CFTC Chairman Gary Gensler to testify before the House Committee on Agriculture

Chairman Gensler – Testimony before the House Committee on Agriculture

CFTC Chairman Gary Gensler to testify before the House Committee on Agriculture

Event Date – 03/31/2011

CFTC General Counsel Dan Berkovitz to testify before the US Senate Committee on Agriculture, Nutrition and Forestry

General Counsel Berkovitz – Testimony before the US Senate Committee on Agriculture, Nutrition and Forestry
CFTC General Counsel Dan Berkovitz to testify before the US Senate Committee on Agriculture, Nutrition and Forestry

Event Date – 03/30/2011

Position limits head for showdown in court

(Reuters) Consultation has closed on the Commodity Futures Trading Commission’s latest proposal for position limits. Now the rulemaking process embarks on the final stage, which will probably end up before the U.S. Supreme Court.

The last day of the two-month consultation on Monday witnessed a volley of carefully coordinated submissions from Goldman Sachs, Barclays Capital, Morgan Stanley, the International Swaps and Derivatives Association (ISDA) and a host of others, all urging the CFTC to withdraw the proposed rulemaking.

Many of the objections build upon the criticisms set out at length by the Futures Industry Association (FIA) at the end of last week. The responses help lay the legal paper trail that will be cited when the rule is eventually challenged in the courts.

Australian Exchange Enters Commodities Fray

By GEOFFREY ROGOW

SYDNEY—A new Australian energy-and-commodities exchange is the latest player hoping to lure trade away from venues in Chicago and London toward fast-growing Asian-Pacific economies.

But Financial & Energy Exchange’s bet that Australia’s resource bonanza will buoy its newest commodities exchange when it goes live this year is unlikely to change the landscape of energy trading globally.

CME’s Donohue: Flash Crash Fixes Only Compound Market Issues

By Jacob Bunge

Of DOW JONES NEWSWIRES

CHICAGO -(Dow Jones)- The top executive of CME Group Inc. (CME) warned U.S. regulators that “flash-crash” fixes for the stock market are headed down the wrong path, and that new securities trading rules should be modelled on the futures market.

A lack of coordination between stock and futures exchanges in times of turbulent trading will make it harder for investors to continue doing business and may exacerbate market movements, CME Chief Executive Craig Donohue said.

“One key lesson of the events of May sixth is that closely linked markets should have coordinated halting mechanisms, yet the single security circuit breakers actually undermine that principle and have the potential to exacerbate disruptions across related markets during significant market events,” wrote Donohue in a letter to U.S. securities and derivatives authorities.

Sen. Levin: It’s Time to Curb ‘Excessive Speculation in Commodity Markets’

By Jamila Trindle, WSJ

Sen. Carl Levin (D., Mich.) offered some recommendations to the Commodity Futures Trading Commission: Establish position limits to curb “excessive speculation in the commodity markets” and promote fairer prices.

Mr. Levin’s letter was among more than 5,000 comments on CFTC rules proposed in January aimed at keeping individual traders from holding more than a certain percentage of the market in more than two dozen commodities, including oil.

“Until this proposed rule is adopted and effective position limits are put in place, the American economy will continue to be vulnerable to excessive speculation and the violent price swings it can cause,” Mr. Levin wrote. The CFTC currently sets hard limits only on certain agricultural commodities and lets the exchanges impose restrictions on other products, including oil.

CFTC Chairman Gary Gensler has said the agency probably won’t finalize the rule on position limits until this summer because it has been flooded with comments.

CFTC may propose two key measures in April: O’Malia

By Christopher Doering

(Reuters) – The U.S. futures regulator could propose its two key remaining regulations in late April but will not finalize most of its rules by a July deadline, a commissioner at the agency said on Wednesday.

The U.S. Commodity Futures Trading Commission has proposed the first drafts of most of its rules, but two key regulations remain — a detailed definition of swaps to be covered by its new rules, and the capital and margin needed for swaps dealers and major swaps participants.

Scott O’Malia, a Republican and one of five commissioners at the CFTC, said he expected those rules to be introduced toward the end of next month.

