Summary of the final rule, which will repeal and replace CEA Part 35, generally permitting the transaction of swaps in an agricultural commodity subject to all rules and regulations applicable to any other swap:
New Part 35 will permit the transaction of swaps in an agricultural commodity subject to all provisions of the CEA – and any rule, regulation, or order thereunder – applicable to all other swaps.
New Part 35 will also explicitly provide that swaps in an agricultural commodity may transact on a swap execution facility (SEF) and/or Designated Contract Market Regulation|designated contract market]] (DCM) to the same extent that any other swap may transact on a SEF and/or DCM.
On April 7, 2011, the CFTC and the SEC released a joint study on algorithmic derivatives descriptions. After conducting its analysis, which included meetings with industry leaders, regulators, and academics, as well as comments submitted by the public, the staff offered conclusions. more>
At an open meeting on January 20, 2011, the SEC finalized rules requiring an issuer of asset-backed securities (ABS) to "perform a review of the assets underlying the ABS and disclose information relating to the review." Rules regarding shelf eligibility conditions for asset-backed securities were re-proposed on July 26, 2011. On October 13, 2010, the SEC adopted an interim final temporary Rule 13Aa-2T concerning the reporting of security-based swap data. Also introduced at this meeting was a new proposed rule to "mitigate conflicts of interest at security-based swap clearing agencies, security-based swap execution facilities, and national security exchanges that post or make available for trading security-based swaps." more>
Among the provisions of the Dodd-Frank Act are several requirements affecting commodity trading advisors (CTAs), commodity pool operators (CPOs) and investment advisors to private funds. The Securities and Exchange Commission submitted a proposed rule on systemic risk reporting requirements for private fund advisers including hedge funds, CPOs and CTAs in February 2011; the rules became finalized in October 2011.
The Commodity Futures Trading Commission participated in the joint rulemaking with the SEC on the reporting requirements, and also proposed its own rules on certain compliance aspects for CPOs and CTAs. These rules were finalized in February 2012. more>
Among the provisions of the Dodd-Frank Act are several requirements affecting commodity trading advisors (CTAs), commodity pool operators (CPOs) and investment advisors to private funds. The Securities and Exchange Commission submitted a proposed rule on systemic risk reporting requirements for private fund advisers including hedge funds, CPOs and CTAs in February 2011; the rules became finalized in October 2011.
The Commodity Futures Trading Commission participated in the joint rulemaking with the SEC on the reporting requirements, and also proposed its own rules on certain compliance aspects for CPOs and CTAs. These rules were finalized in February 2012. more>
At an open meeting on May 10, 2012, the CFTC finalized rules, guidance and acceptable practices under Dodd-Frank Act that, among other things, amend Section 5 of the Commodity Exchange Act ("CEA") concerning designation and operation of contract markets, and add a new CEA Section 2(h)(8) to include the listing, trading and execution of swaps on designated contract markets. The rules were originally proposed on December 1, 2010. more>
At an open meeting on February 24, 2011, the CFTC proposed an interpretive order regarding disruptive trading practices. The proposal defines as disruptive any practice that:
violates bids or offers;
demonstrates intentional or reckless disregard for orderly execution; or
is of the character of, or is commonly known to the trade as, “spoofing” (bidding or offering with the intent to cancel the bid or offer before execution). more>
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act), named after Senate Banking Committee Chairman Chris Dodd and Chairman of the House Financial Services Committee Barney Frank, was signed into law by President Barack Obama on July 21, 2010. more>
On March 2, 2011, the Securities and Exchange Commission (SEC) proposed rules regarding incentive-based compensation arrangements under the Dodd-Frank Act. The regulation would require incentive-based compensation annual reports, enforce new compliance procedures and add a threshold of $50 billion for certain institutions. Final rules concerning shareholder approval of executive compensation and golden parachute compensation were adopted on January 25, 2011. more>
The Dodd-Frank Act requires most swaps to be traded on an exchange or on a similar system and then guaranteed by a clearinghouse, where the parties would be required to post collateral. However, the act allows the Secretary of the Treasury to make a final determination as to whether foreign exchange transactions should be granted an exemption from the Dodd-Frank definition of swaps. more>
