The Commodity Futures Trading Commission (CFTC) plans to soon begin finalizing the proposed rules to oversee the multi-trillion dollar derivatives market in the United States, but it doesn't believe it will be able to complete its work by the July deadline set by Congress.
"In terms of timing of finalizing rules...we have been discussing dividing proposals into three broad groups" -- early group, middle group and late group, CFTC Chairman Gary Gensler told a Futures Industry Association conference in Boca Raton, FL, Wednesday. The rules would implement the financial regulatory reforms mandated by the Dodd-Frank Wall Street Reform Act, which was signed into law last July (see Daily GPI, July 22, 2010).
"We are hoping to take up the early group of final rules in the spring," he said. This group would include entity definitions; registration requirements for swap dealers and major swap participants; possibly the end-user exemption; large trader reporting rule; enforcement rules (such as the whistle blower rules and the anti-manipulation rule); and the fair credit reporting rule.
In addition "there are four broad clusters of rules, as well as a number of more specific rules, that may be included in the middle group," Gensler said. The first cluster includes rules relating to clearinghouses, such as risk management, financial resources; participant eligibility record keeping; and straight-through processing. The second cluster will include rules related to business conduct standards for swap dealers, both internal and external.
Gensler said the third cluster will include rules governing swap data repositories and swap data record keeping and reporting requirements. The fourth cluster will include regulations for trading platforms, such as designated contract markets, swap execution facilities and foreign boards of trade, as well as real-time reporting and block trading rules.
Also included in the middle group will likely be the controversial rule on establishing position limits to prevent excessive speculation in commodity markets. Gensler noted that the CFTC already has received more than 3,500 comments on the proposed rules. "It will take some time to consider, summarize and respond to all of the comments," he said. Gensler signaled that the agency will probably consider a final rule on position limits in the summer.
Speaking to a separate conference in Miami, FL, Tuesday, CFTC Commissioner Bart Chilton expressed strong support for position limits. "We were supposed to implement those limits in January, and I'm disappointed that we have not done so. If we had the desire, we could institute limits for the spot months in the over-the-counter [OTC] trading based upon the physical supply. We could put limits in regulated markets. We could have helpful limits in place that could guard against markets being adversely impacted by excessive speculation. We could do that now if we wanted. And, as you can tell, I want," he said.
"When I make the case for position limits, sometimes opponents say, 'won't we see market migration outside the U.S. if limits are in place?' It is a concern. Before the new law it was common for traders to jump into the dark, OTC pool to hide from regulation. Now that we're going to be regulating that pool, that won't be an option. Could traders go to other nations? Yes, if our limits are too restrictive, they could. That is why I have suggested that we err on the high side at first and then recalibrate as we go forward, and as other nations put rules and regulations in place," Chilton said.
Gensler said the late group will likely consist of the disruptive trading practices interpretive order, product definitions, capital and margin requirements in swap transactions, supervision and testing requirements and conforming rules. He said he does not expect the rules in this group to be considered until late summer or early fall.
"Congress gave the CFTC broad latitude in determining when final rulemakings would become effective. Congress specifically determined that no rule would go [into effect] less than 60 days after it is finalized. We may give market participants more time than that, however," Gensler said.
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