Tag: new rules

Commissioners Unhappy With CFTC No-Action Letters

Several commissioners have spoken out over the CFTC’s no-action letters, claiming that many of them were instituted hastily, leaving little time to review or edit them.

The Commodity Futures Trading Commission has put in place almost 70 rules since the 2010 regulatory reform law was put into place. Of these rules, 36 were related to Dodd-Frank. However, within these 36 rules, over 200 no-action letters or other forms of guidance have had to be issued after the rules were instituted.

Some commissioners have defended the CFTC no-action letters, saying that their use was inevitable, as overhauling the operations of the $600 trillion dollar derivatives market is no small task. As former commissioner Micheal Dunn explained it to Risk.net, “You can’t make an omelette without breaking some eggs.”

Most commissioners agree that some no-action letters will be necessary. However, it seems for many commissioners, the issue revolves around how the CFTC no-action letters were instituted.

Commissioners have pointed out that while some of the no-action letters are only temporary, quite a few of them are indefinite or permanent. Many of the commissioners only received notice of the letters the night before they were issued, which has them feeling as though their input had not been considered over what is essentially a complete change in policy.

CFTC chairman nominee Timothy Massad recognized the need for a more streamlined and organized rule making process while being questioned at a confirmation hearing by the Senate.

While former CFTC chairman Gary Gensler spent most of his time putting many of the Dodd-Frank rules into place, it seems Massad’s focus will fall on figuring out how to amend and enforce these rules.

US Swap Activity Slows as Mandatory SEF Trading Begins

US swaps trading practically came to a halt on the first day of mandatory SEF trading.

This Tuesday (February 18th) marked the first day that trades had to be executed through SEFs in the US. And it seems that traders aren’t quite ready to jump on board.

A total of 143 swaps were executed on Tuesday for a notional value of $14.6 billion. This trade count is about 81% down from the most recent pre-mandatory SEF trading day (February 14th). On Friday, 764 swaps were traded for a notional value of $65.8 billion.

It seems that many traders are holding back, waiting for others to test the waters and waiting to see if there are any issues before getting back into the swing of things. And while dealers have admitted to being a bit disappointed by the initial turn out, the results weren’t unexpected, perhaps having learned from the poor turn out after US clearing deadlines just last year.

Surprisingly, while interest rate swaps dropped off due to their inclusion in mandatory SEF trading regulation, swap futures did not see a similar spike in trading, even though they do not fall under the regulation.

It seems very likely that normal trading volumes will resume once traders acclimate to the new rules.

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.

French Banking Lobbyists Criticize European Union’s Proprietary Trading Rules

The European Union’s plan to quell big banks’ proprietary trading has been met with criticism from French banking lobbyists who say it will give an advantage to US banks, which would not be affected by the new rules.

Interestingly, the rules the European Union has agreed upon are already less severe than their initial plans to actually break up large banks, which were deemed “to big to fail” after the fall of the Lehman Brothers sparked the financial crisis of 2008.

While French banking lobbyists criticize the European Union’s plans, saying they will take away French banks’ freedom to trade, EU commissioner Mike Brainer has pointed out that the new rules will not actually restrict the banks from trading, but merely make them move the trading to a separated subsidiary. The goal behind this is to separate risky trading from the safer banking actives like deposit taking.

Meanwhile, as French banking lobbyists criticize the European Union for being too strict, other countries like Germany and England have found the rule to be adequate, according to a Reuters report on the matter. And, furthermore, other countries have found the EU’s plans to be too lenient on the banks.

The rule will wind up being similar to the US Volcker Rule, though the banning of proprietary trading will only wind up affecting the top 30 European banks.

Regardless, the European Union will have plenty of time to debate the issue, as rules aren’t likely to go into effect until 2017.

CFTC Looks to Address Swap Report Data Issues Affecting Swap Transparency

According to the Wall Street Journal, the Commodity Futures Trading Commission is beginning to make changes to fix swap report data issues that have made it difficult to facilitate market transparency.

The CFTC will be putting together a group to review its swap report data collection process, as well as ensure that banks and other financial institutions are reporting and keeping records that are on par with the rules the Commission has put in place.

This probe into swap report data issues has been sparked by an error in reporting from the CFTC that caused the commission to miscalculate the overall size the of derivatives market.

Commissioner O’Malia has mentioned that reporting issues are widespread throughout the CFTC, and that they are hindering the Commission’s ability to oversee the market.

It may be some time before these swap report data issues are actually fixed however, as the CFTC is currently extremely underfunded. As of right now, there are only two employees in charge of rounding up all of the swaps report data, and it takes them twelve days to have the data ready to publish. This is four times longer than other reports the CFTC publishes.

Among the problems being considered in the probe, the CFTC will look into whether or not the agency needs new rules, technology, or personnel with more data analysis expertise.

Acting chairman Mark Wetjen has instructed staff to have formal recommendations prepared by June.

IVSC and Global Regulators Begin to Create Valuation Standards for Bank Assets

According to Reuters, global regulators, including the International Valuation Standards Council (IVSC), have begun to plan the first worldwide standard for valuing some of the more difficult-to-price assets held by banks.

