Chair Massad Discusses CFTC's Market Risk Strategy and Priorities for "Fine-Tuning" Flawed Rules
Commentary by Bob Zwirb
CFTC Chair Timothy Massad spoke before the Natural Gas Roundtable. In his speech, he discussed the CFTC's rulemaking priorities and efforts to address risk in the financial markets.
Chair Massad highlighted the CFTC's intention to "fine-tune" its rules and touched on specific areas, including the following:
- issuing a final interpretation regarding embedded volumetric optionality;
- proposing rules to reduce reporting and recordkeeping requirements for trade options;
- providing easier access for local utility companies to the energy swaps market;
- granting relief from real-time reporting requirements for certain less liquid and long-dated swap contracts;
- modifying the residual interest deadline; and
- revisiting procedures for special calls, especially when triggered automatically by market participant trades above set levels.
Chair Massad reiterated that the CFTC is focused on finishing the position limits rule. With particular emphasis, he stated that the CFTC is considering ways to address "excessive speculation" and ensure that market participants engage in bona fide hedging. "It has been suggested," he said, that one way of addressing this issue might be for the CFTC to rely on the exchanges to review applications for "non-enumerated" exemptions, which would require the CFTC to create a process that allowed the exchanges to grant "timely exemptions" and permitted the CFTC to review the determinations of the exchanges. Additionally, Chair Massad announced that the CFTC is working on a comprehensive report to analyze the swap dealer de minimis rule, and stated that he expects a preliminary report to be published, along with a request for comments, well before December 2017.
Chair Massad also discussed policy concerns regarding benchmarks. He stated that the need for integrity in benchmark administration is "critical," and referenced recent enforcement actions involving the manipulation of benchmarks. He explained that European legislators currently are considering legislation that could prohibit European banks and asset managers from trading products in U.S. markets that are tied to benchmarks unless the European Commission determines that the benchmarks are supervised in an equivalent manner. Chair Massad expressed reservations about the EU proposal, noting that the U.S. does not have a government-sponsored supervisory regime for benchmarks. He suggested that European regulators consider focusing their standards on the benchmarks that are used most widely.
See: CFTC Chair Massad's Remarks.
Commentary
Chair Massad covered a number of important areas in which the CFTC either is taking, or has taken, reasonable steps to address some of the shortcomings of the Dodd-Frank regulatory regime.
Chair Massad's speech raises a number of policy concerns. First, although Chair Massad acknowledges that "[c]ommercial end users were not responsible for [the financial] crisis," and that "the ultimate purpose of the derivatives markets [should be] to help commercial companies manage their risks," he does not advocate the next logical step, which would be for the CFTC to question whether the statute should be reformed to take into account these realities instead of choosing to tinker with complex exemptions to unduly complicated rules.
Second, with respect to position limits, Chair Massad easily could have made an almost identical statement - that physical commodities (agriculture, energy and metals) were not responsible for that crisis. This would raise the obvious question as to why the CFTC seeks to impose limits on those commodities in the first place.
Third, in discussing position limits, Chair Massad emphasizes the phrase "excessive speculation," noting that "[o]ur responsibility is to address excessive speculation." However, that raises a question which no one associated with Dodd-Frank has ever addressed: What is "excessive speculation"? How do you measure it? Who are the wise men or women who know where the red line for that sin is drawn?
Fourth, Chair Massad observes that some have suggested the CFTC should rely on the exchanges with respect to the review of applications for what are known as "non-enumerated" exemptions. What's left unsaid is this: it has also been suggested that the CFTC should rely upon the exchanges for setting position limits in the first place.
Finally, Chair Massad acknowledges that the number of clearing members and futures commission merchants are on the decline, but minimizes the role of regulation, which he attributes to trends that began before the signing of Dodd-Frank. But what about other trends that appear to be going in the wrong direction as well? The diminishing number of foreign derivatives firms and regulators willing to do business with the U.S., for example, in response to the CFTC's exercise of jurisdiction beyond its shores and the concentration of risk among CCPs as a result of the clearing mandate?