Category: Regulators

Christopher Ehrman made Director of Whistleblower Office at CFTC

Christopher Ehrman, previously an attorney at the Securities and Exchange Commission (SEC) has been named as the new Director of Whistleblower Office at the Commodities Futures Trading Commission (CFTC).

The Whistleblower Office was created by a provision in the Dodd Frank Wall Street Reform and Consumer Protection act, which was signed into law almost three years ago by President Obama. The Office was intended to create financial incentives and restitution, as well as anti-retaliatory protection, for those who provide information to the CFTC regarding violations of regulation.

Christopher Ehrman was most recently an Assistant Director at the Office of Market Intelligence at the Securities and Exchange Commission, and brings with him extensive regulatory experience. As Gary Gensler said, in a CFTC press release that came out today, “Chris, who comes to us after many years of experience in the SEC’s Enforcement Division, takes on an important role at the Commission to oversee our Whistleblower program and engage with people who report misconduct in the futures and swaps markets.” Ehrman was a practicing attorney at the SEC before being promoted to Assistant Director, and has his JD from the University of Kentucky.

A full document press release can be found on the CFTC’s website.

Regulatory Adjustment to New CFTC Ruling on Cross-Border Swaps

The impacts of the Commodities Futures Trading Commission’s (CFTC) response to cross-border swaps are yet unknown. With a 75 day period of guidance in addition to the implementation of the final ruling, this unprecedented move by the CFTC may deeply impact the market.

On Friday, July 12th, the CFTC voted 3-1 in favor of instituting final guidelines for regulating cross-border bilateral swaps. Gary Gensler, in his opening statement said that “Even though we oversee, here at the CFTC, a complex and sometimes difficult to understand market […] the questions the American people are looking for us to answer are simple: Have we lowered risk? Have we brought transparency to these markets? […] This is why reform matters.”

The presenters of the cross-border rules also went on to define certain aspects of the bill. When discussing the definition of “US-Person,” they widened the definition to include natural born US citizens, businesses with principal or primary stations in the United States and funds if they were majority owned by US Citizens. Other important aspects of these guidelines include ‘unfettered’ access to other counties’ data. According to the meeting, the CFTC has set up relationships for substituted compliance with Australia, Canada, Japan, and the EU, with ongoing talks with some entities in Switzerland and Hong Kong.

The full proceedings are available on the CFTC’s website.

CFTC and European Commission Reach Concordance on Derivatives

The tenuous issue of cross-border derivatives regulation between the United States and the European Union may be over soon, according to a press release from the CFTC today. Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), and European Commission representative Michel Berneir have announced that the two regulatory bodies may have created a ‘common path forward’ for dealing with cross-border swaps.

The European Commission and the CFTC have many advantages of developing cross-border regulations together. In light of this demonstration of international cooperation, some have hopes that the G20 promise to promote transparency in over-the-counter derivatives trading will become more of a focal point in regulation.

The Path Forward, as this plan has been anointed  includes many no-action temporary reliefs in situations where CFTC and EC rules regarding risk mitigation and recording have been considered equivalent. For example, in the case of bilateral uncleared swaps, the rules have been deemed comparable in purpose and scope by both regulatory bodies. Because of this equivalence, the CFTC has ordered a no-action time relief for the transaction-based requirements. Furthermore, the CFTC projects that foreign trade boards will be able to list swap dealings directly, if they’ve already been given no-action relief.

In addition to those no-action time-limited reliefs, the CFTC’s press release included others such as multilateral trading facilities (MTFs). The full press release can be found on the CFTC website.

Basel Committee May Rethink Regulatory Complexity

On Monday, the Basel Committee released a discussion paper dealing with the simplicity of the regulatory systems, leading some to take it as a sign that the committee may advocate simpler regulations in the future. In the paper, they discuss several current aspects of regulation such as risk sensitivity, complexity, and international equivalence.

Since the financial crisis of 2008, international regulatory bodies have become very active, trying to diagnose and address the issues that led to the crash. However, some have criticized these institutions for perhaps worsening issues, rather than diagnosing the potential issues in the economy.

The Basel Committee has recently made several recommendations for countries’ regulatory policies, including recent strategies on mitigating risk through controlling more capital in day to day business. The committee has focused primarily on risk-based systems of regulation, and these types of systems have inherent complexity, but certain members of the committee have acknowledged the issue. In fact, in 2012 the committee also started a sub committee called the Task Force on Simplicity and Comparability dedicated to assessing the impact of the policies.

