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CFTC Extends No-Act SEFs and DCMs from Certain CFTC Regulations for Correction of Errors

Washington, DC — Today, a no-action letter issued by the U.S. Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight and Division of Clearing and Risk (Divisions) will serve as an extension to the relief granted in CFTC Letter No. 16-58 which will be expiring on June 15, 2017. In addition to the no-action letter providing relief from certain CFTC regulations to allow swap execution facilities (SEFs) and designated contract markets (DCMs) to rectify clerical or operational errors that resulted in a swap being rejected for clearing and consequently becoming void, it also permits SEFs and DCMs to amend clerical or operational errors brought to light after a swap has been cleared.

In order to enable SEFs and DCMs to correct clerical or operational errors that result in a swap being rejected for clearing, the Divisions will recommend that the CFTC to not take any enforcement action against a SEF or DCM for a lack of compliance with  the required methods of execution in CFTC Regulations 37.9(a)(2) and 38.500 as well as the prohibition against pre-arranged trading in CFTC Regulations 37.203 and 38.152 provided that within one hour after a trade has been rejected for clearing, the SEF or DCM corrects all errors by allowing a new, pre-arranged trade with terms and conditions that comply with the terms and conditions of the original trade.

The relief also caters to operational and clerical errors that have only been discovered after the swap has been cleared to be corrected.  The Divisions will not recommend that the CFTC engage in any enforcement action against a SEF or DCM for failure to comply with the required methods of execution in CFTC Regulations 37.9(a)(2) and 38.500 and the prohibition against pre-arranged trading in CFTC Regulations 37.203 and 38.152 if, after a trade has been cleared and an error is discovered, the SEF or DCM permits a pre-arranged trade between the original parties that counteracts the swaps carried on the DCO’s books. To read more, please click here.

CFTC to discuss reworked speculation limit rule

According to Bloomberg, key members of the Commodity Futures Trading Commission (CFTC) will meet tomorrow to work on a new version of a proposal to limit speculation.

The rule was initially conceived by the CFTC as a way to limit the banks’ ability to control specific markets after speculators were blamed for huge price increases on commodities like wheat and oil in 2008. However, the rule was shot down by District Judge Robert L. Wilkins after being challenged by Wall Street groups, ruling that the CFTC did not provide enough reasoning to prove that the rule was necessary.

In order to create a proposal that has a chance of passing, the CFTC will have to include significant economic analysis that proves the need for limits on speculation.

While talk of reworking their rule had been around for a while, the CFTC had also filed for an appeal on the ruling of their previous proposal, which they now say they will drop in favor of their rewritten proposal.

It is possible that some aspects of the proposal might change. While both CFTC Chairman Gary Gensler and Commissioner Bart Chilton support the previous rule, Commissioner O’Malia has voiced contention with it.

Should the CFTC come to an agreement on a new proposal, businesses and other groups would have about a month to discuss it  before it could be put up for a vote.

Swaps Trade Transitioning Smoothly, Despite Government Shut Down

With the exception of a few delays instituted within the past week, the deadline put in place by the Commodity Futures Trading Commission for swaps traders to comply with new regulations has come, and the transition is well underway. As of today, almost all swaps trades are being handled through Swap Execution Facilities, or SEFs. And, according to The Financial Times, some SEFs have already begun announcing their first transactions ahead of schedule, with Javelin Capital Markets having opened its doors to pair buyers with sellers on Tuesday, a full day before the deadline.

The CFTC mandated that all swaps trading must be done through SEFs in order to add more transparency to the swaps market, which is often considered to be a major factor in the cause of the 2008 financial crisis.

While all swaps trades will have to go through SEFs eventually, the CFTC recently granted a one month delay to foreign exchange swaps and a two month delay in equity swaps, after members of the industry complained that they needed more time.

Interestingly, while the transition to a more streamlined and transparent market place is going rather smoothly, operations within the CFTC will be quite hectic, thanks to the government shutdown that began on Tuesday.  According to the Wall Street Journal, the CFTC is currently running with a mere 28 of its over 600 employees. However, while many of its normal practices will undoubtedly be put on hold, the CFTC will still be monitoring the market place for any suspicious trading.

Activists Rally for Financial Speculation Tax

Occupy Wall Street is back, and this time their target is high frequency trading. On the second anniversary of the Occupy Wall Street movement, protesters will be gathering in New York City to demand Congress pass the “Robin Hood Tax.” The Robin Hood Tax, also known as the Financial Speculation (or Transactions) Tax, is an excise tax on the transfer of ownership of certain financial instruments, including bonds, stock, derivatives, and foreign currency exchange. With the proposed tax in place, each time a financial product is traded, a small percentage (less than half of one percent) of the value of the trade is collected in tax.

