While the Commodity Futures Trading Commission (CFTC) works its way through the regulatory process to set position limits on over-the-counter (OTC) derivatives trading, “there are things we can do right now, that we can implement in January if necessary,” to rein in an out-of-control market, Commissioner Bart Chilton said in testimony before a congressional committee Wednesday.
There are ways the Commission “could set a price point, a level at which we would have tightened regulatory oversight,” Chilton said. That oversight might involve “a special call for swaps data, to see where the positions are netted. And if traders are actually above the certain position point, then use all our authorities, our emergency authorities, our trading authorities, working with the exchanges, ICE [IntercontinentalExchange] and CME [CME Group], to get their net positions down, maybe in swaps, maybe in options, maybe in futures.”
The CFTC is expected to propose a rulemaking Thursday to place position limits on front-month transactions first, to be followed up after more data is gathered by limits on all months’ positions. Since any proposal would require a 60-day comment period, followed by staff consideration of possibly thousands of comments, even the spot month rule would not likely be effective until early spring.
Since the agency already has front-month position limits on commodities traded on the futures market, it has a history on which to base an extension of the limits to the OTC market. Republican congressmen on the House Agriculture Committee’s subcommittee on general farm commodities and risk management argued, however, that Commission action on all months’ limits should await collection of further data on the extent of the market.
Chairman Gary Gensler said the CFTC could, however, set a formula now and add the numerical input to the formula when more data on the actual size of the market is available. The Commission is working on a separate rule calling on large traders to submit extensive swap position data, but that rule has yet to be finalized.
There also were comments from industry witnesses at the congressional hearing as to whether different classes of speculators such as index funds and automated block trading would get different treatment. Jim Collura, representing the New England Fuel Institute and end-users in the Commodity Markets Oversight Coalition, said he expected to see different regulation for index funds compared to traditional market speculators.
The Dodd-Frank Financial Reform Act requires the CFTC to place limits on the number of commodity futures, options and swap contracts that any one speculative trader can hold in all venues at a given time.
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