The purpose of the paper, which was published yesterday on the Basel Committee website, was not to make recommendations, but elicit responses. It is currently open for comment until October 11th.

CFTC Vote On Cross-Border Swaps Set for Friday

After weeks of speculation, it looks like the Commodity Futures Trading Commission (CFTC) will conclude a foreign regulatory issue this Friday, July 12th. The vote will regard how domestic regulations on swaps apply to foreign firms wishing to do business with those in the United States.

The regulations have become a devisive issue in the CFTC , with commissioners on the board giving competing advice on what exactly to do. Current CFTC Chairman Gary Gensler, Democrat, has advocated applying the domestic regulations to the foreign firms as well, but there has been some dissent. Mark Wetjen, Republican, has recommended being more cautious with a ruling on foreign firms, citing that it may hurt, rather than help, the US economy.

Conjecture that Gary Gensler’s term would be over in July prompted some to think that voting on swaps regulation would occur after his position were filled by someone else.

This issue has become important for the derivatives market, and some key players have gotten involved in the recent discussions with the regulatory giant. Speculation that foreign firms would be required to comply with CFTC standards has purportedly caused instability in the market.

The interested parties go beyond just banks, firms and regulators though. Recently, Democratic Senator Elizabeth Warren has weighed in on the issue. In an interview with the Hill on June 20th, she said that “It would be a real mistake for commissioners to think they can run out the clock and just hold tight until Gary Gensler’s term expires. I will certainly still be here and watching this process very closely” But since it appears Gary Gensler will also vote on the regulation’s application to foreign markets, her concerns were unfounded.

Basel Committee Reform Capital Rules of Derivatives Trading

On June 28th, The Basel Committee came out with two papers that recommend strengthening the regulatory oversight of counterparty credit swaps to decrease the alleged risk of derivative transactions.

The first paper improves upon the interim credit assessment suggestions that the Basel Committee made with the Current Exposure Method (CEM) and the Standardised Method. The new credit risk assessment of counterparties in derivative trading fine-tune upon the CEM and the Standardised Method by creating separate risk exposure plans for margined and unmargined trades.

The second paper focuses on the capital risk of banks when working with central counterparties (CCPs). As is, CCPs are utilized to create stability in the markets by clearing and settling trades through risk and obligation assessment as well as supervising the final swap. The new proposal from the Basel Committee includes a recommendation that all trades are sufficiently well capitalized, as well as suggestions to conserve positive incentives for banks to utilize central clearinghouses.

The Basel Committee was established in 1974 by a group of nations concerned about regulatory inconsistencies between countries. Many of the regulatory policies that it wanted to recommend since the financial crisis of 2008 were supposed to be finalized in 2o12, but have been delayed due to complications.

The two papers published are currently open for public comment until the end of September, 2013.

 

CFTC Brings Charges Against Corzine For MF Global Collapse

Jon Corzine, the ex-CEO of MF Global, a major derivative broker that went bankrupt in October, 2011, is reportedly being brought up on charges by the CFTC relating to the collapse.

On Thursday, June 27th, the CFTC issued a press release stating that they would be bringing charges against Jon Corzine, the former CEO, and Edith O’Brien, Former Assistant Treasurer, in relation to the derivative giant’s collapse in fall 2011. The collapse took with it over one billion dollars of customer money, and the resolution of the crisis are considered to be one of the largest bankruptcies in the United States. In accounts of the crisis, it seems that MF Global may have unlawfully used customer funds to cover losses.

Corzine originally joined MF Global with intent to turn the futures broker into an investment bank, and according to the CFTC release, “Corzine’s strategy called for making increasingly risky and larger investments of the firm’s money.” Corzine had allegedly been made aware of the low cash balance of the firm, but still continued to order the payback of loans and obligations.

Edith O’Brien, who was an Assistant Treasurer at MF Global is being charged with aiding and abetting, as she allegedly approved and caused the implementation of loans that caused millions of dollars of damage.

Both Corzine and O’Brien plan to fight the charges, but the CFTC hopes to ban them from the futures industry.

Elizabeth Warren Chides Commissioners Slowing Cross-Border Swap Regulations

With Gary Gensler’s term expired in April, 2013 and a re-appointment being as soon as July, Elizabeth Warren is decrying commissioners for what she sees as stalling regulation.

