CFTC Open Meeting, October 18, 2011
|Interim and Final Rule||VACATED BY COURT ORDER||Re-proposed Rule Issue||Comment Deadline (reopen February 26, 2015)|
|November 18, 2011||September 28, 2012||November 5, 2013||March 28, 2015|
|Final Rule Issue||Effective Date||Compliance Date|
|October 18, 2011||January 9, 2012||May 7, 2012|
- Final Rule on Derivatives Clearing Organization General Provisions and Core Principles;
- Final Rule on Position Limits for Futures and Swaps; and
- Consider a Notice of Proposed Amendment to Effective Date for Swap Regulation.
Meeting Summary and Links to Related Documents
- The proposed amendment to the effective date for swap regulation passed 5-0. There was general agreement among commissioners that, as definitional rules have yet to be finalized or effective, an extension of the July 14, 2011 Effective Order. Relief will be extended until July 16, 2012, or when definitional rules become finalized and effective.
- The DCO provisions final rule passed 3-2, with Sommers and O'Malia voting against the rule (see commissioner statements below).
- The position limits final rule passed 3-2, with Sommers and O'Malia voting against the rule (see commissioner statements below).
Chairman Gary Gensler; whose statements include:
- Support for the position limits rule, saying, "when the CFTC set position limits in the past, the agency sought to ensure that the markets were made up of a broad group of market participants with no one speculator having an outsize position. At the core of our obligations is promoting market integrity, which the agency has historically interpreted to include ensuring that markets do not become too concentrated."
- "The final rule fulfills the Congressional mandate that we set aggregate position limits that, for the first time, apply to both futures and economically equivalent swaps, as well as linked contracts on foreign boards of trade. The final rule establishes federal position limits in 28 referenced commodities in agricultural, energy and metals markets."
- "We are seeking additional comment as part of an interim final rule on these spot month limits with regard to cash-settled contracts."
- Support for the DCO rules, saying, "when customers don’t clear their transactions, they take on their dealer’s credit risk. We have seen over many decades, however, that banks do fail. Centralized clearing protects all market participants by requiring daily mark to market valuations and requiring collateral to be posted by both parties so that both the swap dealer and its customers are protected if either fails. It lowers the interconnectedness between financial entities that helped spread risk throughout the economy when banks began to fail in 2008."
Commissioner Scott O'Malia, whose statements include:
- The position limits rulemaking will form the foundation for Commission surveillance of the physical commodity markets, whereas the DCO rulemaking will form the foundation for Commission oversight of the financial integrity of market transactions. That is why I am particularly disappointed with both rulemakings. Both rulemakings rely on one fundamentally flawed assumption – namely, that the Commission, in nearly all circumstances, knows best and can substitute its judgment for that of exchanges and DCOs, despite the complexities of the futures - and now swaps - markets. As I will further explain, such assumption leads to regulations with substantial costs and little corresponding benefits. Such assumption is also difficult to justify from an evidentiary and statutory perspective.
- Regarding position limits, O'Malia states, "Today’s rule represents the Commission’s desire to “check the box” as to position limits. Unfortunately, in its exuberance and attempt to justify doing so, the Commission has overreached in interpreting its statutory mandate to set position limits...For commercial hedgers this rule puts them on the defense immediately and will keep them scrambling to (i) justify, and perhaps to alter, their hedging strategies and (ii) comply with the extraordinarily complex aggregation and hedging limitations."
- O'Malia highlights two concerns with the DCO rule:
- the $50 million capital requirement, and
- five-day minimum liquidation time and added margin requirement.
- O'Malia goes on to explain the repercussions stemming from the 5-day margin requirement for certain swaps, as they relate to DCM Core Principle 9 ("the 85/15 percent rule"). The rule, in this context, may stifle competition.
- Additionally, O'Malia submitted "statements of dissent" for the final rules on position limits and DCOs. These statements can be found HERE.
Commissioner Michael Dunn, whose statements include:
- Dunn began his comments by offering several summary statistics regarding the economic fallout from the recession following the financial crisis of 2008, but stated, "none of this was a result of problems with the regulated futures markets."
- "No one has proven that the looming specter of excessive speculation in the futures markets we regulate even exists, let alone played any role whatsoever in the financial crisis of 2008. Even so, Congress has tasked the CFTC with preventing excessive speculation by imposing position limits. The law is clear, and I will follow the law. However, as Commissioner at the CFTC, I think it is important to let the public know what may happen once we implement position limits."
- "After we implement position limits, in all likelihood, the prices of heating oil and gasoline will not drop precipitously as some have strongly suggested. Airline tickets will not be cheaper and the food you buy at the grocery store will be the same price. Investments in precious metals will continue to rise and fall unpredictably."
- Finally, Dunn acknowledged that, in exchange for supporting the position limits rule, he requested several assurances from the staff and Chairman Gensler be put into the public record. These assurances included a willingness to revisit the issue to correct ant unintended consequences such as a negative impact on legitimate business activity. Specifically, Dunn requested assurances that certain "anticipatory hedges" would constitute a bona fide hedge.
Commissioner Jill Sommers, whose statements include:
Regarding the DCO proposal:
- "These rules are needlessly prescriptive and go beyond what is required by the statute. Our registered DCOs have a fantastic track record of protecting their own financial safety and soundness and have proven themselves, even during the financial crisis, to be excellent at managing margin and risk. We should allow them to continue to do so without imposing unnecessary and inflexible rules, regulations, and restrictions upon them."
- "Swaps that are exchange traded and cleared will likely have a similar risk profile as exchange traded futures and options. We should not be creating a separate regulatory regime for economically equivalent products. I believe this approach will not stand the test of time and will have to be re-thought as the market evolves."
- "The fact that we are allowing letters of credit to be used as initial margin for futures and not for swaps is an example of this thinking – and is a distinction that is not legally or factually justifiable."
Regarding the position limits proposal:
- "I have had concerns all along about the particular application of the limits in this rule, compounded by the unnecessary narrowing of the bona-fide hedging exemptions, beyond what was required by the Dodd-Frank Act."
- "This final rule abandons important and long-standing Commission precedent without justification or reasoned explanation, by merely stating 'the Commission has . . . expanded the list of enumerated hedges.'"
- "I have always believed that there was a right way and a wrong way for us to move forward on position limits. Unfortunately I believe we have chosen to go way beyond what is in the statute and have created a very complicated regulation that has the potential to irreparably harm these markets."
Commissioner Bart Chilton, whose statements include:
- Regarding position limits, Chilton says, "while I'd have an even tougher rule in many respects if I were the only author, this is nonetheless a very strong, needed and imperative rule to ensure more efficient and effective markets devoid of fraud, abuse and importantly, manipulation. This rule balances the needs of consumers and market participants alike."
- "Exemptions to limits will from here on out be approved by the Agency, not the exchanges, and under strict guidelines. A bona fide hedge will truly be a bona fide hedge."
- "this rule will bring all derivatives within the Commission’s jurisdiction—futures and swaps—the formerly dark OTC markets—under the same position limits. This brings needed transparency and accountability to markets that were part and parcel to the economic meltdown in 2008."