COLUMN-Two paths to failure on Dodd-Frank
(Scott McCleskey is a managing editor for the ThomsonReuters Governance, Risk and Compliance unit. The views expressed are his own)
By Scott McCleskey
NEW YORK, Feb. 14 (Complinet) – With all the chest-thumping about U.S. financial reform last year, you would suppose that the regulatory authorities responsible for implementing the provisions of the Dodd-Frank Act would now have the political wind at their back.
This is particularly the case given the tight deadline for most of the provisions — on or before the July 21 anniversary of the Act’s enactment. You would be wrong. Both sides of the aisle in Congress have taken or threatened steps which only serve to undermine the process of regulatory reform and leave the market with all the costs and none of the benefits of reform. (more…)
ANALYSIS-CFTC speculation limits may pass quietly, unchanged
By Christopher Doering
WASHINGTON, Dec 17 (Reuters) – New U.S. rules to limit speculation in commodity markets could move forward quickly, and with few alterations, after objections by the measure’s most vocal supporter unexpectedly delayed a key vote.
Gary Gensler, head of the U.S. Commodity Futures Trading Commission, abruptly postponed a vote on Thursday to open proposed new position limits to public comment, evidence of mounting pressures internally as the agency implements dozens of rules meant to make markets safer and more transparent.
The agency must carefully balance the laws it is required to implement as part of the sweeping Dodd-Frank financial overhaul with the opinions of its five commissioners, who disagree on how they should get there.
Gensler has managed to maneuver around the two Republican commissioners who have several times voted against releasing new rules, concerned they could damage the market. This week he pushed forward with a plan to set up special exchanges to trade swaps after delaying a vote last week due to objections.
He faced concerns from the opposite corner on Thursday — Bart Chilton, a Democrat and most ardent supporter of limits, who argued that the two-part approach would leave markets unprotected from rampant speculation for too long.
Those who follow the CFTC believe Chilton will eventually support releasing the position-limit plan for 60 days of public comment.
FACTBOX-CFTC to-do list for implementing reforms
Nov 22 (Reuters) – The U.S. Commodity Futures Trading Commission faces the mammoth task of writing detailed regulations to implement reforms passed by Congress giving the agency oversight of the $600 trillion over-the-counter derivatives market.
Working from a list of 30 topic areas, the agency may end up writing 50 to 60 regulations, CFTC Chairman Gary Gensler has said.
The CFTC hopes to unveil the first drafts of most of the proposed rules by the end of the year to allow time for public comment and revisions before its July deadline for final regulations. Some rules have earlier deadlines.
Regulators have held hundreds of meetings with industry players as they consider the details. For a full list of meetings, see: http://r.reuters.com/hum65p
Below is a list of rule-making areas for the CFTC: (more…)
ANALYSIS-Study casts doubt on traders’ ‘raison d’etre’
By Herbert Lash
NEW YORK, Oct 12 (Reuters) – A new study about May’s “flash crash” casts doubt on two basic premises of high-frequency traders: that they help markets function properly by providing liquidity and that they smooth out price volatility.
High frequency traders have pointed with glee to the fact a mutual fund company, identified as Waddell & Reed Financial Inc, helped trigger the steep market plunge on May 6, as outlined by U.S. regulators in a report almost two weeks ago.
Yet the new study by staff of the Commodity Futures Trading Commission to be unveiled on Tuesday not only gnaws at the service high-frequency traders claim to provide but says their response to that day’s slide sparked greater volatility. (more…)
OPINION-The heavy lift of harmonization-CFTC’s Chilton
–The author is Bart Chilton, a commissioner at the U.S. Commodity Futures Trading Commission. The opinions represent the view of the author and not that of Reuters.
By Bart Chilton
Now that the U.S. has approved the largest financial regulatory reform ever undertaken, it’s time for other nations to join in to ensure more efficient, effective market systems. Here is what we know: free markets without sufficient sideboards led to the global economic collapse.
Banks moved away from traditional lending and into exotic mortgages and foolhardy bets — like naked credit default swaps — and ultimately the American taxpayer was left with the bill for bailing out large institutions previously thought of as too big to fail.
Some speculators used futures and derivatives markets like private playgrounds, contributing to record highs in commodity prices in 2008. Free markets are good, but rational free markets with appropriate oversight are much better (and safer).
On Sept. 15, the European Commission (E.C.) issued a legislative proposal for regulating over-the-counter (OTC) markets that looks strikingly similar to the new U.S. law. Staffs at the U.S. Commodity Futures Trading Commission and the E.C. Financial Markets Infrastructure office have been working closely on ways to make our two sets of laws consistent.
Such communication between regulators at the international level is critically important in the brave new world of global electronic markets.
COLUMN-Cocoa’s rise and fall puts spotlight on FSA: John Kemp
– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, Sept 15 (Reuters) – Cocoa’s stunning rally and equally spectacular bust over the last five months provides compelling evidence that large positions, especially in contracts close to delivery, influence futures prices, and that regulators should develop effective position limits to ensure market prices reflect supply-demand fundamentals and not the impact of dominant positions.
Britain’s Financial Services Authority (FSA), which regulates commodity markets, continues to insist there is no evidence large positions, either singly or collectively, influence futures prices, most recently in a position paper published in December 2009 (http://www.fsa.gov.uk/pubs/other/reform_otc_derivatives.pdf).
