Testing and Supervision
CFTC staff also is working on a release concerning a principles-based testing and supervision regime designed to ensure that electronic trading systems are tested and supervised by trained personnel and that appropriate risk controls are in place. If approved by the Commission, the release would seek comment concerning proposals designed to ensure that those who provide market access to customers establish, implement and enforce rules and procedures to mitigate some of the risks of high-frequency trading.
The CFTC is using existing authorities to increase transparency in the derivatives markets. When markets are open and transparent, they are safer and sounder, and costs will be lower for companies and the people who buy their products.
In September 2009, the Commission began disaggregating its weekly Commitments of Traders (COT) reports to make the categories of traders more informative. Before then, the COT reports broke traders into two broad categories: commercial and noncommercial. The new disaggregated reports improved upon the previous reports by breaking the data for physical commodities into four categories of traders: Producer/Merchant/Processor/User; Swap Dealers; Managed Money; and Other Reportables. The CFTC also released five years of historical data so that regulators and the public could identify trends in the makeup of the markets. This data informs the market about swap dealer and managed money positions on a weekly basis.
Also, the agency began periodically releasing data on index investment in the commodity futures markets. In September 2008, the CFTC published a Report on Swap Dealers and Index Traders that was based on data received pursuant to special call authority. Updated data is now released on a monthly basis and includes both gross long and gross short positions.
At our most recent public meeting, the CFTC finalized its rule to establish position limits for futures, options and swaps on 28 physical commodities as required by the Dodd-Frank Act. Before I discuss the specifics of the rulemaking, I will provide the historical and regulatory contexts for position limits.
Legislative and Regulatory History of Position Limits
Since 1936, the Commodity Exchange Act has prescribed position limits to protect against the burdens of excessive speculation, including those caused by large concentrated positions. Between the CFTC and the futures exchanges, there are currently position limits in the spot month on physical delivery contracts in the agricultural, energy and metals markets. There also are a number of agricultural contracts that have single-month and all-months-combined position limits that apply to contracts beyond the spot month. The exchanges had set all-months-combined limits in energy markets until 2001 and in metals markets earlier; however, those limits were replaced with position accountability regimes.
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 participants with a diversity of views. 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.