The SEC meeting on June 22, 2011 finalized rules concerning amendments to the Investment Advisers Act of 1940, as well as registration exemptions for reporting by certain investment advisers. An SEC notice concerning investment adviser performance compensation regulation was published on May 10, 2011. The comment deadline for this proposal is July 11, 2011. more>
Section 753 of the Dodd-Frank Act gives the Commodity Futures Trading Commission (CFTC) and U.S. Securities and Exchange Commission (SEC) the authority to monitor and enforce "manipulative and deceptive" practices in the swaps, security-based swaps, and commodities markets. The rules are intended to mirror the SEC's Rule 10b-5, a powerful regulation used to combat fraud and manipulation in securities markets. more>
On September 10, 2010, the CFTC approved its final rules regarding off-exchange retail foreign exchange transactions. Although the rulemaking pre-dated the Dodd-Frank Act, once the Act was signed in July, 2010, the commission's forex rules, along with the forex rules of other regulatory authorities, became a part of Dodd-Frank. Under Dodd-Frank, the CFTC will have jurisdiction over retail foreign exchange transactions, except in the case of entities which fall under the authority of one of the following regulatory agencies ("Prudential Regulators"):
Office of the Comptroller of the Currency, Treasury (OCC);
Board of Governors of the Federal Reserve System (Fed);
Federal Deposit Insurance Corporation (FDIC);
Farm Credit Administration (FCA); and
Federal Housing Finance Agency (FHFA)
The Act requires that such rules include appropriate requirements with respect to disclosure, record keeping, capital and margin, reporting, business conduct, documentation, and any other standards or requirements as Federal regulatory agencies shall determine to be necessary. more>
In accordance with Title II of the Dodd-Frank Act, the FDIC is required to establish rules regarding the orderly liquidation in case of a default of a "covered financial company," which is defined as financial company that poses significant risk to the financial stability of the United States. The Act outlines the process for the orderly liquidation of such a covered financial company following the FDIC’s appointment as receiver and provides for additional implementation of the orderly liquidation authority (OLA) by rulemaking. more>
Position limits are intended to protect futures markets from excessive speculation that could cause unreasonable or unwarranted price fluctuations and are sometimes referred to as "speculative position limits", or "speculative limits". The Commodity Exchange Act (CEA) authorized the CFTC to impose limits on the size of speculative positions in futures markets. more>
CFTC Final Rule: Position Limits for Futures and Swaps
The SEC has issued two rule proposals regarding the security-based swap data repositories (SDRs) and the reporting and dissemination of swap data through Regulation SBSR. Neither rulemaking has been finalized. more>
The CFTC has issued rule proposals under Dodd-Frank regarding swap dealers (SDs) and major swap participants (MSPs) at six different meetings in 2010 and 2011. The issues discussed were: duties; registration; conflicts of interest; required compliance policies; reporting and recordkeeping; further defining “swap dealer,” “major swap participant” and “eligible contract participant”; business conduct standards, confirmation; confirmation, reconciliation and compression; swap trading relationship documentation; orderly liquidation termination; and margin requirements for uncleared swaps.
In late 2011, the commission began issuing final rules pertaining to SD/MSPs. Topics for which a final rulemaking has been issued can be found in the alert box at the top of the page. Summaries and links can also be found below. more>
Swap execution facilities (SEFs) were given life by the Dodd-Frank Act, which requires over-the counter (OTC) swaps to be cleared and traded on this new type of regulated platform. Any swap that clears must trade on an exchange or an SEF. This regulation has fallen under the jurisdiction of various regulatory agencies such as the CFTC and the SEC. Other agencies are also addressing swaps execution facilities such as the Financial Services Authority (FSA) and European Commission. more>
In accordance with the Dodd-Frank Act, the CFTC and the SEC, in consultation with the Board of Governors of the Federal Reserve System, have proposed rules and interpretative guidance under the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934 to further define the terms "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant," and "eligible contract participant."
Under Dodd-Frank, the SEC will have jurisdiction over "security-based" swaps, and the CFTC will have jurisdiction over all other swaps, except for a category known as "mixed swaps" which may have both security-based and non-security-based components. For mixed swaps, the two agencies will have joint oversight responsibilities.
