In a letter to the Office of Management and Budget (OMB), Commodity Futures Trading Commissioner Bart Chilton Wednesday proposed that the agency be allowed to impose a targeted fee on transactions in the derivatives markets.
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 and the Securities and Exchange Commission are self-funded.
In 2011, Chilton opposed trader fees of all types and stripes, but he acknowledged that they were better than returning to the economic calamity of 2008 absent sufficient funding from Congress (see Daily GPI, Feb. 2, 2011). The proposed fee would pay for some of the agency’s additional responsibilities in overseeing the derivatives market under the Dodd-Frank Wall Street Reform Act.
For the past two years, President Obama has tried to ensure that the CFTC had adequate funding and requested $308 million for the implementation of 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.
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.
“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.
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