“That could be optimistic,” he told Reuters in an interview.

Officials at the CFTC and the Securities and Exchange Commission, among the agencies engaged in the arduous task of writing hundreds of rules to implement the 2010 Dodd-Frank Wall Street reforms, have said they will miss deadlines from Congress to get many of the new regulations put in place.

CFTC Chairman Gary Gensler said this month the agency hopes to finalize rules in three clusters and may consider phasing in the effective dates of regulations by asset class.

“I think most of them we’re going to miss,” O’Malia said. “It’s not because we’re not trying. Getting it right is more important than getting it done early.”

Continue reading here.

CFTC Considering Data, Comments on Position Limits

By Jamila Trindle, Of DOW JONES NEWSWIRES

WASHINGTON -(Dow Jones)- The Commodity Futures Trading Commission plans to use data it proposes to collect on the swaps market to set position limits, CFTC general counsel Dan Berkovitz intends to tell lawmakers Wednesday, according to prepared testimony.

“Under the Commission’s proposed large swap trader reporting rule, which would apply to swap dealers and cleared swaps, this new data would be used to calculate the appropriate position limits,” Berkovitz plans to say in the speech.

Berkovitz also plans to say that before creating the final rule, the Commission intends to evaluate the more than five thousand comments on the position limits proposal, which would keep individual traders from holding more than a certain percentage of the market in more than two dozen commodities, including oil.

Right now, the CFTC sets hard limits only on certain agricultural commodities and lets the exchanges impose restrictions on other products like oil.

Chairman Gary Gensler said last week that the CFTC isn’t a “price-setting agency,” but it has a number of tools to deter manipulation, including position limits and authority to take action against attempts to manipulate the market.

“Rising prices for basic commodities–including in agricultural and energy markets–highlight the importance of having effective market oversight that ensures integrity and transparency,” he said last week at a meeting of European regulators.

Gensler has said the agency probably won’t finalize the position limits rule until this summer because there are so many comment letters on the issue.

-By Jamila Trindle, Dow Jones Newswires; 202-862-6684; jamila.trindle@ dowjones.com

FSA at Odds With European Commission Over Aspects of MiFID II

By Peter Elstob

(Complinet)e The Financial Services Authority and the European Commission disagree over some planned revisions to the Markets in Financial Instruments Directive, including proposals to extend pre-trade transparency to over-the-counter non-equity markets, it has emerged. At a discussion that the European Capital Markets Institute organised in Brussels last week, the FSA called for “a very flexible approach” to implementing any new MiFID transparency regime, and “a very gradual phase-in period”. FSA and commission speakers also differed over the possibility and desirability of “future-proofing” the revised MiFID.

Martine Doyon, head of international strategy for the FSA’s markets division, told the ECMI meeting that the relationship between market transparency and liquidity was a complex one. While the conventional theory was that transparency has a positive effect on liquidity up to a certain transaction size, becomes less beneficial in larger sizes, and can be detrimental to liquidity in very large sizes, Doyon said finding the right balance in practice was extremely difficult, because the “crunch-points” at which transparency has a negative effect on liquidity are determined by many factors and variables. These include the financial instrument concerned; for example, whether it is a simple instrument such as a liquid share, or a very complex, bespoke, OTC derivative. As well as the type of instrument, the type of trading methodology was a factor, Doyon said.

“Are we talking about an instrument traded on a limit-order book? Are we talking about an instrument … traded on a bilateral basis over the counter? Are we talking about an instrument where there is liquidity already, or are we talking about an instrument where basically the liquidity comes from capital commitment from liquidity providers? All these factors will have an impact on what becomes the crunch point; at what point transparency is actually adding a negative and adverse impact on liquidity … Also, it matters very much whether you’re talking about pre-trade or post-trade transparency,” she said.

Commission ‘going too far’

All these considerations highlighted the importance of giving careful thought to calibration, the FSA official stressed. “It’s important, in our view, to have a very flexible approach in the implementation of any new transparency regime. A transparency regime which would work today, I can guarantee you, is not going to be adequate in five years’ time.”

