hedgers and promote efficient price discovery,” said the CFTC. This exemption however, will not be extended to index funds.

The second major alteration affects class limits. At first the CFTC said it would use class limits, applying the limits to exchange-traded futures, related over-the-counter swaps, and across both of those classes combined. Now, class limits have been relaxed. Traders exceeding a particular limit would be allowed to use opposing positions that fall underneath the swaps position to reduce their net position. However, it is likely that the provision will be revised in the future: “While class limits can be an effective tool to address undue market power in a particular segment of the derivatives market, the commission has determined that such limits should not be imposed without additional data and analysis.”

The rule is scheduled for a vote on October 4th, and may be changed further before it comes before the Commissioners. Position limits have always been a politically decisive issue at the CFTC, and this tendency was only exacerbated by the sharp rise in food and oil prices this year, which many politicians have blamed on speculation. Furthermore, the rule attracted scrutiny again last week when two frustrated CFTC staff members filed complaints with the Commission’s Inspector General. The anonymous letters and emails alleged that the rule-making process was rife with intrigue and that the final rule was unworkable.

UPDATE CFTC finalizes temporary relief from Dodd-Frank

Elan Mendel — Fri, 15 Jul 2011 07:33:59 +0000

UPDATE CFTC finalizes temporary relief from Dodd-Frank

UPDATE 7/15: The CFTC has issued a final order delaying the implementation of Category2 and 3 rules. “In our effort to protect the American public, the CFTC is now approving final rules called for in the Dodd-Frank Act with more final rules to be considered in upcoming meetings next week, in August and throughout the fall. Today, we are granting temporary relief from certain provisions that would otherwise apply to swaps or swap dealers on July 16,” said Chairman Gensler. “This order enables the Commission to continue its progress in finalizing rules.”

UPDATE: The CFTC has released the Category 1 list showing the areas which require rule-makings. Rules in these areas will not become effective until the rules are finalized. Each final rule will come with an implementation timetable.

View the full Category 1 list here.

The CFTC has also released the Category 4 list showing the self-effective rules that will not be subject to temporary relief. All of these provisions WILL GO INTO EFFECT ON JULY 16th.

View the full Category 4 list here.

The CFTC held an open meeting today to discuss the implementation on the Dodd-Frank Act. CFTC Rules and regulations required by the Dodd-Frank Act were set to go into effect in July, though many rules have not yet been finalized. This morning, the Commissioners voted to submit a proposal to the federal register that would delay the implementation of some self-executing elements of the law (such as entity and product definitions) until they had been finalized or until December 31st, 2011. Any amendments to the Commodity Exchange Act covered by the Dodd-Frank Act will also be delayed until finalization or December 31st.

Other Dodd-Frank rules (to be listed on the CFTC’s website as Category 1 rules) will not go into effect until commented on and finalized, irrespective of the December deadline, so they do not need to be addressed by this proposal. However, provisions like the designated contract market, DCM, and derivatives clearing organization, DCO, core principles will be implemented in July, as will anti-fraud and manipulation rules. The CFTC will provide special relief from the new swaps rules for swap execution facilities, major swap participants, and swap dealers.

Said Chairman Gensler: “Some might ask: why six months? Six months will provide the Commission with the opportunity to re-examine the status of final rulemaking in light of the changed regulatory landscape at the time. It would allow us, if appropriate at the time, to tailor relief from certain provisions of the Dodd-Frank Act at the end of the year.”

Commissioners O’Malia and Sommers voted to strike the December 31st deadline for temporary relief (the Sunset Provision), arguing that it will simply have to be extended in six months, but the other three Commissioners voted it down. The rule will be published to the federal register shortly, and the CFTC will provide a full explanation of which Dodd-Frank provisions fall under which types of relief. There will be a brief 14-day comment period on the proposal.

Read the CFTC Fact Sheet.

Read the CFTC Q&A.

