CFTC Approves Rule Proposals and Product Interpretation (with Delta Strategy Group Summary and Lofchie Comment)
At an open meeting, the CFTC approved rule proposals regarding (i) the residual interest deadline and (ii) recordkeeping relating to commodity interest and related cash or forward transactions, as well as a proposed interpretation related to forward contracts with embedded volumetric optionality.
The proposed rule on the Residual Interest Deadline in Rule 1.22 ("Use of Futures Customer Funds Restricted") was approved by a unanimous vote. The amendment would remove the December 31, 2018 termination date from the phased-in compliance schedule for futures commission merchants, and provide assurance that the Residual Interest Deadline would be revised only through a separate CFTC rulemaking. (Click here for a fact sheet on the proposed rule; click here for a Q&A sheet.)
The proposed rule related to records of commodity interest and related cash or forward transactions was approved by a 3-to-1 vote, with Commissioner Giancarlo voting in opposition. The proposal amends the existing recordkeeping requirements under Rule 1.35(a) ("Records of Commodity Interest and Related Cash or Forward Transactions") in order to (i) provide that all required records under the rule be searchable, and (ii) clarify that all records be kept in a form and manner that allows for the identification of a particular transaction, except records of oral and written communications that lead to the execution of a transaction. Additionally, the CFTC proposed to exclude certain market participants from some of the written and oral recordkeeping requirements under the rule. (Click here for a fact sheet on the proposed rule; click here for a Q&A sheet.)
The proposed interpretation related to forward contracts with embedded volumetric optionality was approved by a unanimous vote. The interpretation, which was issued jointly by the CFTC, the SEC and the Board of Governors of the Federal Reserve System, further clarifies when an agreement, contract or transaction that provides for variations in delivery amount (i.e., that contains embedded volumetric optionality) will be considered a forward contract and, thus, will be excluded from the "swap" and "future delivery" definitions in the Commodity Exchange Act. (Click here for a fact sheet on the proposed interpretation.)
Lofchie Comment: Commissioner Giancarlo's statement begins with a point that should be obvious: onerous financial regulations do not serve merely to punish the financial industry; they also punish users of the financial industry, which means the entire economy. We note that in his dissent, the Commissioner did not oppose the direction of the proposed rule change so much as he argued that the rule change did not go far enough in clarifying its requirements. This demand for clarity is welcome after years of CFTC rulemakings in which crucial details of rules were unspecified and left open to the government's discretion according to wholly unspecified "facts and circumstances."
Click here to view a summary of the meeting prepared by Delta Strategy Group.
See: CFTC Announcement; Fact Sheet for Proposed Rule on Residual Interest Deadline; Q&A for Proposed Rule on Residual Interest Deadline; Fact Sheet for Proposed Rule Related to Records of Commodity Interest and Related Cash or Forward Transactions;Q&A for Proposed Rule Related to Records of Commodity Interest and Related Cash or Forward Transactions; Fact Sheet for Proposed Interpretation Related to Forward Contracts with Embedded Volumetric Optionality.
See also: Chair Massad's Opening Statement; Commissioner Wetjen's Statement; Commissioner Bowen's Statement; Commissioner Giancarlo's Statement; Commissioner Bowen Statement; Proposal: Residual Interest Deadline for Futures Commission Merchants; Proposal: Records of Commodity Interest and Related Cash or Forward Transactions; Proposal: Forward Contracts with Embedded Volumetric Optionality.