President Obama’s proposal “Financial Regulatory Reform: A New Foundation,” released June 17, packs a few punches for the futures industry. And some major proposals from the Commodity Futures Trading Commission (CFTC) on speculation limits for energy markets and capital requirements for futures commission merchants (FCMs) are creating a buzz.
Obama’s proposal calls for a “harmonization” of the CFTC and Securities Exchange Commission (SEC). The CFTC and SEC must make recommendations to Congress on how to eliminate differences “with respect to similar types of financial instruments that are not essential to achieving investor protection.” The two agencies must complete a report by Sept. 30. Otherwise, the matter will be forwarded to the soon-to-be created Financial Services Oversight Council. Some are concerned that the creation of additional agencies will not solve the problems that exist in the financial system.
“The proposal itself requires three coordinating agencies to make it work. That tells you there are too many agencies. The solution is basically holding things together with band-aids and tape. [What’s being said] is this is the best we can do given the current political landscape. That’s a very unfortunate approach,” says Gary DeWaal, general counsel at Newedge, adding, “It’ll be good at catching last year’s problems, but it won’t help catch the new problems.”
Former CFTC Chairman Philip McBride Johnson says the “harmonization” would “either deprive the SEC of its ability to tilt the scale in favor of investors (slowing the flow of capital) or bias the CFTC against major users of the markets (blunting short hedging) and defeating the very purpose why each of them exist. They have great purposes that could not survive in combined form.”
The proposal received mostly praise from exchange heads, however. Chicago Board Options Exchange Chairman Bill Brodsky says, “We are particularly pleased that the plan recognizes the need for greater coordination and harmonization of the SEC and CFTC, including streamlining the approval of new products and rule filings.” In a statement, CME Group called the proposal “a significant step towards restoring confidence in the integrity of financial markets.”
The proposal also requires standardized OTC derivatives to be centrally cleared and executed on exchanges and requires transparency for all OTC trades and positions through recordkeeping and reporting requirements.
The CFTC also proposed to adjust net capital requirements for FCMs, amending the minimum dollar amount of required annual net capital to $1 million from $250,000 and amending the FCM capital computation to increase the applicable percentage of the total margin-based requirement for futures, options and cleared OTC derivative positions in customer accounts to 10% from 8%. Both the Futures Industry Association (FIA) and National Futures Association (NFA) support the raising of required net capital to $1 million, but oppose the increase in margin-based requirement percentage. The FIA said in a statement that an increase to 10% “has not been justified and could harm competition by encouraging the further concentration of customer funds in a handful of FCMs.” In a comment letter to the CFTC, NFA said “we question the efficacy of this rationale. During the past year’s significant market volatility, there has been no evidence that the current risk based capital requirement has failed or has placed FCMs in precarious financial situations.”
In its comment letter to the CFTC, CME Group said “raising capital requirements to the proposed levels may have the undesirable effects of further concentrating customer accounts among fewer FCMs, decreasing competition and increasing customer costs.”