Certain policies that the Commodity Futures Trading Commission has been working on include a deal with cross-border swaps. One of the policies would require any domestic bank with a foreign branch carrying out more than eight billion dollars of swaps with a domestic entity, to register with the CFTC. This has prompted some concern from abroad about the US intruding in foreign jurisdictions with regulatory policies that conflict domestically. Banks in the United States, in the meantime, postulate that this could hurt American businesses.

Democratic Senator Elizabeth Warren says that she will be watching the CFTC if they try to further slow down policy making. If they stall beyond the current deadline of finalizing regulation, which is July 12th, 2013, then there is a chance that Gary Gensler will no longer be chairman of the CFTC. As she said in an interview on June 20th with The Hill, “It would be a real mistake for commissioners to think they can run out the clock and just hold tight until Gary Gensler’s term expires. I will certainly still be here and watching this process very closely”

In addition to the commissioners Warren is addressing, there are other branches of the US government interested in slowing down the CFTC’s policy decisions, perhaps to put it out of Gensler’s reach. The House Financial Services committee recently passed a bipartisan bill in support of exempting foreign banks from these regulations as long as they deem their regulatory bodies to be of equal purport.

CFTC Commissioner Chilton’s Address to Hedge Fund Conference Covers HFT, Global Markets

On Tuesday, June 18th 2013, CFTC Commissioner Bart Chilton gave the keynote address in the conference Hedge Fund Industry in 2013, which was held in Chicago, Illinois. In the address, he gives some insight into the working parts behind the Commodities Futures Trading Commission, and why they see some aspects of the financial industry as potential threats to the stability of the market.

Chilton, who has been a CFTC Commissioner since August, 2007, gave a speech that he prefaced by saying that “while this is a talk about trouble, I assure you it isn’t a lecture about trouble.” His speech seemed lighthearted and relaxed, and he even made a quip about Dodd-Frank; “And so, in 2010 Congress and President Obama put in place a new law: Dodd-Frank. I’m sure you guys have your own euphemism for it, but let’s keep this PG.” However, the rest of his speech was less humorous.

In discussing the development of High Frequency Trading (HFT), which he referred to as cheetahs, he mentioned that given the right circumstances, HFT was beneficial.

Look, these cats have some true attributes and they shouldn’t become an endangered species. At the same time, they are impacting markets in ways we barely understand, and it ain’t all good all the time. If we don’t have some rules and transparency about their activities, we run a market risk that some cheetah-related event that harms markets, could put them on an endangered list, and rapidly.

Another one of the subjects he covered was global markets, which is very topical. He explained that balancing domestic and international regulatory policy was difficult, because trading and other financial transactions are globally linked. He went onto explain several global transitions that regulatory policy will influence, and said “we need to give the market a reasonable amount of time to adjust to global derivatives market regulation. The markets will need time to adapt to a new interpretation of the term ‘U.S. person.’ In many instances we’ll have a pretty good idea when the first set of foreign rules come online. In Europe, trade repository reporting is likely to begin in November. We should be cognizant of that as we assign CFTC phased-in compliance.”

Chilton summed up the address by saying that these markets don’t just effect the key players like regulators or traders, but also the everyday consumer, and put the regulations into the context of risk management.

Gary Gensler’s Term May Be Over in July

The Commodity Futures Trading Commission Chairman Gary Gensler may be replaced as early as July, reports The Financial Times. His term, which began on May 26th 2009, was set to expire in April this year, but until a new Chairman has been appointed by President Obama, Gensler may ride out the term until the end of this year.

The other members on the commission, such as Jill Sommers, Bart Chilton, Scott O’Malia, and Mark Wetjen are also up for re-appointments this year, and lobbyists and lawyers are waiting eagerly to see what the turnover is. According to the bylaws of the Commission, each commissioner is supposed to serve a five year term, as appointed by the president. Furthermore, no more than three members may be of the same political party at the same time.

2013 may yield a large turnover for CFTC commissioners since Chilton and Gensler’s terms were up this April, and Sommers recently announced her plans to resign. Sommers has been a CFTC commissioner since August 2007 and announced to Bloomberg in January that “My intention is not to leave until after this last group of rules. It’s not effective immediately. I suspect I’ll leave sometime after the first quarter.”

As for the potential new appointees to the commission, several names have come up but none have been confirmed.