FCM Risk Management
The Commission also has been in active discussions with market intermediaries for months about how best to comply with pre-execution risk-control requirements, particularly as they relate to block transactions. Again, these discussions involved important policy considerations that will have an impact on market structure and therefore deserved considerable attention. I expect the Commission to provide additional guidance on this topic very soon.
The Commission also has taken a number of less visible steps to further implement Dodd-Frank, including letters intended to address uncertainties related to inter-affiliate clearing and execution; negotiating with our Canadian counterparts about the level of detail and sufficiency of information required to be delivered to ensure meaningful risk disclosure; and negotiating MOUs and information-sharing arrangements with domestic and foreign regulators.
End User Issues
As we further implement Dodd-Frank, gauging potential impacts on end-users and effects on competition has been a focus in evaluating how best to proceed.
One of the basic tenets of Dodd-Frank is to minimize, to the greatest extent, impacts on end users who were not to blame for the financial crisis and yet depend on well working derivatives markets. In that vein, we have acted to mitigate costs imposed on end users, and avoid unintended consequences.
To ensure that we have the most accurate and complete information available, I have asked the CFTC staff to convene several roundtables, solicit formal public comment on initiatives we are considering, and in some cases, re-open comment periods on previous proposals. Again, adequate deliberation is important – I believe that a full and open discussion of issues will result in the best regulatory outcomes.
By the same token, these roundtables were not just for show – they resulted in action. Just last week, the Commission addressed the impact of the special entity de minimis threshold with a rule proposal to ensure that utility special entities can access liquidity to hedge risk.
At the same time, the Commission extended temporary relief from compliance with certain recordkeeping requirements in order to avoid dis-incentivizing trading by end users on SEFs and DCMs. Based on feedback from market participants, we recognized that extending the compliance deadline and re-scoping applicability of the regulatory requirements would help avoid end users bearing unnecessary costs, and potential market disruption. We also reopened public comment on issues related to physical commodity hedging in order to accommodate discussion through another roundtable and to more fully develop the public record.
Cross Border Regulation and Progress
The cross-border application of commission rules has continued to be a major area of focus this year, with respect to both policy and implementation. In many respects the foundation of these efforts is the Path Forward statement issued jointly with the European Commission last year. That statement affirmed the shared objective of rigorous implementation of the G20 commitments, and the need for close coordination by global regulators.
In practical terms, this points to the importance of relying on substituted-compliance, or equivalency as described in Europe. Substituted compliance for swaps incentivizes foreign jurisdictions to harmonize their risk management, reporting, clearing, and execution standards with U.S. standards under Dodd-Frank. In doing so, it also better aligns the interests of firms operating in these jurisdictions with the interests of foreign regulators.