Swaps definitions fall into two categories. "Entity definitions" detail which firms and individuals fall are considered to be subject to dealer and swap participant rules. "Product definitions" detail the types of transactions that are considered to be swaps, security-based swaps, and mixed swaps, and also which products may be exempt from agency oversight. more>
One of the provisions of the Dodd-Frank Act is an amendment to the Commodity Exchange Act that would prohibit swap transactions unless it were submitted to a Derivatives Clearing Organization (DCO) for clearing, or if the swap met one of the requirements for exemption. In separate meetings, the SEC and CFTC issued proposed rules regarding the process for review of swaps for mandatory clearing. more>
The document proposes which entities will be subject to the prohibitions, and explains the types of financial transactions that will be exempt from the bans. The proposal seeks comment from the public and market participants on 394 questions on such topics as definitions of banking entities, exemptions, types of activities covered under the rule, and compliance considerations. The deadline for public comment was originally set for January 13, 2012, but on December 23, 2011, the House Financial Services Committee requested a 30-day extension to February 13, 2012. The Dodd-Frank Act mandates that the rule become effective on July 21, 2012, followed by a two-year compliance transition. more>
At an open meeting on August 4, 2011, the CFTC approved its final rule on its whistleblower program. The rule maintains the “discretionary power” of the Commission with regard to the amount awarded to informants.
At an open meeting on May 25, 2011, the SEC issued its final rule under which the whistleblower, in order to be eligible, must "voluntarily provide the SEC with original information that leads to the successful enforcement by the SEC of a federal court or administrative action in which the SEC obtains monetary sanctions totaling more than $1 million.” more>
The European Securities and Markets Authority (ESMA) is an independent European Union regulatory agency that oversees European securities trading across all of the EU member states. ESMA was established on January 1, 2011, and replaces the Committee of European Securities Regulators (CESR). Steven Maijoor is currently the chairman of the European Securities and Markets Authority (ESMA); he was named to the position on January 13, 2011. more>
The Federal Deposit Insurance Corporation (FDIC) was created by Congress though the Glass-Steagall Act in 1933 in response the frequent bank failures of the 1920s and early 1930s. As an independent agency, the FDIC is charged with maintaining stability in the U.S. financial system by insuring deposits, supervising financial institutions and managing receiverships.
Additionally, one of the provisions of the Dodd-Frank Act required the FDIC to establish rules regarding the orderly liquidation of any systemically important financial company encountering a default. more>
As established under Title I of the Dodd-Frank Act, the Financial Stability Oversight Council (FSOC) provides, for the first time, comprehensive monitoring to ensure the stability of our nation's financial system. It was passed by the House Financial Services Committee on December 2, 2009 to put an end to “too big to fail” financial firms. It was created as a nine-member council, led by the Treasury secretary, to look out for systemic risks. The FSOC will subject to Fed oversight any nonbank financial companies whose financial distress would pose risks to the financial stability of the United States.more>
The Advisory Committee on Emerging Regulatory Issues was created on May 11, 2010, five days after the so-called "flash crash" on May 6, 2010, when a single trader mistakenly entered a "sell" order of CME Group's e-Mini S&P 500 futures worth $4.1 billion. The order triggered a frenzy of high frequency trading activity that briefly saw the Dow Jones Industrial Average break 700 points in a matter of minutes. While the market stabilized quickly once the error was discovered, the incident highlighted the potential liquidity problems associated with high speed trading. more>
The Financial Services Authority (FSA) is an independent non-governmental body that regulates the financial services industry in the UK. Established by Gordon Brown in 1997 when the Labour party came into power, the FSA was granted statutory powers by the Financial Services and Markets Act of 2000. The FSA is accountable to Treasury Ministers and, by extension, Parliament. The FSA receives no government funding and is financed by the firms it regulates. more>
Established by Title X of the Dodd-Frank Act, the Consumer Financial Protection Bureau (CFPB) will conduct rule-making and enforcement of consumer financial protection laws, promote financial education and monitor financial markets that affect consumers. Many parts of the Dodd-Frank Act relating to the CFPB are planned to go into effect on July 21, 2011. Treasury Secretary Timothy Geithner is charged with creating the CFPB. On September 17, 2010, Elizabeth Warren was named Assistant to the President and Special Advisor to the Secretary of the Treasury on the CFPB. On July 17, 2011, Richard Cordray was nominated as Director of the CFPB, having formerly served as head of the enforcement division at the agency. more>
The mission of the Commodity Futures Trading Commission (CFTC) is to protect market users and the public from fraud, manipulation, and abusive practices related to the sale of commodity and financial futures and options, and to foster open, competitive, and financially sound futures and options markets. more>
The U.S. Securities and Exchange Commission (SEC) is the U.S. regulatory agency charged with the oversight of securities markets and market participants in the U.S. Its mission is to protect investors, to maintain fair, orderly, and efficient markets, and to facilitate capital formation. Mary L. Schapiro is the current chairman of the SEC. more>
Summary of the final rule, which will repeal and replace CEA Part 35, generally permitting the transaction of swaps in an agricultural commodity subject to all rules and regulations applicable to any other swap:
New Part 35 will permit the transaction of swaps in an agricultural commodity subject to all provisions of the CEA – and any rule, regulation, or order thereunder – applicable to all other swaps.
