Tag: committee

FIA Sets Forth Five Core Principles in Enhancing CFTC Market Surveillance

In a response to a request by the CFTC’s Technology Advisory Committee for comment on how best to develop a 21st century surveillance system, the Financial Industry Association (FIA) and the FIA Principal Traders Group submitted a comment letter this week setting forth five core principles for modernizing market surveillance. In the comment letter, Walt Lukken, president and CEO of the FIA, urged the CFTC to rely heavily on existing resources moving forward, even as it “leverage[s] the evolving and changing technological landscape and reform[s] its surveillance and oversight mission in a significant and technologically-adept way.”

The FIA suggested that the CFTC approach surveillance modernization in a manner consistent with its longstanding practice of delegating front-line surveillance responsibilities to the exchanges themselves and that the regulatory body avoid building new systems that replicate those built or commissioned by existing exchanges. Even in implementing new enhanced cross-DCM surveillance routines, the FIA contended, the CFTC could utilize existing large trader and daily transaction reports to test and validate these processes. Additionally, the FIA stressed the importance of increasing the technical and analytical expertise of the CFTC staff through training and targeted hiring, and encouraged the CFTC to maintain data privacy as a priority in developing new market surveillance systems.



Congresswoman Urges Review of Bank Guarantees of Offshore Affiliates

Maxine Waters, ranking member of the House Financial Services Committee, urged the CFTC this week to begin investigating the offshore actions of Wall Street banks in avoiding certain mandates set forth in the Dodd-Frank Act. In a letter to Timothy Massad, the CFTC’s recently-confirmed chairman, Representative Waters criticized the removal by banks of parent guarantees from overseas affiliates, which allows banks to trade in the interdealer market while skirting Dodd-Frank restrictions aimed at increasing price competition and transparency. By cutting off these guarantees, banks are able to trade in the United States through swap execution facilities established under Dodd-Frank, while their non-guaranteed subsidiaries are subject only to local laws of foreign jurisdictions.

Rep. Waters also sent letters to the Federal Reserve, Office of the Comptroller of the Currency, Securities and Exchange Commission, and Federal Deposit Insurance Corporation. In these correspondences, Rep. Waters reiterated that the CFTC should take a more aggressive stance in reviewing changes to the guarantees.

European Benchmark Legislation May Harm Banks’ Derivatives Positions

While the European benchmark legislation was designed to add clarity to the marketplace after the LIBOR scandal, it may wind up causing European banks to drop derivatives positions.

Under the European Parliament Economic and Monetary Affairs Committee’s revised European benchmark legislation, EU based institutions will be forbidden from holding any products linked to unauthorized benchmarks.

Banks are finding this to be problematic, as it seems a majority of non-EU benchmarks will not meet the required standards to be considered authorized, which, as the rules currently stand, could include over the counter (OTC) derivatives.

In the original proposal for European benchmark legislation, the European Commission would have prevented EU financial institutions from using any benchmarks outside of Europe, unless they were produced by institutions with rules comparable to that of the EC. However, many are hoping to have this changed so that benchmarks from institutions who have agreed to the practices laid out by the International Organization of Securities Commission can also be accepted—though even that would rule out most non-EU benchmarks.

It seems unlikely that the European Commission will be giving much leeway to banks in this area, and while European officials are hoping to have the final rule ready by May, it will not be taking effect until later in 2014 or early 2015.

Democrats Support New Change to Volcker Rule

The Volcker rule may be getting tweaked once again.

The banking industry has been pushing to have a group of debt investments omitted from the Volcker rule, saying that they differ from the types of investments that the Volcker rule was designed to regulate. And it seems likely that they may be getting their way as House officials recently signed a letter looking for guidance from financial regulators on how to go about doing so.

Maxine Waters (D., Calif.) and Carolyn Maloney (D., N.Y.), senior members of the House Financial Services Committee are among the 17 House Democrats who signed the letter, asking regulators to clarify that collateralized loan obligations (CLOs) aren’t necessarily equity investments.

As the Volcker rule is currently written, CLOs can fall under its regulation if it has any of the characteristics of an equity investment. The letter requests that regulators look to exempt CLOs from regulation in some of those cases, though it also points out that there may be instances where regulating CLOs could be required.

Should the Volcker rule not be changed, banks will have to divest their CLOs before the it goes into effect in 2015, according to the Wall Street Journal.

However, with the CFTC under new, seemingly much more lenient management, it’s unlikely that this will be an issue.

Blythe Masters Joins CFTC Advisory Committee

JP Morgan’s commodities chief, Blythe Masters, is now a member of a CFTC advisory committee, according to an announcement made yesterday by the Commodity Futures Trading Commission.

Masters has been working in the swaps industry for well over a decade, and helped JP Morgan begin using credit default swaps to hedge bank risks.

