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CFTC Publishes Major Transparency Initiative

The Commodity Futures Trading Commission (CFTC) Tuesday moved to bolster futures trader transparency, including that of large traders, with a proposal to require detailed information on ownership, control and other information for all trading accounts active on U.S. futures exchanges.

The advanced notice of proposed rulemaking proposes to collect the information in an account ownership and control report (OCR) on a weekly basis. OCR data will be an important addition to existing regulatory data resources, the CFTC said, enhancing market transparency; leveraging existing surveillance systems; and fostering synergies between the commission's regulatory, enforcement and economic research programs.

Currently, the CFTC explained, its "trade register" is a comprehensive daily record of every trade facilitated by an exchange through open outcry, electronically or noncompetitively. While this register contains detailed information on the terms of a trade, the parties involved and other data points, there is no information on the owners or controllers of those accounts.

In addition, the trading account numbers in exchange trade registers often do not correspond to account numbers reported in other commission data systems, including its large trader reporting system. "Efficient integration of large trader and trade register data will be one of the most important regulatory benefits deriving from the OCR. At present, the commission can sometimes link the two data sets on a case-by-case basis, but the process is extremely labor-intensive, requires assistance from exchange clearing members and others, and does not lend itself to more routine, automated surveillance and follow-up investigation," the CFTC notice said.

OCR will respond to new regulatory data needs in an era of electronic trading, according to the commission. The CFTC pointed to the evolution since the 1990s of futures trading from open outcry to global electronic systems. In 1999 electronic trading accounted for only 5% of volume on all U.S. exchanges. By 2008 it was responsible for some 80% of volume, and had become ever more difficult to monitor. While traders in the open outcry ring were readily identifiable, the thousands trading electronically are not.

The commission has recently standardized the content and format of all trade registers submitted to it. Collecting the additional information "will facilitate integration of existing resources, and leverage them in dynamic new ways. It will facilitate innovative trade practice and market surveillance by [the Division of Market Oversight]; bridge the gap between individual transactions reported on exchange trade registers and aggregate positions reported in large trader data; and allow other commission offices and divisions to better utilize regulatory data in support of their own missions."

The Advanced Notice details the data points to be collected in the OCR, including trading account numbers, the names and addresses of accounts' owners and controllers, and the last four digits of owners' and controllers' social security or tax identification numbers; the special account number, if one has been assigned; and an indication of whether the account is a reportable account pursuant to large trader thresholds.

Together with the trade registers and large trader reports, the OCR "will allow the Commission to see more clearly and completely by identifying otherwise anonymous market participants and revealing links between apparently unrelated trading accounts whose aggregate behavior is of regulatory consequence."

The OCR would achieve four CFTC objectives. That includes identifying with certainty all accounts that (1) are under common ownership or control at a single exchange; (2) are under common ownership or control at multiple exchanges; (3) are also included in the commission's large trader reporting program; and (4) identifying the entities to which the commission should have recourse if additional information is required, including the trading account's executing firm and clearing firm, and the name(s) of the firm(s) providing OCR information for the trading account.

The CFTC sees the accumulated data as providing backup for investigatory work of potential price manipulations. It also will help the CFTC's Office of the Chief Economist (OCE) in its research and reports on major policy issues.

Related account information derived from the OCR "will help OCE to better link traders' intraday transaction with their end-of-day positions. It will also help OCE to calculate how different categories of traders contribute to marketwide open interest."

The notice provides technical guidance with respect to the anticipated form, manner and frequency of the OCR and asks specific questions and seeks public comment to help the commission formulate a rule implementing the OCR. Comments will be due within 45 days of publication of the advance notice in the Federal Register, which is expected in the next few days.

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