The Commodity Futures Trading Commission (CFTC) hosted its eighth public meeting to consider rulemakings under the Dodd-Frank Wall Street Reform and Consumer Protection Act on Dec. 16. While only four rules were considered at the meeting, some commissioners had strong feelings about the direction they were taking.
Rules discussed included swap confirmation, portfolio reconciliation and portfolio compression for swap dealers and major swap participants, risk management requirements for derivatives clearing organizations (DCOs), core principles and definitions of swap execution facilities (SEF) and position limits on physical commodities.
Most of the meetings controversies centered on those last two rule proposals. In her opening statements, Commissioner Jill Sommers inquired about the enforcement of position limits and went on to say that it would be irresponsible of the Commission to promulgate rules if it can’t enforce them.
The first rule considered and sent on to the Federal Register dealt with swap confirmation, portfolio reconciliation and portfolio compression for swap dealers and major swap participants. The rule proposal outlines requirements that will need to be met for each of these actions. For instance, swaps that are entered into by two swap dealers or major swap participants must receive confirmation of the trade on the same calendar day.
CFTC released Q&A sheet on SD-MSP Confirmation-Reconciliation
Second, the commissioners discussed and sent on the proposed rule for risk management requirements for DCOs. As part of the rule proposal, the CFTC outlined six core principles DCOs will need to comply including participant and product eligibility, risk management, settlement procedures, treatment of funds, default rules and procedures, and system safeguards.
CFTC released fact sheet on Risk Management of DCOs
The third rule discussed had to do with the definition and operation of SEFs. While the topic was originally slated to be discussed the week prior, Chairman Gary Gensler moved it to this meeting to allow staff more time to work on the proposal. Much of the discussion revolved around the operation of SEFs and exactly how they will work. Of particular interest, was how much like a futures exchange would they look. Additionally, concerns were made about trading and products requirements, compliance obligations, operational capabilities, surveillance obligations, and financial information and resource requirements. The rule was sent on to the Federal Register with a vote of four-to-one with Commissioner Sommers voting against the rule proposal.
CFTC released fact sheet on SEFs
Finally, the commissioners spent a considerable amount of time discussing position limits. Nearly across the board, the commissioners had some degree of problems with the rule proposal with Commissioners Michael Dunn and Bart Chilton being the most vocal. The proposal sought to place limits on 28 physically deliverable commodities and their “economic equivalent.” Some commodities specifically listed were gold, silver, copper, crude oil, wheat and soybeans. The proposal sought to institute a two-phase rule including spot-month limits set at 25% of the deliverable supply of the commodity and non-spot-month position limit for each referenced contract to be set using the 10, 2.5 percent formula: 10 percent of open interest in that contract below the first 25,000 contracts and 2.5 percent thereafter. Much of the opposition to the rule centered around enforcement and the ability of the Commission to actually monitor trader positions. Chairman Gensler received unanimous support in asking the rule be brought back at the next open meeting to be discussed again with a number of changes made. Below are the original CFTC released documents on position limits.
CFTC released fact sheet on position limits