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CFTC Readies ‘Bullet-Proof” Rule on Speculative Limits
The Commodity Futures Trading Commission (CFTC) is expected to release within a few weeks a new and improved rule aimed at restricting excessive speculation in the swaps market, said CFTC Commissioner Bart Chilton last Wednesday.
Chilton also proposed last week that the agency be allowed to impose a targeted fee on transactions in the derivatives markets to help offset any shortfalls in the agency’s budget. Moreover, he agreed with the recommendations of three senators that the CFTC and FERC work more cooperatively to prevent manipulation in the energy markets.
The U.S. Court of Appeals for the District of Columbia Circuit last fall rejected the CFTC’s initial rule on restricting speculative trading, saying that the Dodd-Frank Wall Street Reform Act “clearly and unambiguously” requires the Commission to make a finding of necessity (excessive speculation) prior to imposing limits on the positions that one trader can hold. The rule was remanded to the CFTC for further consideration (see NGI, Oct. 1, 2012). The agency has since appealed the court decision, and is drafting a new rule.
The new speculation rule will be “similar” in some respects to the original rule, but “we’re going to make this sort of bullet-proof,” Chilton told a packed room of attorneys and energy executives at the annual conference of the Energy Bar Association in Washington, DC. “We are going…to get limits in place period. Congress wanted them; President Obama wants them; traditional market participants want them and I want them.”
The original rule, which was voted out of the CFTC in October 2011, established 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 New York Harbor Heating Oil (see NGI, Oct. 24, 2011).
“I am fully confident that we’ll be sued again [by opponents of position limits in the energy markets] because I think they don’t care if they win or lose. I think they’re just trying to run out the clock,” Chilton noted.
The Commission will also address the cost-benefit analysis of the new rule. “I think we did as good a job as we could” with the initial rule in analyzing the costs and benefits, Chilton said. “Hardly anybody responded to us” when the agency asked them how much position limits would cost them, “other than to say we don’t like this rule at all.”
In addition to a cost-benefit analysis, the rule that the CFTC is working on will seek to clarify the phrase “as appropriate” in Dodd-Frank, and “we may do some other things to tighten it up.”
The words “as appropriate” have appeared in statutes governing the CFTC’s authority to implement position limits for at least 40 years without challenge, until now. In fact, the CFTC used the authority of that exact line, complete with its “as appropriate,” to establish position limits on grain commodities decades ago. Even those who drafted Dodd-Frank later weighed in, saying they had intended for the language to explicitly instruct the CFTC to establish position limits “at levels that were appropriate.”
In a letter to the Office of Management and Budget (OMB), Chilton last Wednesday addressed another controversial issue. He proposed that the CFTC be allowed to impose a targeted fee on transactions in the derivatives markets to help fund the agency.
The CFTC is the only federal financial regulator that does not have some type of self-funding, “and given the austere budget atmosphere, it’s time to take a serious look at this issue for derivatives markets,” he wrote to OMB Director Sylvia Matthews Burwell. Both the Federal Energy Regulatory Commission (FERC) and the Securities and Exchange Commission are self-funded.
Chilton said in 2011 he opposed trader fees of all types and stripes, but he acknowledged that they were better than having to return to the economic calamity of 2008 absent sufficient funding from Congress (see NGI, Feb. 7, 2011). The proposed fee would pay for some of the agency’s additional responsibilities in overseeing the derivatives market under the Dodd-Frank Act.
For the past two years, the Obama administration has tried to ensure that the CFTC had adequate funding and requested $308 million to implement Dodd-Frank and to do all the new work associated with the regulation of the over-the-counter derivatives market. But last year the agency received only $205 million, and the figure has been cut to less than $200 million as a result of sequestration, Chilton said. The more lawmakers complain about how “crappy” Dodd-Frank is, the more they want to cut the budget, Chilton noted.
“There is simply too much to effectively oversee on our current budget. In addition, new technologies and trading methods [high-frequency traders] have resulted in vastly increased volumes, which also adds to the regulatory responsibility of the agency. [And] there is unprecedented malfeasance in the financial sector urgently requiring additional enforcement resources,” Chilton wrote.
He has proposed that a targeted transaction fee of 0.06 cent be assessed on non-hedging transactions (especially high-frequency trades) in the derivatives markets, which would result in approximately $300 million in funding for the agency. “And that does not include swaps, which would reduce the fee even further,” Chilton said.
“Some will yell that the sky is falling with this proposal. They will suggest that liquidity will dry up. Price discovery will be irreparably impaired. We’ll see migration to London or some other place. Really, do me a solid and save it. Get real. Take a penny, a red cent. Divide it into 100 different pieces…Then take six of those pieces. That’s all I’m suggesting…Really? It isn’t like six one-hundredth of a cent is somehow the tipping point. I’m not making light of it, but if folks leave markets due to that, they were looking for an excuse.”
“True end-users would not be assessed transaction fees. This would ensure that the markets’ fundamental purposes of pricing and hedging are not impaired and at the same time would not impair market liquidity,” he said.
In addition to providing more funding, the proposed transaction fee would “deter folks from entering into flash-in-the-pan, non-bona-fide trading. In other words, if you’re using our markets like a slot machine, you’re [going to] contribute to the oversight and enforcement services that need to be part and parcel to markets,” he said.
Responding to three senators’ recent recommendations for the CFTC and FERC to stop bickering over their jurisdictional boundaries, Chilton agreed. “We need to do a better job. I take the letter [from the the senators] seriously and we’re going to work on working better with FERC. To prove a point, I broke bread with a FERC commissioner” on Tuesday.
In a letter last Monday, Sens. Dianne Feinstein (D-CA), Ron Wyden (D-OR) and Lisa Murkowski (R-AK) called on the two agencies to execute a more robust memorandum of understanding (MOU) to resolve the ongoing dispute over their jurisdictions. “We do have an MOU and it is legally binding. We’ve had it since I’ve been at the Commission [in 2007],” Chilton said.
MOUs “are as good as the people [who] are there [in the agencies]…It really depends on the people. The one thing that you can do is agree to information-sharing and we have that, and that happens between the staff,” he noted.
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