She will be taking part in a discussion the CFTC advisory committee will be having next week over the Commission’s cross-border regulation policy.

The policy, which has been bemoaned by both foreign and domestic banks, says that trades made by foreign banks still fall under CFTC rules if U.S.-located personnel arrange, execute or negotiate the transactions.

The CFTC was sued by several banks recently for this policy, and it seems the Commission is now seeking to amend its guidelines.

Masters is joining the CFTC advisory committee just as JP Morgan is selling of its physical commodities business. The reason for the bank’s decision to sell off its multi-billion dollar operation seems to be the amount of headaches many of the new rules have created for banks in recent times.

The CFTCs apparent change of heart over cross-border regulation has come quickly after former chairman Gary Gensler stepped down, and it seems likely that banks will see a softer side of the CFTC over the next few months, and possibly years because of this.

CFTC May Push Interest-Rate and Credit Swaps onto SEFs

According to Bloomberg, the Commodity Futures Trading Commission (CFTC) is set to push interest-rate and credit swaps onto SEFs in the near future.

While the CFTC is currently reviewing the plans, they haven’t found any reason to object to them as of yet. And with the first of these new requirements being instituted on January 16th, it seems unlikely that they will find one.

Addinginterest-rate and credit swaps to the list of trades that must be monitored is another step toward market transparency for the CFTC, which has been attempting to take the risk out of swaps trading ever since it played a major role in the 2008 financial crisis.

Which swaps need to be traded over SEFs has been a debate within the industry since the mandate was put in place back in October. Packaged swap deals are currently still under debate, as the Securities Industry and Financial Markets Association and International Swaps and Derivatives Association asked for them to remain off SEFs back in November. And with people saying that the industry doesn’t currently have the infrastructure to monitor them properly, they may remain off the platforms for some time.

CFTC Commissioner Scott O’Malia has called for an agency advisory committee on January 21st to oversee the decisions made on interest-rate and credit swaps and to get industry feedback.

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.

Regulatory Giants Discuss Disaster Recovery Relief in Regards to Sandy

Hurricane Sandy took a physical toll on New York City, but a joint meeting of the Securities and Exchange Commission (SEC), Financial Industry Regulatory Authority (FINRA), and the Commodity Futures Trading Commission (CFTC) on the topic of disaster recovery, proved that it’s not just physical damage that companies are worried about.

Hurricane Sandy, which touched down in New York City on October 28th and 29th, disrupted several equities and options markets. On August 16th, 2013, officials from these regulatory giants met to discuss further improvements that can be made to stem the effects another natural disaster may have on the financial systems. Based on their discussion, they proposed a three point best practices of disaster recovery which is posted on the CFTC website.

The first point of their “Business Continuity Planning” paper is “Widespread Disruption Considerations,” which advocates that firms that might be affected by power outages, etc., take any natural disaster into consideration. Certain issues became very apparent during Hurricane Sandy, such as lack of remote access, which relies on internet and phone communication.

The second part of their three point continuity plan is the “Alternative Locations Considerations” which recommends that equities and options firms take precautions by thinking of a potential secondary location that won’t be disrupted in case of a ‘regional’ outage, such as was witnessed during Sandy. This section includes important issues such as power generators, staffing, adequate resources and shuttle services. Lastly, the committee advocates evaluating vendor relations, including services such as settlement, banking and finance.

A full version of the “Business Continuity Planning” can be found on the CFTC website.

Gensler: CFTC Faces Challenges Implementing Volcker Rule

On Tuesday July 30th, Gary Gensler, Chairman of the Commodity Futures Trading Commission (CFTC), testified before US Senate Committee that one of the largest issues the CFTC will confront in the coming years is the implementation of the Volcker Rule, which will prohibit all banks from doing proprietary trading.

Also in his testimony, Gensler cited the recent progress made with cross-border swaps regulation in addition to registration of securities as positive steps forward in the CFTC’s aim to create transparency in the futures industry.

Gensler stated in his testimony to the CFTC that the Volcker Rule, which prohibits banks from using deposits in speculative trades that do not benefit consumers, is in the process of being adopted by the US. However, he also mentioned that he will have to cooperate with certain domestic regulatory bodies to fully implement the ruling.

Other issues Gensler states could pose challenging to the CFTC include the regulation and evaluation of benchmarks. He said, in his speech to the US Senate Committee on Banking, Housing and Urban Affairs that the CFTC will have to work in close connection with international regulators to ensure these benchmarks are based on “fact, not fiction,” as Gensler said. The International Organization of Securities Commissions (IOSCO) created a taskforce looking into benchmarks of the financial industry, and the CFTC has worked with them in the past to ensure overarching international regulation is up to standards.

A full transcript of Gary Gensler’s testimony can be found on the CFTC website.



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.