The first task of the IVSC, it seems, will be developing a benchmark by which to base this valuation. There is currently little to no guidance on how to price an asset contained within a company’s account, particularly when there is no market for the asset.

The independent, not-for-profit IVSC will be playing a large role in valuating these assets.

According to the IVSC, the main difficulty behind pricing will be derivatives, which should not be much of a surprise, given their reputation for being more risky than most assets.

The IVSC, which is headed by David Tweedie, consists of 74 member bodies from 54 countries, but does not actually have any enforcement powers, which leaves the question of who will be ensuring that any new rules created are followed up for debate.

At any rate, based on the large scope with which the standards will encompass, and with many top accountants in the industry currently warning of moving too fast, it seems unlikely that any actual effect from these standards will be seen for quite some time.

Federal Reserve to Discuss New Physical Commodity Rules

According to Reuters, the Federal Reserve is setting up to take public comments on new physical commodity rules that will limit banks’ ability to trade certain commodities this week.

This marks the Federal Reserve’s first steps in what will most likely be a long road ahead for reforming physical commodity rules. The driving force behind this reform comes from public and political complaints over the risk involved with having banks trade physical commodities like crude oil and aluminum.

During a Senate hearing last July, people involved in the industry spoke out about the banks’ ownership of the storage facilities that are required for physical commodities, and how this allowed them to inflate prices. Hundreds of millions were paid out in fines by big banks for manipulating energy markets in 2013 alone, producing a strong argument for reforming physical commodity rules.

Those taking part in the hearing as witnesses will include Norman Bay of the Federal Energy Regulatory Commission (FERC), market oversight chief Vince McGonagle of the Commodity Futures Trading Commission (CFTC), and Michael Gibson, the Federal Reserve’s director of banking supervision and regulation.

The Federal Reserve has not disclosed how it plans to reform physical commodity rules, but members of the industry will have 60 to 90 days to submit letters to be used in the forming of these new rules after the hearing.

EU Reaches Agreement on New Financial Regulations

According to Reuters, after months of discussions and arguments, the EU has finally begun to come together over how it plans to regulate the swaps industry.

After agreeing to work with the US over working out global standards to police the $600 trillion dollar derivatives industry, which is thought to have played a major role in the financial crisis of 2008, the EU has fallen behind the US’s Commodity Futures Trading Commission in creating and implementing new rules for the system.  An understandable issue, while the CFTC is a US only entity, the EU has to convince whole separate countries to agree before implementing rules.

Though this marks another step taken towards financial stability, it seems there is still a long way to go, and it may take some time before even the next step is made.

The EU has only about three more months to discuss policy before the European Parliament begins to campaign for May elections. And, after which, the EU will have to wait until October for a new European commission to continue.

This should make for an interesting few months as the EU scrambles to get laws in place that synch up to the CFTC’s, which is refusing to acknowledge any rules from foreign regulators that the Commission does not find up to par with its own.

Big Banks Look to Reverse New CFTC Rules

According to the New York Post, several of the US’s largest banks plan to sue the Commodity Futures Trading Commission (CFTC) over some of the new rules it has been implementing.

The banks are looking to get many of the new rules reversed through the law suit, citing that the CFTC violated rulemaking procedures while implementing them. They claim that the CFTC rushed many of the laws, passing them before the banks were given proper time to review and comment on them.

The banks are concerned that the passing of these laws — requiring all overseas trades that are even slightly involved with US markets to be cleared by both foreign and US regulators– will adversely affect liquidity in the market, as well as raise costs and create redundancy within regulation.

Many feel that the CFTC has not weighed the actual benefits to the industry these new rules would create against their cost, going as far to say that CFTC chairman Gary Gensler forced these rules through merely to get one more shot in on the banks before he steps down.

The lawsuit is expected to be filed very soon, as many of these rules are due to go into effect before next year.

SEF Rules Are Trouble for Asian Derivatives Markets

According to Reuters, many Asian and U.S. banks are looking for ways around new rules implemented by the Commodity Futures Trading Commission and other regulators. Some fear their maneuvers may lead to liquidity shortages within the market.

While regulators are trying to round up all derivatives trading onto new Swap Execution Facilities (SEFs), a mere 10 to 20 percent of Asia’s turnover in currency and interest rate derivatives are currently going through SEFs, while the vast majority are being settled either in the wider market or bilaterally. Breaking up liquidity in this manner is making it difficult for investors looking to hedge portfolio risk.

In response to the CFTC mandating all trading over $8 billion (per year) with American counterparties must be done over SEFs, Asian derivatives market traders are severely limiting their trading with U.S. participants in order to stay under the $8 billion dollar threshold.

US banks are doing their best to find loopholes in the SEF rule, trying not to be left out of the expanding Asian derivatives market. Some are offering to use their London subsidiaries to keep Asian derivatives market traders from having to pay higher brokerage fees.

Regulators are concerned that the SEF rules may lead to a “Balkanization” of the market, and warn that these rules and the costs they create may cause more trading to be done outside of SEFs, creating less transparency within the market and undermining the purpose of their institution altogether.