The FSA has rejected calls to follow the U.S. Commodity Futures Trading Commission (CFTC)’s lead in imposing position limits on commodity derivatives. It insists that London’s “position management” approach is more flexible and effective.
“Moving away from a regime which is flexible and established, to a different and more rigid system would imply there is an identifiable problem with the current regime. We have seen no evidence of this,” according to the FSA.
Although the article is focused on the FSA, even the CFTC’s powers and policies are far from a preventative measure against excessive positions on futures markets, including cocoa. Fundamentally, it is index traders which are behind the upward pressure on prices. Index traders predominately enter swap agreements with swap dealers such as investment banks, and these swap dealers then hedge their risks in futures markets – and are exempt from positions limits in both the US and the UK. Swap dealers remain bona fide commercial hedgers, and the speculators behind the swap deals effectively escape regulation.
COLUMN-Gensler on brink of position-limits victory: John Kemp
– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, June 25 (Reuters) – U.S. Commodity Futures Trading Commission (CFTC) Chairman Gary Gensler appears to be on verge of achieving a big victory in his battle to impose stricter position limits on major energy futures contracts.
Back in January, Gensler unveiled proposals for tough new limits on futures positions in U.S. crude, natural gas, gasoline and heating oil. Unlike previous limits set by exchanges, these would be set by the Commission itself and would aggregate all positions in economically equivalent futures and options for a particular commodity.
The proposals were designed to limit exemptions for firms seeking to hedge financial rather than physical exposures and largely restrict financial and physical hedgers from also running speculative positions.
Finally, the proposals contain strict new account aggregation procedures that would cumulate positions based on a minimum 10 percent equity ownership and largely end the present safe harbour for independent account controllers.
Push-back against the proposals has been fierce. The U.S. Futures Industry Association (FIA) and many major swap dealers have argued the CFTC lacks statutory authority to impose limits unless it finds they are necessary to “diminish, eliminate or prevent” the burden imposed on interstate commerce by excessive speculation.
COLUMN-FSA coffee case heralds commods crackdown: John Kemp
LONDON, June 2 (Reuters) – The Financial Services Authority’s (FSA) decision to fine a London coffee broker 100,000 pounds ($146,400) and ban him from working in the financial services industry marks a significant toughening in the market abuse regime for commodities.
The banning order on Andrew Kerr marks the first successful action for market abuse in commodity markets. Kerr is accused of helping a client execute large orders during a period in which reference prices were set based on a volume-weighted average. It was a deliberate move to influence market prices in the run up to an option expiry.
While Kerr’s behaviour was unusually blatant, and unfortunately for him captured on tape in unguarded language, using large volume trades to support or batter market prices close to daily or option settlements is common practice across commodity markets.
It has been tacitly supported by much of the industry as well as the regulator. So the decision to make an example of Kerr suggests a marked tightening of the rules, or at least the way they are implemented.
LOOPHOLE IN EU REGULATIONS
I have written before that the problem stems from a conflict at the heart of the EU’s Market Abuse Regime.
The main directive (EU Directive 2003/124/EC as transposed into UK law at Section 118 of the Financial Services and Markets Act) warns about potential abuse resulting from trading in substantial volumes affecting the price of a financial instrument; large orders in a concentrated time span causing price movements that are subsequently reversed; and orders around a specific time when reference prices, settlement prices and valuations are calculated that an effect on those prices or valuations.
COLUMN-What’s in a word? Senate battle on derivatives: John Kemp
– John Kemp is a Reuters market analyst. The views expressed are his own –
By John Kemp
LONDON, May 10 (Reuters) – May or shall. Even one small word can make a big difference. Lobbyists for financial services firms and officials from the Commodity Futures Trading Commission (CFTC) and the U.S. Treasury are sparring over a single word in the derivatives reform legislation being considered by the U.S. Senate.
At issue is the Commission’s authority to impose position limits on major energy contracts.
The Commission believes it has all the authority it needs to impose limits on exchange-traded energy contracts under Section 4a of the Commodity Exchange Act. It is currently asking Congress to extend that authority to over-the-counter (OTC) markets and derivatives traded on foreign exchanges so it can impose aggregated limits.
By contrast, industry representatives insist the Commission cannot act because it has made no factual finding that limits are “necessary” to diminish, eliminate or prevent speculation — or even that excessive speculation is a real threat to big and liquid energy markets.
The industry has asked the CFTC to postpone further rule-making until the outcome of the congressional debate is known.
PREVIEW – Odds stacked against CFTC metals position limits
By Frank Tang and Christopher Doering
NEW YORK/WASHINGTON, March 23 (Reuters) – The top U.S. futures regulator, which has struggled to gain support for a plan to curb concentration in energy markets, could face even tougher resistance on Thursday as it considers whether similar provisions are needed for metals.
The Commodity Futures Trading Commission will hold a day-long hearing to determine whether it needs to write a rule to create speculative position limits for gold, silver and copper markets to prevent price manipulation.
Commissioners will hear from metals markets players who oppose position limits and are expected to argue that limits will drive trade to unregulated or overseas markets.
A group of gold and silver “bugs” who believe governments and banks artificially depress precious metals prices are expected to ask the commission to prevent price manipulation in metals markets.
Bart Chilton — one of five CFTC commissioners and the most outspoken in favor of position limits across all commodities of finite supply — tamped down support for metals curbs ahead of the hearing, but said he remained optimistic.
“At this point I don’t think there is support on the
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