The Commodity Futures Trading Commission (CFTC) last Tuesday voted out a rule requiring the establishment of a data reporting system that would be a precursor to the setting and enforcing of aggregate position limits for physical commodity swaps.
Several CFTC members expressed concern with the reporting requirement with respect to swaps, as well as the prospective imposition of the limits under the Dodd-Frank financial reform law. A CFTC staff member said the burden on industry to report physical commodity swaps to the agency would be just under $40 million a year, while the cost to the agency will be approximately about $2.5 million a year.
The reporting system would be analogous to the Commission's large trader reporting system for commodities futures and options contracts traded on designated contract markets. And it would "serve as a transitional tool for swap positional data until swap data repositories are in operation and potentially serving as the Commission's primary source for swaps positional data, at which time the Commission may either continue or discontinue the proposed system," the CFTC said.
Certain firms would file reports daily with the Commission on reportable positions in physical commodity swaps. There would be two sources for position reports -- if cleared, positions would be reported by clearing organizations and their members; if not cleared, the swap dealers would provide position reports on their own positions and those of their counterparties that are large enough to meet the reporting threshold.
The regulation would apply to 46 exempt commodities, including crude oil, coal and natural gas, as well as agricultural commodities. For reporting purposes, swap positions would be converted to a futures equivalent. A reportable position would be 50 futures contracts in a single month, according to the CFTC.
Despite some misgivings, Commissioner Scott D. O'Malia voted for the proposed reporting rule. "We're attempting to build a new foundation for a new form of market oversight and surveillance that is nothing like we have done before. In particular the large trader report is attempting to bring together information from both the swaps and futures markets to set position limits applicable to linked contracts. The foundation of the position limit is the reporting.
"However, I am concerned that this foundation will not be robust and that the large trader reports will not effectively support this structure, especially given that they will ultimately be replaced by data from swap data repositories. Furthermore, the temporary system is not up and running yet and the cost borne by industry and the Commission will be considerable," he said.
"I fear that we are rushing to implement new reporting methodologies without taking into consideration how each of the new and existing reporting requirements fit together as our foundation...It might be wise for the Commission to delay the implementation of the large trader reporting scheme until the Commission rulemaking defining the swap dealer is finalized.
"I would prefer the Commission take [an] aim-ready-fire approach to position limits, rather than [they] shoot first [and] ask questions later," O'Malia said.
Chairman Gary Gensler assured O'Malia that the CFTC's approach to position limits would be "aim first."
Commissioner Jill E. Sommers said she supported the proposal to receive daily position reports for physical commodity swaps "because I believe it furthers our continued effort to expand transparency into swap markets, and because I believe it is critical that the Commission receive this information as soon as possible."
Acknowledging that the proposal was a "precursor to the Commission moving forward with a proposal on the imposition of position limits," she said her approval of position reporting "should not in any way be interpreted as expressing support for moving forward with the imposition of position limits set forth by the deadlines in Dodd-Frank." Sommers noted that she voted against a rule, which was issued by the CFTC in January, that imposed position limits on four energy contracts.
"My grave concerns about moving forward with position limits have not been eased" since then, she said. Dodd-Frank requires the CFTC to establish "limits on the amount of positions as appropriate...that may be held by any person" in energy and metals products within 180 days, and in agricultural products within 270 days.
"In my view no position limit is appropriate if it is imposed without the benefit of receiving and analyzing complete data concerning the open interests in each market. Only then is the Commission able to properly consider the size of each market and calibrate a limit that is appropriate for each market," Sommers said.
"Because of the 180 and 270 days requirements in Dodd-Frank...the Commission is tentatively planning a Nov. 30 public meeting to vote on proposed speculative position limits for exempt and agricultural commodities. Mind you by Nov. 30 the Commission will not have garnered any data from the proposed rule we are discussing [now] because it, or some modified version of it, probably will not be effective in final former by [that date]. In addition, by Nov. 30, swap data repositories will still be at least one year away from operating," she said.
The Commission will not have data to impose position limits until swaps data repositories are up and running and all swaps data are reported, she noted. Optimistically, she said, she doesn't see this happening until the end of 2011.
"I think all five of us are grappling with the time line here" on position limits, said Gensler. Nevertheless "I'm supportive of [the proposal] because I think it would also give us data for surveillance purposes and hopefully it would sunset once the swap [repositories] are in place."
Commissioner Bart Chilton said he was "somewhat sympathetic" to Sommers' position -- the CFTC "sort of putting the cart before the horse" -- but he added that there are large concentrations of power in the metals, energy and agricultural markets. "I think we need to go forward with it [positions reporting]," but "find that right line to walk."
This was the CFTC's second meeting to consider proposed regulations to implement Dodd-Frank (see NGI, Oct. 4). The agency plans to meet next on Oct. 26, where it will consider six proposed rules on anti-manipulations, disruptive trading practices, rule certification under Part 40 of the CFTC's regulations, alternatives to credit ratings, associated revisions to the CFTC's 1.25 regulations and process of review of swaps for clearing.
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