The head of the Commodity Futures Trading Commission (CFTC) last week during a Senate hearing indicated that he would support imposing user fees on futures and swaps traders to help fund the agency, similar to the system used at FERC. And Republican and Democratic senators alike put Gensler in the hot seat, expressing their frustration with the agency's foot dragging in implementing speculative position limits under the Dodd-Frank Wall Street Reform Act, and the "haphazard" pace of the CFTC's rulemaking process.
"I'd look forward to working with Congress in any way you'd think is most appropriate to help ensure the public has a well-funded CFTC," said Chairman Gary Gensler in response to a question by Sen. Frank Lautenberg (D-NJ).
The CFTC is the "only financial regulator that does not offset a portion of its costs," Lautenberg noted. The Federal Energy Regulatory Commission (FERC) is self-funded by imposing user fees on interstate natural gas pipelines and power transmission lines. In 2011 FERC collected and spent $298 million, costing the Treasury zero.
CFTC Commissioner Bart Chilton first raised the idea of a user fee in February 2011 when it looked like the Commission was not going to receive sufficient funding for fiscal year 2012 (see NGI, Feb. 7, 2011).
Gensler also indicated that he expects U.S. District Judge Robert Wilkins for the District of Columbia to issue a decision in the "near term" on a request for a temporary injunction of the CFTC's speculative position limit rule. The International Swaps and Derivatives Association and the Securities Industry and Financial Markets Association brought the legal challenge in December (see NGI, Dec. 12, 2011). The district judge has signaled that it's "highly likely that the rule implementing position limits will be struck down," said Sen. Jerry Moran of Kansas, the ranking Republican on the Senate Appropriations Committee's Subcommittee on Financial Services and General Government.
In the event of an adverse court decision, "I don't have a plan yet...The first thing I would do is turn to our attorneys and probably personally read whatever opinion comes [from] the judge," Gensler said during the hearing.
"I believe that what we did in October [with the final rule] was consistent with the congressional mandate." The controversial final rule seeks to curb excessive speculation in commodity futures contracts and economically equivalent swaps. It establishes limits on speculative positions in 28 core physical commodity contracts, four of which are energy contracts: Nymex Henry Hub Natural Gas, Nymex Light Sweet Crude Oil, Nymex New York Harbor Gasoline Blendstock and Nymex New York Harbor Heating Oil (see NGI, Oct. 24, 2011).
Gensler said the rule won't be implemented until the agency defines what a "swap" is, and until it collects more information on position limits in the derivatives market.
Moran was critical of the CFTC's performance. "What I often hear from the futures industry is that they are overwhelmed by the volume, frequency and speed in which the CFTC is issuing new regulations." And "there's a sense out there [that] while you are willing to sit down, you're not quite as willing to listen" to industry. He further decried the "haphazard nature of the rulemaking" process, and the apparent move from principles-based regulation to prescriptive regulation at the CFTC.
But Republicans weren't the ones taking shots at the CFTC. A group of senators last Wednesday introduced legislation that calls on the CFTC to use its emergency powers to rein in speculation in the futures markets. Saying that the regulators have been dragging their feet on setting speculation limits in the market, the legislation would set a 14-day deadline for the Commission to implement position limit rules to prevent allegedly excessive speculation by Wall Street traders in futures markets.
"We need to take decisive action now to stop speculators who are driving up [gasoline] prices for all of us at a time we can least afford it," said Sen. Ben Cardin (D-MD), one of the co-sponsors of the legislation.
"The CFTC has the power to stop this excessive speculation but has been dragging its feet. This legislation would direct the CFTC to take immediate action to reduce unnecessary speculation and give families some relief at the pump," said Sen. Amy Klobuchar (D-MN), also a co-sponsor. The bill, which was sponsored by Sen. Bernie Sanders (I-VT), has six co-sponsors, all Democrats.
The CFTC needs to "set position limits on speculators like it was mandated to do in the [Dodd-Frank] Wall Street Reform law. The legislation we are introducing today would force the Commission to take that action," said Sen. Al Franken (D-MN).
The recent surge in crude oil prices is widely attributed to speculators that control more than 80% of the energy futures market, according to Sanders. The oil prices have in turn pushed up the price of gasoline, which stood at a national average of $3.84/gallon on Tuesday.
The Senate legislation calling on the CFTC to use its emergency powers is identical to a bipartisan bill that overwhelmingly clear the House by a vote of 402-19 during a similar crisis in 2008, Sanders noted.
In other CFTC-related action last week, the agency voted out a final rule that will "democratize the markets" by broadening access to real-time central clearing, according Gensler. The rule is designed to bolster competition in the multi-trillion-dollar swaps market and help commercial customers by providing hedging opportunities with lower risk and volatility.
The rule, which is a package of four proposals initiated under the Dodd-Frank financial reform law, cleared the Commission by a 4-1 vote, with Commissioner Scott O'Malia the sole dissenter. The Commission action came as gasoline prices were spiraling upward to $4.00/gal. and above, even before the summer driving season, amid cries that excessive commodities speculation was partly to blame.
"The commission sent a loud message to Wall Street: no more dark markets and no more predatory behavior," said Dennis Kelleher, CEO of Better Markets, a market reform advocacy group. "This rule will enable many businesses to compete in clearing swaps, rather than just the five big banks that now control 96% of the derivatives business in the United States...and protect taxpayers again from picking up the tab on another financial crisis."
The final rule addresses documentation between a customer and a futures commission merchant (FCM) -- such as Goldman Sachs and JP Morgan -- that clears on behalf of the customer; the timing of acceptance or rejection of trades for clearing by derivatives clearing organizations (DCO) and clearing members; and clearing members risk management for swap dealers (SD), major swap participants (MSP) and FCMs that are clearing members. DCOs would guarantee the obligations of both parties in a transactions, Gensler said.
With respect to clearing documentation, the regulations prevent agreements that would:
The rules further would require an SD, MSP and FCM to submit swaps for clearing to a DCO "as soon as technologically practicable after execution but no later than the close of business on the day of execution." This essentially calls for clearing to be done as close to real-time as possible. Swaps that are not subject to mandatory clearing, such as those used by end-users to mitigate their commercial risk, "must be submitted for clearing to a DCO not later than the next business day after execution of the swap, or the agreement to clear, if later than execution," the agency said.
"This rule will foster bilateral clearing arrangements between customers and their FCM. The rule will promote competition in the provision of clearing services and swap liquidity to the broad public by limiting one FCM or swap dealer from restricting a customer or counterparty access to other market participants," Gensler said.
The staff recommendations would provide an "appropriate nudge to the market to embrace the change to clearing even more quickly than it has," said Commissioner Mark Wetjen. The market would be required to comply with the rule by Oct. 1, according to Gensler. However, compliance could be later for SDs and MSPs if the agency has not defined the entities by that date.
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