Chilton on Cheetahs

Elan Mendel — Wed, 13 Jul 2011 21:42:19 +0000

Chilton on Cheetahs

CFTC Commissioner Bart Chilton continued his campaign to reign in high-frequency traders this week before the American Soybean Association Legislative Forum. High-frequency traders, sometimes known as cheetahs, use high-speed computers and hyper-sensitive algorithms to make lightening fast trades.

Chilton argues that unregulated cheetahs are dangerous to financial stability. They make markets susceptible to “flash crashes” like the one seen in May 2010, and they may abuse trading volumes to “cut the line” at exchanges. Chilton recommends (to borrow his extended metaphor) that cheetahs be captured and caged via CFTC regulation.

The Commissioner recommended four rules:

Testing algorithms before they go live;
A pre-approval or accreditation process for cheetah traders;
Kill switches for “feral” programs;
Accountability and enforcement for rouge cheetahs.

Chilton has been advocating for cheetah regulation since at least February 2011. The long arm of Dodd-Frank somehow missed this trader-type, and he would like to see this revised. However, not everyone sees the cheetah traders as a threat to market stability. Mark Spanbroek of the FIA European Principal Traders Association, a newly minted industry organization, argues that complaints about his profession are overblown: “Nine out of ten issues in FX stem from banking activity…Yes, there are some independent algo trading firms [in the space] but they are nowhere near as active as [the] banks.”

While he might not see eye-to-eye with Chilton on cheetah-related market instability, Spanbroek claims that market regulation and transparency measures would be welcome: “Regulation, and especially central clearing, would make the [foreign exchange] market more transparent for them to trade in. Right now, clearing is carried out through the prime brokerage relationship with a bank, not the clearing house model that we view as more open and transparent…I know this sounds odd, but principal traders want to be regulated.”

Read Bart Chilton’s comments.

CFTC finalizes Dodd-Frank anti-manipulation rule

Elan Mendel — Thu, 07 Jul 2011 18:18:51 +0000

CFTC finalizes Dodd-Frank anti-manipulation rule

In an open meeting this morning, the CFTC finalized five Dodd-Frank rules, including the anti-fraud and manipulation rules required by Dodd-Frank section 753. The new rule expands the Commissions current enforcement powers, which were recently characterized by Washington Senator Maria Cantwell as “probably one of the weakest statutes to try to go after manipulation.” According to Chairman Gary Gensler, the stricter rule “closes a significant gap, as it will broaden the types of cases we can pursue and improve the chances of prevailing over wrongdoers.”

The new rule, 17 CFR Part 180, “prohibits manipulative and deceptive devices and contrivances, employed intentionally or recklessly, regardless of whether the conduct in question was intended to or did create an artificial price.” Previously, manipulation needed to be intentional and successful to fall afoul of regulation. The CFTC has included an exception for good-faith mistakes and straightforward negligence. The rule also clarifies the Commission’s authority to prohibit price manipulation on commodities and swaps.

The language contained in the new Dodd-Frank anti-manipulation rule will make it easier for the CFTC to pursue manipulation cases. In its over thirty-year history the Commission has only won a single manipulation cases, though it has settled others out of court. Expanding the regulation to recklessness removes the burden to prove intent from the enforcement team. Anti-manipulation measures are wildly popular, especially in light of the recent oil price spikes.

This morning’s meeting also yielded final rules on the definition of an agricultural commodity, protection of consumer information and privacy, and regulations on large trader reporting requirements on physical commodity swaps. Details on each proposal can be found on the CFTC website, www.cftc.gov.

CFTC releases no-action draft for Dodd-Frank relief

Elan Mendel — Fri, 01 Jul 2011 19:34:53 +0000

CFTC releases no-action draft for Dodd-Frank relief

The CFTC has released a draft of a no-action letter intended to supplement the recent proposed order regarding Dodd-Frank relief. The letter addresses three specific Dodd-Frank provisions that, while they fall under the Category 2 exemption, may not actual qualify for the extension proposed in the order.