New Part 35 will also explicitly provide that swaps in an agricultural commodity may transact on a swap execution facility (SEF) and/or Designated Contract Market Regulation|designated contract market]] (DCM) to the same extent that any other swap may transact on a SEF and/or DCM.
In accordance with the Dodd-Frank Act, the CFTC and the SEC, in consultation with the Board of Governors of the Federal Reserve System, have proposed rules and interpretative guidance under the Commodity Exchange Act (CEA) and the Securities Exchange Act of 1934 to further define the terms "swap dealer," "security-based swap dealer," "major swap participant," "major security-based swap participant," and "eligible contract participant."
Under Dodd-Frank, the SEC will have jurisdiction over "security-based" swaps, and the CFTC will have jurisdiction over all other swaps, except for a category known as "mixed swaps" which may have both security-based and non-security-based components. For mixed swaps, the two agencies will have joint oversight responsibilities.
Swaps definitions fall into two categories. "Entity definitions" detail which firms and individuals fall are considered to be subject to dealer and swap participant rules. "Product definitions" detail the types of transactions that are considered to be swaps, security-based swaps, and mixed swaps, and also which products may be exempt from agency oversight. more>
The document proposes which entities will be subject to the prohibitions, and explains the types of financial transactions that will be exempt from the bans. The proposal seeks comment from the public and market participants on 394 questions on such topics as definitions of banking entities, exemptions, types of activities covered under the rule, and compliance considerations. The deadline for public comment was originally set for January 13, 2012, but on December 23, 2011, the House Financial Services Committee requested a 30-day extension to February 13, 2012. The Dodd-Frank Act mandates that the rule become effective on July 21, 2012, followed by a two-year compliance transition. more>
Position limits are intended to protect futures markets from excessive speculation that could cause unreasonable or unwarranted price fluctuations and are sometimes referred to as "speculative position limits", or "speculative limits". The Commodity Exchange Act (CEA) authorized the CFTC to impose limits on the size of speculative positions in futures markets. more>
CFTC Final Rule: Position Limits for Futures and Swaps
The final rule establishes speculative position limits for 28 physical commodity futures contracts, and futures and swaps that are "economically equivalent" to those contracts. These include:
Grain and livestock futures (corn, wheat, oats, rice, the soy complex, milk, coffee, sugar, cocoa, cattle and hogs);
Energy (crude oil, heating oil, natural gas and gasoline; and
Metals (gold, silver, copper, platinum and palladium.
There are separate limits set for spot month (generally, 25 percent of deliverable supply), and non-spot-month (generally, 10 percent of open interest in the first 25,000 contracts and 2.5 percent thereafter). Open interest used in determining non-spot-month position limits will be based on futures open interest, cleared swaps open interest, and uncleared swaps open interest.
The cash-settled NYMEX Henry Hub Natural Gas contracts will be subject to a cash-settled spot-month position limit and an aggregate limit (extending across positions in both physical-delivery and cash-settled natural gas contracts) set at five-times the limit that applies to the physical-delivery NYMEX Henry Hub Natural Gas contract.
Economically Equivalent Definition
a “look-alike” contract, meaning it settles off of its referenced futures contract or contracts that are based on the same commodity for the same delivery location;
a contract with a reference price based on only the combination of at least one physical commodity price and one or more prices in the same or substantially the same commodity as the relevant underlying futures contract, provided that such a contract is not a locational basis swap;
an intercommodity spread contract with two reference price components; or
it is priced at a fixed differential to an underlying futures contract.
Implementation Timeline
The final rules call for a two-tiered implementation of position limits:
Spot-month limits will be effective sixty days after the term “swap” is further defined under the Dodd-Frank Act. The limits adopted at that time will be based on the spot-month position limit levels currently in place at DCMs, and be reviewed biennially, with a determination based upon deliverable supply.
Non-spot month limits for corn, wheat, rice, oats, cotton, and the soy complex, will become effective sixty days after the term “swap” is further defined under the Dodd-Frank Act. The effective date for all others will be determined after the commission monitors open interest for one year.
Exemptions for bona fide hedgers have been broadened to include certain anticipated merchandising transactions, royalties, and service contracts in the final rulemaking to reflect concerns by commercial firms.
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