A divided Commodity Futures Trading Commission (CFTC) Thursday voted out a final rule establishing internal business conduct standards to shield customers from the risks associated with swap dealers (SD), as well as a new proposal on block trades.
During the meeting commissioners vented their growing frustration both with the pace of the rulemaking process and the content of some of the rules being adopted.
The final rule on business conduct standards cleared the Commission by 3-2, with, as has come to be expected, Republican Commissioners Jill Sommers and Scott O’Malia dissenting. The proposed block rule, which passed by a similar margin, seeks to establish minimum block sizes for large notional off-facility swaps and block trades, while protecting the identities of parties to swap transactions.
The conduct standards rule is a collection of five CFTC proposals that establish:
This “sets up a sort of ‘Good Housekeeping’ standard for everybody to operate by,” said Commissioner Bart Chilton.
O’Malia said he planned to send a letter to the Office of Management and Budget commissioner requesting an independent review of the rule to determine whether it fully complies with President Obama’s executive order, which called on agencies to clean house of costly regulations.
Sommers questioned the soundness of the rules being adopted by the CFTC. “I have been hopeful over the past year that things would change when we started finalizing rules, and especially the rules that are so integral to the new regulatory framework, but things have not changed. I am no longer optimistic; I do not believe that these rules have a chance of withstanding the test of time, and instead believe that this Commission will be consumed over the next few years using our valuable resources to rewrite rules that we knew, or should have known, would not work when we issued them,” she said.
“I am most disturbed…by the walls we are erecting on communications between the trading and clearing units of swap dealers and affiliated FCMs…Rather than protecting customers, I fear the rules will increase their costs and create needless inefficiencies for those looking for full-service options.”
While supporting both rules, Chilton urged the agency to move forward on implementing the position limit rule, which seeks to curb market speculation by restricting the number of contracts that a trader can hold.The final rule, which the CFTC adopted in October, sets two types of speculative limits: spot-month position limits and non-spot month limits. (see NGI, Oct. 24, 2011). The limits on spot-month contracts (contracts where product is delivered in the current month) would take effect 60 days after the term “swap” is defined under the Dodd- Frank Wall Street Reform and Consumer Protection Act.
Limits would be placed 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. The rule applies to futures and options contracts on these commodities and swaps, futures and options that are economically equivalent to these contracts.
“I’m sorely disappointed that it has been five months since the Commission voted on the rule, and nothing — nothing — has moved forward to begin to impose position limits and address excessive speculation. I understand all the arguments about needing data [on swap market positions before limits can be implemented], but I’m tired — and the American public is tired — of waiting for a swaps definition rule to be promulgated in order for position limits to be effective. There are things we can and should do now, and today I’m calling for them to be done,” he said.
“Specifically, in addition to imposition of spot month limits in the 28 referenced contracts in the futures and options on DCMs [Designated Contract Markets, such as Nymex], I am calling for a rule withdrawing the [existing] ability of exchanges to utilize position accountability levels in non-spot months for these contracts, and effectively setting limits in non-spot months,” Chilton said.
Progress on implementation of the Commission’s rule on position limits has been stalled until the agency can agree to a final rule on defining “swaps” and the entities, SDs and MSPs (see NGI, May 2, 2011). “I know there may be intractable issues. If that remains the case that would slow down the rule, put those issues on a separate track and get out the main rule now. I am requesting that the agency move on one of these two paths in order to get position limits in place.”
CFTC Chairman Gary Gensler indicated that the CFTC will address the swaps definition in April, and the definitions for SD and MSP entities “very shortly.” But he added, “We’re only going to do them when we get it right.”
The Commission had expected to take up a final rule on SD and MSP definitions at the meeting, but the Securities and Exchange Commission “wasn’t ready” to move forward on the final joint rule.
Energy trade groups are concerned that the CFTC is moving toward a broad definition of SDs that could subject end-users and hedge funds to greater scrutiny under the Dodd-Frank law.
In action on Capitol Hill, the House Financial Services Committee has voted out a bill (HR 1838) that would repeal a provision in the Dodd-Frank Act requiring major banks to conduct their trading of derivatives through affiliates.
The legislation, which was sponsored by Rep. Nan Hayworth (R-NY), cleared the House panel by voice vote. It would repeal Section 716 of Dodd-Frank, which bars banks from being swaps brokers or dealers, or conducting proprietary trading in derivatives. The large Wall Street banks objected loudest to the insertion of this prohibition in Dodd-Frank.
The fate of the bill in the House and Senate is uncertain. But even if it should clear Congress, President Obama has vowed to veto any attempt to repeal Dodd-Frank, which he signed into law in July 2010 (see NGI, July 26, 2010).
“During the debate over the Dodd-Frank Act, many experts, including Federal Reserve Chairman Ben Bernanke, former FDIC [Federal Deposit Insurance Corp.] Chairwoman Sheila Bair, and former Federal Reserve Chairman Paul Volcker, expressed concerns regarding Section 716,” Hayworth said.
“These experts warned that this Dodd-Frank provision actually increases risk by pushing swaps activities into entities that are not directly regulated by the FDIC and the Office of the Comptroller of the Currency. In addition to risk, significant additional costs are incurred capitalizing unnecessary new subsidiaries and affiliates; this money would be better spent on investment and job creation. HR 1838 will repeal the most onerous aspects of this provision while still prohibiting taxpayer bailouts,” she said.
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