The affected provisions are:

Section 742(c) amends Commodities Exchange Act (“CEA”) Section 4s(1) to create segregation requirements on collateral collected by swap dealers and major swap participants for uncleared swaps.
Section 725(c) amends CEA section 5b(a) to prohibit derivatives clearing organizations (“DCOs”) from clearing swaps unless they are registered with the Commission.
Section 731 creates a new CEA section 4s(k) outlining the duties and designation of a swap dealer and major swap participant chief compliance officers (“CCOs”).

The Division of Clearing and Intermediary Oversight (“DCIO”) and the Division of Market Oversight (“DMO”) state in the no-action draft that they “will not recommend that the Commission commence an enforcement action against any person for failure to comply with the above referenced provisions” between July 16th and the expiration of the order of relief on Decemebr 31, 2011.

CFTC to discuss Dodd-Frank rulemaking schedule at Sunshine Act Meetings

Elan Mendel — Mon, 20 Jun 2011 17:24:27 +0000

CFTC to discuss Dodd-Frank rulemaking schedule at Sunshine Act Meetings

The CFTC published a notice to the federal register today announcing a series of meetings to discuss rule-making matters to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the publication of final Dodd-Frank rules and the issuance of more proposed rules.

The meeting dates to discuss these Dodd-Frank proposals are as follows:

July 7, 2011 at 9:30 a.m.

July 19, 2011 at 9:30 a.m.

August 4, 2011 at 9:30 a.m.

September 8, 2011 at 9:30 a.m.

September 22, 2011 at 9:30 a.m.

Meeting agendas will be made available seven days before the meeting date.

Gensler: Temporary relief from Dodd-Frank for swaps

Elan Mendel — Mon, 13 Jun 2011 21:36:47 +0000

Gensler: Temporary relief from Dodd-Frank for swaps

Bloomberg is reporting today that Gary Gensler the the CFTC will consider temporarily exempting swaps from Dodd-Frank implementation this July. In a letter sent to Republican Senators Pat Roberts, Richard Lugar, and Saxby Chambliss, Gensler explained that it will only be temporary relief.“The proposed relief would make it clear that, though the law will have changed, as a practical matter, the market will have relief during the period of the exemption,” the letter said.

The SEC also announced last Friday that it intended to delay the implementation of many of its proposed rules pending further debate and finalization. As the Dodd-Frank deadline approaches, many lawmakers have voiced their concern over the mounting pile of unfinished rules. This temporary relief is a far cry from the extreme measures proposed in the House, which would have delayed Dodd-Frank implementation until December of 2012. This action, which it will delay badly-needed reforms, should ensure that the new regulations do more harm than good.

CFTC to Hold Open Meeting on Dodd-Frank Act

Felix Shipkevich — Thu, 24 Mar 2011 13:14:23 +0000

CFTC to Hold Open Meeting on Dodd-Frank Act

The Commodity Futures Trading Commission (CFTC) will hold a public meeting on Wednesday, March 30, 2011, at 9:30 a.m. in its Washington, D.C. headquarters to consider the issuance of proposed rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act on the following topics:

Parts 1, 5, 7, 15, 30, 36, 37, 41 and 155 conforming amendments, and
Swap data recordkeeping and reporting requirements for pre-enactment and transition swaps.

9th Series Meeting of the Proposed Rules under the Dodd-Frank Act Set

Elan Mendel — Fri, 07 Jan 2011 00:39:44 +0000

9th Series Meeting of the Proposed Rules under the Dodd-Frank Act Set

The Commodity Futures Trading Commission (CFTC) will hold a public meeting on Thursday, January 13, 2011, at 9:30 a.m. at the CFTC Hearing Room in Washington DC.

The meeting will discuss the proposed rules and regulations under the Dodd-Frank Act. Specifically, the CFTC will get the concerns of the public regarding the proposed position limits for derivatives; the swap trading relationship documentation requirements for swap dealers and major swap participants; and, the adoption of a final rule that addresses requirements for derivatives clearing organizations, designated contract markets and swap execution facilities regarding the mitigation of conflicts of interest.

The meeting will be open to the public on a first-come, first-served basis.

(Source: http://cftc.gov/PressRoom/PressReleases/pr5960-11.html)