CFTC Commissioner Chilton Releases "The End-User Bill of Rights" (with Lofchie Comment)

CFTC Commissioner Bart Chilton released ten principles today to help guide the Commission as it moves into a more transparent Dodd-Frank regulatory regime. Each principle is highlighted below.

1. The right to reasonable Dodd-Frank implementation. While noting the need for Dodd-Frank to be swiftly implemented, Chilton stated that he would extend the Dodd-Frank compliance date for end-users to October 31, 2013, provided they made good faith attempts to comply.
2. The right to legal certainty. Chilton noted the importance of providing end-users and other market participants legal certainty well in advance of compliance dates. He also stated that he would not support enforcement actions against any market participant on an issue requiring clarity that is subject to an outstanding request for interpretive guidance.
3. The right to compete in the markets. Chilton reiterated his past recommendations for high-frequency trader registration and speculative position limits to ensure that end-users are the predominant market participants.
4. The right to safe accounts. The Commissioner further remarked that end-users should have the right to decide whether to maintain segregated accounts or keep their money with futures commission merchants.
5. The right to have confidence in the commodity markets. Chilton also called for greater penalties to deter market abuse, suggesting maximum penalties of 10 million for entities and 1 million for individuals.
6. The right to clear or not to clear. He further stated that central hedging units for non-financial end-users should be free to choose whether to clear and be exempt from reporting requirements.
7. The right to margin flexibility and reasonable capital rules. Noting that under-collateralization has not been an end-user problem, stated that he supports exempting non-financial entities who are not systemically important from prescriptive margin requirements.
8. The right to hedge. The Commissioner also stated that speculative position limits should encourage prudent commercial risk management practices.
9. The right to smart regulation. Acknowledging that implementing Dodd-Frank will provide smarter ways to accomplish regulatory goals, Chilton stated that end-users should benefit from this knowledge and be given a six-month reprieve for historical swap reporting requirements.
10. The right to be heard. Finally, Chilton called for the creation of an End-User Advisory Committee, where previously unregulated end-users will be able to voice the concerns they face as a result of Dodd-Frank implementation.

Lofchie Comment: Commisioner Chilton's important end-user bill of rights raises several questions. If end-users require a reasonable amount of time to implement Dodd-Frank rules, why is that not also true as to the sell side? If Principle 1, the right to reasonable Dodd-Frank implementation is to be adopted by the CFTC as a general rule of good regulation, then how does the CFTC justify the adoption of rules with impossible effective dates that are then the subject of non-action letters that are issued after the rule's effective date? See, by way of example, this item from justyesterday's news, where the CFTC has issued a limited exemption after the effective date of a rule. Item 2 and the notion that a "good faith" effort to comply should be deemed to satisfy a rule, is a principle of sound enforcement at all times. Where regulated persons are making a good faith effort to comply, and assuming no injury has been done to third parties, enforcement should generally be light. Unfortunately, I read Commissioner Chilton as making a different, and more limited, point: he is conceding that the CFTC rules have been adopted with an impractical deadline and, thus, it would be inappropriate to enforce them at all. In my view, the solution to that problem is not that the CFTC should "forgive" violators; the solution to that problem is that the CFTC should postpone the effective date of its rules so that firms have a reasonable opportunity to develop compliance procedures. Likewise as to item 2, and the notion that market participants are entitled to "legal certainty": how does that principle of good regulatory behavior square with the CFTC's ongoing refusal to clearly define terms, such as the term "swap," but instead to assert that every rule is subject to re-interpretation in light of the "facts and circumstances" (the very opposite of legal certainty).As to item 3, on what policy basis would one limit the market so that end-users were predominant. Wouldn't that ensure that the market is small and illiquid (or moves abroad)? Also, I want a bill of rights for lawyers.

Click hereto view speech in full (links externally to CFTC website).