Ensuring that Regulations Keep up with the Markets
The CFTC is focused on ensuring our regulations are responsive to today’s markets. We are implementing the historic Dodd-Frank Wall Street Reform and Consumer Protection Act, which gives the Commission oversight of the nearly $300 trillion swaps market. Dodd-Frank includes many important provisions, but includes two overarching goals of reform: bringing transparency to the swaps market and lowering the risks of this market to the overall economy. Both of these reforms will better protect taxpayers from again bearing the brunt of a financial crisis and will cut costs for businesses and their customers.
As the Commission considers Dodd-Frank rules, we have benefited from significant public input throughout the process. We have received more than 25,000 comment letters. CFTC staff and Commissioners have met more than 1,000 times with members of the public to discuss the rules. We have conducted 14 public roundtables on Dodd-Frank.
This summer, the agency turned the corner and began finalizing rules to make the swaps marketplace more open and transparent for participants and safer for taxpayers. We have held 20 public meetings where we finalized 18 rules, and we have more public meetings scheduled this year and into next year.
While each rule is important for the public’s protection, I will highlight a few important measures for you.
We approved a final rule to implement enhanced anti-manipulation and anti-fraud authority. These tools are similar to rules that the Securities and Exchange Commission, Federal Energy Regulatory Commission and Federal Trade Commission have for securities and certain energy commodities. The new authority expands the CFTC’s arsenal of enforcement tools and strengthens its ability to effectively deal with threats to market integrity.
In addition, the CFTC on July 7 approved a final rule on large trader reporting for physical commodity swaps. Prior to the Dodd-Frank Act, the Commission only had limited authority to obtain large trader data regarding the swaps market. The rule requires position reports on economically equivalent swaps from clearing organizations, their members and swap dealers.
Pre-Trade Risk Filters and Controls
As electronic trading has grown, we have seen a significant rise in high-frequency trading, and the CFTC is working to ensure our regulations are a match for modern challenges.
The Dodd-Frank Act requires that regulated trading facilities have the capacity and responsibility to prevent manipulation, price distortion and disruptions of the delivery or cash-settlement process through market surveillance, compliance, and enforcement practices and procedures. This includes methods for conducting real-time monitoring of trading, and comprehensive and accurate trade reconstructions.
In December 2010, the CFTC proposed a rule that would require that risk controls include market restrictions that pause or halt trading under specified market conditions and that trading facilities coordinate their risk controls. The proposed rule contemplates that other appropriate risk controls, such as price collars or bands, maximum order size limits, stop loss order protections, kill buttons and others, may also be required.
The CFTC also has proposed regulations to require each swap dealer, major swap participant and futures commission merchant that is a clearing member to establish credit and market risk-based limits based on position size, order size, margin requirements and other similar factors. The proposed regulations would require use of automated means to screen orders for compliance with the risk-based limits.
In addition, the proposed regulations would require monitoring for adherence to the risk-based limits intra-day and overnight. A clearing member could monitor and mitigate risk with the ability to see all working and filled orders for intraday risk management, or with a “kill button” that cancels all open orders for an account and disconnects electronic access.