On April 16, 2013, Minnesota Democrat Keith Ellison introduced the Inclusive Prosperity Act (H.R. 1579), which proposes the excise tax to strengthen our financial security, reduce market volatility, expand opportunity, and to prevent the shrinking of the middle class. The tax is expected to generate as much as $350 billion. Supporters of the tax include Warren Buffet, David Stockman, Bill Gates, Nancy Pelosi, George Soros, and Paul Volcker.

Over a dozen countries have already implemented a system of financial transaction taxation, including many of the world’s largest economies.  At least eleven European countries have either implemented or will soon implement an FTT.  Additionally, leading Asian financial markets, including China and Singapore, also charge an FTT like tax. As of September 17, the Inclusive Prosperity Act has been referred to the House Committee on Ways and Means.

Top Regulators Meet With Obama On Dodd-Frank Progress

It was announced on Sunday that President Obama is planning to meet with key regulatory officials Today to discuss the advancement of Dodd-Frank. Representatives from the Treasury, the Consumer Financial Protection Bureau, the Federal Housing Finance Agency, the Commodity Futures Trading Commission, the Securities and Exchange Commission and the National Credit Union Administration will be in attendance.

Since being signed into law in 2010, the Dodd-Frank has been the target of both praise and criticism. On the one hand, it’s supporters have purported Dodd-Frank brought increased sustainability and accountability to the regulatory system, but it’s critics have commented on its broad reach. The reforms within the Dodd-Frank Act extended from anti-predatory lending and mortgage reform, to imposing rules on derivatives.

The Commodity Futures Trading Commission’s (CFTC’s) chairman, Gary Gensler, will be present at the talks, along with key members from other financial regulatory agencies. According to Bloomberg, White House press secretary Josh Earnest says that President Barack Obama wishes to meet with the regulators because he wants to press the importance of implementing all of the Dodd-Frank Act’s reforms.



Fed Re-evaluating Commodities Control Ruling

The Federal Reserve announced that they will be reviewing their rulings regarding Banks trading commodities after receiving complaints.

Since the Bank Holdings Act, which is over 50 years old, deposit holding banks have been disallowed from directly holding commodities. But in 2003, the Federal Reserve put in place a provision letting non-commercial banks deal in commodities, but forbade them from dealing in commodities storage. According to Bloomberg, however, the ten largest banks generate over 6 billion dollars in revenue from trading in commodities, both financially and tangibly.

However, some have voiced concern that it is perhaps un-competitive to have a Bank having financial and physical holdings. As a Senate Subcommittee is investigating JP Morgan for possible gas price manipulation, the subject of commodities has been increasingly important. U. S. Sentaor Sherrod Brown has voiced his own concern regarding the potential for manipulation. “When Wall Street banks control the supply of both commodities and financial products, there’s a potential for anti-competitive behavior and manipulation,” he said in an article for Bloomberg.

The Federal Reserve will be analyzing their stance on the ruling on the 23rd.

Simulated Wall Street Cybersecurity Attack to Test Preparedness

On Thursday, July 18th 2013, the Securities Industry and Financial Markets Association (SIFMA) will be carrying out Quantum Dawn 2, a simulated cybersecurity attack meant to assess preparedness.

Since the last cybersecurity simulation in 2011, the list of firms and institutions wishing to be included in this year’s attack has more than doubled, according to the SIFMA brief released today. The organizations undergoing the attack has grown to include stock exchanges, businesses, the U.S. Treasury and Department of Homeland Security, and the simulation will attempt to expose any critical weaknesses in security these firms may have. The previous exercise, that was held in November 2011, was designed to analyze the continuity of equities trading and clearing in the event of a system disruption.

The importance of cybersecurity has come to the forefront of discussions of the greatest risks posed in the financial markets. The focus of the exercise is not to mimic the act of one or two hackers attempting to gain access to a personal computer or account, but rather to simulate state-sanctioned actions targeting entire systems. Issues of cyber security became even more serious in light of last summer’s Flame, a malware that infected about 1000 computers across the world, and was so advanced that experts agreed that no singular hacker could have been it’s origin.

The simulation will be orchestrated on July 18th, and more than 50 banks will be participating.


Guidance and Policy Statement Regulations on Cross Border Swaps Released

Following the vote on guidance and regulation on Friday, the Commodities Futures Trading Commission (CFTC) released the manuscript of the guidelines regarding cross border swaps today, July 16th 2013.

Cross border swaps have become a hot issue in the CFTC for some time now, but was resolved following last Friday’s vote, which passed the new regulations as well as a 75 day guidance period. As of 6 pm, July 16th 2013, the manuscript has not been published to the Federal Registry.

The full document, which is about three hundred pages long, can be found on the CFTC website.

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.