The proposed regulations will enhance legal certainty for DCOs, clearing members and market participants by providing a regulatory framework to support DCO risk management practices. This will help strengthen the financial integrity of the futures and swap markets.
The proposed participant eligibility requirements will promote fair and open access to clearing. Importantly, the proposal addresses rules of how a futures commission merchant can become a member of a swaps clearinghouse. The proposal promotes more inclusiveness while allowing the clearinghouses to scale a member’s participation and risk based upon its capital.
The proposal would establish a registration application form to bring about greater uniformity and transparency in the DCO application process and facilitate greater efficiency and consistency in processing submissions.
I support the proposed rulemaking to establish position limits for physical commodity derivatives. The CFTC does not set or regulate prices. Rather, the Commission is directed to ensure that commodity markets are fair and orderly to protect the American public.
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 market 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 markets do not become too concentrated.
Position limits help to protect the markets both in times of clear skies and when there is a storm on the horizon. In 1981, the Commission said that “the capacity of any contract market to absorb the establishment and liquidation of large speculative positions in an orderly manner is related to the relative size of such positions, i.e., the capacity of the market is not unlimited.”
Today’s proposal would implement important new authorities in the Dodd-Frank Act to prevent excessive speculation and manipulation in the derivatives markets. The Dodd-Frank Act expanded the scope of the Commission’s mandate to set position limits to include certain swaps. The proposal re-establishes position limits in agriculture, energy and metals markets. It includes one position limits regime for the spot month and another regime for single-month and all-months combined limits. It would implement spot-month limits, which are currently set in agriculture, energy and metals markets, sooner than the single-month or all-months-combined limits. Single-month and all-months-combined limits, which currently are only set for certain agricultural contracts, would be re-established in the energy and metals markets and be extended to certain swaps. These limits will be set using the formula proposed today based upon data on the total size of the swaps and futures market collected through the position reporting rule the Commission hopes to finalize early next year. It is only with the passage and implementation of the Dodd-Frank Act that the Commission will have broad authority to collect data in the swaps market.
The proposal also would ensure sufficient market liquidity for hedgers as well as efficient price discovery.
Swap Execution Facilities
I support the proposed rulemaking to fulfill Congress’s mandate to have rules and core principles requirements for swap execution facilities (SEFs). The proposed rule also fulfills Congress’s mandate to promote transparency through the trading of swaps on SEFs.
The proposed rule will provide for all market participants an ability to execute or trade with other market participants. It will afford market participants with the ability to make firm bids or offers to all other market participants. It also will allow them to make indications of interest – or what is often referred to as “indicative quotes” – to other participants.
Furthermore, it will allow participants to request quotes from other market participants. These methods will provide hedgers, investors and Main Street businesses both the flexibility to execute and trade by a number of methods, but also the benefits of transparency and more market competition. I believe that transparency and competition in markets is consistent with Congress mandated in the definition of a swap execution facility, whereby all market participants can communicate with all market participants such that everybody gets the benefit of a competitive and transparent price discovery process.
The proposal does allow participants, though, to do request for quotes, whereby they would reach out to a minimum number of other market participants for quotes. It also allows that, for block transactions, swap transactions involving non-financial end-users, swaps that are not “made available for trading” and bilateral transactions, market participants can get the benefits of the swap execution facilities’ greater transparency or, if they wish, would still be allowed to execute by voice or other means of trading. To fulfill Congress’s mandate that, the rule requires SEFs to provide impartial access to market participants for trading on the platform or system.
The proposed rule also would require SEFs to – on a yearly basis – state which contracts are deemed “available for trading,” based on factors including trading activity and open interest. The rule, if finalized, goes into effect in January 2012. This will give the markets time to adapt, allow SEFs to tell the market what contracts are available for trading.