The following are highlights from a U.S. Commodity Futures Trading Commission hearing on Thursday that introduced rules for swap execution facilities, and limits for speculative positions held by commodity traders.
It was the eighth meeting the CFTC has held as part of a broader push by the agency to implement rules to overhaul the $600 trillion over-the-counter swaps market under the Dodd-Frank financial law enacted in July.
Speakers at the hearing include Chairman Gary Gensler and commissioners Michael Dunn, Jill Sommers, Bart Chilton and Scott O'Malia.
GENSLER ON WHEN CFTC WILL RETURN TO POSITION LIMITS:
I think it will be when this commission takes action, but it is pending business in front of commission right now. All I did was adjourn the meeting.
GENSLER ON POSITION LIMIT DELAY:
I chose similarly last week. I think its just appropriate to let this one ripen a bit more. I think it's quite apparent there's support for details of a proposal from a number of commissioners, but as Commissioner Chilton raised what do we do in the pendecy, the time lag between when a rule is implemented.
CHILTON ON POSITION POINTS:
These great accountability levels ain't so great. They may serve some important purpose, but they're hardly mandatory position limits and they're hardly position points that I'm talking about, that once you get above a certain level we seek the additional information, we figure out what the net aggregate is and there are things we can do ... above and beyond the exchange.
CHILTON ON CFTC AUTHORITY UNTIL LIMITS IN PLACE:
If they are above this level, there are certain steps that the agency may take if they deem it appropriate to get the trader down. We can jaw bone them. We can take a vote to do something else. They're all sorts of things that the commission can do, one of them is working with the exchange to get the trader down.
We currently have the ability, if we deem it appropriate, to ask the trader to reduce below that position point level.
CFTC GENERAL COUNSEL DAN BERKOVITZ ON POSITION LIMITS:
We believe the commission does have ample legal authority to adopt the position limits as proposed on a phased implementation schedule.
Generally, as a matter of administrative law, the administrative procedure act ... provides agencies with reasonable leeway in the manner and issuance, timing and implementation of agencies' rule. This is particularly true in a case such as this where there are complex technical issues involved in rule.
CFTC'S BERKOVITZ ON POSITION LIMIT FORMULAS:
The commission could by rule establish the formula. The formula would specify how the numerical limits would be calculated based on the data, what we would do with that data, so people would have notice and opportunity for comment on the formula and the rule under consideration.
Then when the data comes in, we would just crank the data through the formula and the limits would be established.
O'MALIA ON SEFS PROPOSAL AND BLOCK TRADES:
I want to make sure that through electronic trading we're checking the box, and we're getting pre-trade transparency to the absolute extent we can. We also have work to make sure we get on exchange.
Just to say 'well I'm sorry man put it on the block,' that doesn't give us the transparency we need on either factor. It doesn't promote on exchange and it doesn't promote pre-trade transparency. I don't want that to be a useful cop-out. I want to put as much as we can on the exchange and therefore I believe we must have flexible venues for exchanges.
SOMMERS ON SEFs AND WORKING WITH SEC:
I'm specifically more concerned about them (SEC) allowing any type of system and not being as restrictive as we are being on the definition of a SEF.
How do we deal with that when the industry will have two different standards?
RIVA SPEARS ADRIANCE, WITH CFTC, ON WORKING WITH SEC ON SEFS:
We don't know where they are going to end up.
They are still in the process of working out a lot of details.
I don't know what their final rule-making will be but we certainly know that they are dealing with some different issues than some of the issues that we're dealing with.
GENSLER ON SEFS PROPOSAL:
I think it fulfills Congress' mandate to have rules with regard to SEFs that promote transparency through the trading of swaps on these things called swap execution facilities. The meaning that Congress gave to it is that there be transparency and also that there would be flexibility. I think this proposal does that.
It will afford market participants the ability make firm bids or offers, if they choose to.
O'MALIA ON POSITION LIMITS:
I am supporting today's release of the proposed rulemaking regarding position limits.
Delay is preferable to error.
Without specific swaps data, we have no ability to claim we are applying enforceable limits without understanding the full size of the market. And this is something the Commission ought not be held accountable for.
While the proposal meets the mandates of the Dodd Frank Act, this proposal still suffers from significant flaws in its complexity, and the likelihood of achieving an end state of controlling excessive speculation remains in question.
GENSLER ON POSITION LIMITS:
I support the proposed rulemaking to establish position limits for physical commodity derivatives.
The CFTC does not set or regulate prices. Rather, the Commission is directed to ensure that commodity markets are fair and orderly to protect the American public.
This plan would ensure sufficient market liquidity for hedgers as well as efficient price discovery.
SOMMERS ON POSITION LIMITS PROPOSAL:
Today we do not have the data we need to effectively set position limits. Moreover, in the absence of any data, the limits that we set will be completely unenforceable.
I think it's bad policy to promulgate regulations that are not enforceable.
SOMMERS ON SEFS PROPOSAL:
It also requires that to be registered as a SEF, an applicant at a minimum must provide market participants with the ability to post both firm and indicative quotes on a centralized electronic screen accessible to all market participants who have access to the swap execution facility.
In my view this provision is not mandated by Dodd-Frank and may limit competition by shutting out applicants who wish to offer (Request For Quote) systems without this type of functionality.
CHILTON ON POSITION LIMITS TO REUTERS TELEVISION:
This is going to help us ensure these markets are efficient and effective and devoid of fraud abuse and manipulation.