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CFTC Statement Affirms Flexibility for Foreign Exchanges, With Caveats

The Commodity Futures Trading Commission (CFTC) Tuesday issued a policy statement basically reaffirming its process for individually issuing jurisdictional waivers or "no-action letters" for exchanges located in other countries and subject to regulation in those countries and which allow access to their electronic trading systems in the U.S. The statement essentially supports the position of the IntercontinentalExchange (ICE) over that of the New York Mercantile Exchange (Nymex), and adds some strictures on information sharing with and among regulators.

The CFTC statement addressed complaints that had arisen recently, particularly from U.S.-based exchanges such as Nymex, that foreign-regulated exchanges operate in the U.S. at a competitive advantage if overseas regulation is not as restrictive as the CFTC oversight. These complainants stressed the need for "regulatory parity," stirring up political debate and leading to a CFTC hearing and request for comments on the issue earlier this year. ICE, which through its U.K.-based ICE Futures exchange holds a no-action waiver, stirred the pot when it notified the CFTC it would begin listing a contract directly accessible to its U.S. members for WTI light sweet crude oil with the settlement price linked to contracts traded on Nymex.

A U.S. Senate subcommittee staff report in June argued that permitting ICE's WTI contract to trade in the U.S. without CFTC regulation undermined that regulation -- which has stricter reporting requirements than those in the U.K. (see Daily GPI, June 28).

The CFTC requires traders of energy commodities on Nymex to keep records of all trades and to report large trades to the agency, the so-called Large Trader Reports. But the CFTC does not require this of OTC energy traders or of persons trading U.S. energy commodities on foreign exchanges. The argument is that large traders who want to remain anonymous would choose to trade on ICE rather than Nymex.

In the policy statement the U.S. commission said its job was not to address competitive concerns, but rather to focus -- as in the past -- on "the bona fide status of, and domestic regulatory concerns raised by, an applicant for a no-action letter."

Noting the era of "dynamic change, marked by technological innovation, consolidation, evolving business relationships and increasing global competition" now affecting the industry, the CFTC says it is striving to regulate in a flexible manner in order to allow the U.S. futures industry to compete effectively in a global environment.

While maintaining flexibility in the processing of individual requests for no-action letters, the CFTC statement added "enhancements" to the process. The Commission could impose conditions or requirements or initiate surveillance procedures if, for instance, it finds that products listed on a foreign board of trade with no-action relief in the U.S create unacceptable system risks or market disruptions; adversely affect the pricing of commodities or contracts subject to the Commodity Exchange Act; or interfere with the CFTC's ability to perform its assigned function of market surveillance.

Also, the policy statement gets specific about information-sharing assurances from foreign authorities. In exploring this the Commission staff will ascertain that the market and its regulator have the power to obtain the specific types of information that may be needed by the CFTC, as well as the authority to share that information. Evidence of this would be if the overseas regulator has signed the IOSCO Multilateral Memorandum of Understanding, a document demonstrating the power, authority and willingness to share information.

The companies seeking no-action letters also should be signatories to the Exchange International MOU, developed 1996 after the spectacular failure of Barings plc, demonstrating a commitment to share information necessary for market integrity and system operations. Companies also may be required to supply information to the CFTC which the agency determines is necessary to carry out its surveillance duties. And the status of the no-action beneficiary and its regulatory body may be reviewed annually or biannually by the CFTC staff.

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