CFTC Commissioner Wetjen Discusses Ways to Increase Transparency in Derivatives Markets (with Lofchie Comment)

CFTC Commissioner Mark P. Wetjen delivered remarks before the Global Derivatives Trading and Risk Management Conference. He spoke about the ways in which regulators can encourage greater liquidity and transparency in "today's markets."

Commissioner Wetjen stated that the markets have benefited from automation of derivatives. However, he noted, it is incumbent upon regulators to address the risks that accompany increased automation of the markets.

Historically, he said, trading practices and regulations have evolved by product, trading platform, specific governing body and/or country. He propounded that a segregated approach to governing markets is no longer ideal because global markets are interconnected, and suggested that regulators think "holistically about the interconnections between markets."

Commissioner Wetjen went on to say that regulators lack a comprehensive and thorough understanding of how markets evolve, the types of participants in each market and market participant activity. He stressed that the CFTC needs better access to data, particularly order-book and message data, to fill the gaps in the CFTC's oversight of markets. Additionally, Commissioner Wetjen acknowledged that the CFTC does not have the resources to compile a complete picture of market activity. Commissioner Wetjen proposed that, instead of waiting for additional funding from Congress, the CFTC should consider a partnership with the exchanges it oversees to create a "surveillance function."

Under such a partnership, Commissioner Wetjen said, exchanges would provide technological tools, analytics software and access to data, allowing the CFTC to "devote its human capital" to the task of building up the CFTC's surveillance capabilities over time. In addition, the partnership could create a "common understanding" of what constituted manipulative or illegal activity.

Commissioner Wetjen also recommended that the CFTC continue to create policies to attract nontraditional liquidity providers to swap execution facilities. Commissioner Wetjen suggested that the CFTC revise its floor-trade exemption and follow up on its 2013 Concept Release on Risk Controls and Systems Safeguards for Automated Trading Environments.

Lofchie Comment: Commissioner Wetjen's comments reinforce the point that the regulators seem to believe that information they currently obtain under their own agency jurisdiction is insufficient for their needs. (See SEC Proposes Amended Reporting and Disclosure Requirements for Investment Companies and Advisers (with Mehta and Lofchie Comments and Delta Strategy Group Summary)). It is time to coordinate information demands from different regulatory agencies. Presumably, the CFTC and the SEC each require similar information in order to monitor trading or track financial risk. Why shouldn't the two of them decide what they need jointly and develop a single set of requirements?

See: CFTC Wetjen's Remarks.Related news: MFA Submits Letter to the CFTC Offering Recommendations to Enhance Risk Controls and System Safeguards for the Derivatives Market (December 12, 2013); FIA Responds to CFTC Regarding Concept Release on Risk Controls and System Safeguards for Automated Trading (with Discussion by Gary DeWaal, President of Gary DeWaal and Associates) (December 12, 2013); CFTC Publishes Concept Release on Risk Controls and System Safeguards for Automated Trading Environments (Fed. Reg.) (September 13, 2013); CFTC Technology Advisory Committee Meeting (with Delta Strategy Group Summary) (with Lofchie Comment) (September 13, 2013).