What Happens When Regulators Set Policy Without A Clear Objective

Throughout the Dodd-Frank implementation process, we have faced frustrations and challenges, but this month the CFTC one-upped itself.  Buried in a proposal entitled Adaptation of Regulations to Incorporate Swaps, CMC found a provision that would require: ALL members of DCMs and SEFs to record ALL oral communications that leads to the execution of a trade in a commodity interest or cash commodity.

In our comment letter, CMC expressed concern for several reasons.

  1. CFTC substantially underestimated the considerable costs and limited benefits.  Requiring every commercial member of a DCM or SEF to record its telephone lines (including mobile lines) and index these recordings according to transaction and counterparty will be tremendously expensive and burdensome – if not impossible.  Moreover, the proposal targets firms that have no public interaction.  Unlike FCMs, which are already subject to a similar rule because they interact with the public, the benefit to the public of tape recording trade-related conversations appears limited.
  2. The Proposal penalizes DCM and SEF members.  Many firms, from grain elevators to prop trading firms, opt for exchange membership because it reduces transaction costs.  Requiring DCM/SEF members to comply with this expensive and burdensome requirement will penalize the firms that have chosen to be exchange members.
  3. If the policy objective is to curb market abuse, the Commission can achieve its objective through other means.  The audit trail maintained by firms through electronic messaging or trading could meet the new requirements and the Commission even acknowledged this in its proposal.

Following the Circuit Court decision in Business Roundtable v. SEC, failing to adequately weigh the economic costs of the tape recording proposal against the benefits the public would realize not only risks unintended consequences but also may not satisfy minimum procedural requirements under the Administrative Procedure Act.

I urge you to let the CFTC know what this proposal could mean for you and your business.


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