She went on: “[M]arkets evolve and … if we take into account the fact that there are very significant market reforms in the pipeline, which are extremely likely to have an impact on market structure, we know, right from the beginning, that it’s going to be very difficult to get it right, and there’ll be some need for adjustment. So therefore [the FSA] would probably advocate a very careful and a very gradual phase-in period.” She stressed that the FSA supports many of the commission’s proposals on enhancing post-trade transparency. “But we do think that in some areas the commission is going too far.”

But Maria Velentza, head of the securities markets unit in the European Commission’s internal market department, said that she and her colleagues were obliged to produce legislation that was “time-resistant”. When Diego Valiante, a research fellow at the ECMI, suggested it was unnecessary to create a new venue category of organised trading facility for non-equity products, saying the existing MTF concept, with appropriate adjustments to existing the pre-trade transparency requirements and waivers designed for shares, could deal with the new trading platforms, Velentza responded that he was describing markets as they were today. “But the picture will change in April, or next year,” she warned.

Velentza admitted that the OTF concept was not a panacea. “But the idea is to cover platforms which are not covered by the MTF definition, so OTF would also cover discretionary access. And this would avoid having the debate over whether [broker crossing networks] should be transformed, in all cases, into MTFs — [or] whether they should be systematic internalisers … I think we recognise that in certain cases, [BCNs] may have the same functionalities, and they may have similar objectives, to MTFs. For this reason we also need [them to have] pre-trade transparency. [These similarities] give us enough legitimacy to create this [OTF] category, and subject them to [pre-trade transparency] requirements … So with all this in mind, with the concern of time-resistance, we created this category.” She added that she didn’t know whether the OTF category would survive the MiFID review consultation, but explained that the commission had wanted to go beyond addressing the markets as they operate today, and look to how to respond to future market developments.

No intention to abolish business lines

Velentza reiterated that the purpose of the MiFID review was to try and address the less regulated, less transparent, and riskier parts of the market. “This doesn’t mean that we want to abolish any business models or any business lines,” she insisted. “What we need to ensure is that the right level of regulation is there, [so that] when similar operators operate in similar business lines through different means, the same, or a similar, set of regulations are applied. You need to have a level playing field, otherwise you have issues of competition.”

Support for the OTF idea came from Mike Sheard, ICAP’s corporate affairs director, who said that his firm found it very attractive. “It’s very flexible, it seems to encompass a variety of ways in which transactions can be completed, whether that’s through an order book or through some form of bilateral negotiation,” Sheard said. But he added: “I think that it’s a hopeless task to try and set out that somehow we can future-proof everything that we put together in directives.”

Eric Kolodner, a managing director of Tradeweb, said that it was too early to know whether the commission had got the balance right between transparency and liquidity, but he believed they were moving in the right direction, and thought they were trying to maintain flexibility in terms of trading protocols. “I think that they’re clearly very sensitive to the issue of pre-trade transparency, and post-trade transparency, and its potential effect on liquidity; the need to calibrate per asset class, and perhaps per instrument. But to say that they’re clearly striking the right balance in Europe, I think it’s just too early to say one way or the other,” Kolodner said.

Greenspan’s Derivatives Comments Shouldn’t Be Trusted, Analysts Say

First Posted: 03/30/11

Former Federal Reserve Chairman Alan Greenspan said the Dodd-Frank financial reform bill had the potential to become the “largest regulatory-induced market distortion” since 1971 in a Wednesday op-ed for the Financial Times, leaving some financial experts astounded.

Greenspan took particular aim at the decision — currently under debate at the Treasury — to regulate the foreign exchange derivatives market. Doing so, Greenspan warned, could cause a large portion of the market to move overseas.

Foreign exchange derivatives are used by financial entities to hedge and make bets on currency exchange rates. According to the Office of the Comptroller of the Currency, trading in foreign-exchange contracts produced more revenue than any other type of derivative in 2010 — yielding $9 billion at the nation’s top five banks.