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CFTC Commissioner Dan Berkovitz Wants Agency to Focus on Competition and Position Limits

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Commentary by Bob Zwirb

CFTC Commissioner Dan M. Berkovitz advised the CFTC to focus on (i) increasing competition in the derivatives markets and (ii) setting speculative position limits with exemptions for bona fide hedging activities.

In an address at the FIA Commodities Symposium in Texas, Mr. Berkovitz stated that since recovering from the financial crisis, the derivatives markets have become increasingly concentrated. Mr. Berkovitz emphasized that one purpose of the Commodity Exchange Act is to promote fair competition. Mr. Berkovitz said that the CFTC responded to the issue by setting the swap dealer registration threshold at $8 billion instead of $3 billion. According to Mr. Berkovitz, lowering the threshold would have caused many entities in limited swap dealing to stop dealing in swaps and increase competition. Mr. Berkovitz disagreed with recently adopted speed bumps to slow down faster traders. He urged the CFTC to strive to "take the least anticompetitive means to achieve the objectives of the [Commodity Exchange Act]."

Mr. Berkovitz made other recommendations to the CFTC concerning the derivatives market, such as:

  • allowing proprietary trading firms to trade on swap execution facilities as registered floor traders, instead of registering as swap dealers;

  • removing the practice of "name give-up" (i.e., disclosing the identity of each swap counterparty) for anonymously traded and cleared swaps; and

  • working with prudential regulators to increase bank capital standards without adversely affecting the availability of clearing and other risk-management tools to end users.

Mr. Berkovitz also emphasized the necessity of providing speculative position limits in agricultural, energy and metals commodities. Since Congress tasked the CFTC with establishing certain position limits in 2010, progress stalled, according to Mr. Berkovitz. He argued that the CFTC should establish these limits, noting that the agency already observed and agreed that an exceedingly large speculative position could (i) distort markets, (ii) impede price discovery and (iii) play a role in manipulative schemes. He said that position limits are not intended to regulate commodity prices, and that speculative position limits focus on positions held by a single trader or entity and not the overall market.

Commentary

In discussing "the increase in concentration in the trading and clearing of swaps," Commissioner Berkovitz raises an important issue, but misses the elephant in the room contributing to that trend, which is the Dodd-Frank regulatory framework itself. As an analysis published by the Brookings Institute explains, the Dwindling numbers in the financial industry may be due in part to "[r]egulatory developments  . . . [that] have added to the burdens faced by FCMs." As that article further explains, while regulatory restrictions since 2000 from all agencies have increased by 26%, and by 30% from the SEC, those emanating from the CFTC have nearly doubled, with a "post-2010 spike in regulation . . . driven in large part by Dodd-Frank," as illustrated by this chart:

While a rise in concentration can be explained by a number of reasons, including superior competitive performance, it's important to recognize that one reason could be the impact of the costs of new regulation, which create increased economies of scale. Harold Demsetz, "Industry Structure, Market Rivalry, and Public Policy," 16 Journal of Law and Economics 1, 8 (1973). As Demsetz explains: "Industries experiencing rapid increases in concentration should exhibit greater disparities between large and small [firm] rates of return because of the more significant cost differences which are the root cause of rapid alterations in industry structure."

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