Launch of ICE Futures Europe Swap Futures Contracts – Contract Rules and Procedures

ICE Futures Europe has announced that this Monday, October 1, 2012, the new futures and options contracts (“the Swap Futures Contracts”) based on swaps will be launched.  The specific products are as follows:

  • 285 oil swap futures;
  • 24 options on oil swap futures;
  • 46 NGL swap futures;
  • 14 freight swap futures;
  • 1 liquefied natural gas swap future; and
  • 1 iron ore swap future.

Lofchie Comment:  In his recent speech criticizing the CFTC’s Dodd-Frank rulemaking, CFTC Commissioner O’Malia specifically pointed to the ICE’s making available for trading “futures” as substitutes for “swaps” as an example of the arbitrary burdens that the CFTC imposed on swaps, with the result that market participants are forced to shift to futures contracts that are similar to swaps, but may not serve their needs as well. 

View notice in full here (links externally to ICE website).
See also: Swap Futures Contract Terms separated into General Contract Terms and Specific Standard Terms as appropriate – Attachment 1, Attachment 2, Attachment 3, Attachment 4, Attachment 5, Attachment 6 and Attachment 7.

ISDA Response to BCBS and IOSCO Consultative Document on Margin Requirements for Non-centrally-cleared Derivatives

ISDA responded to the Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) with respect to the Consultative Document “Margin requirements for non-centrally-cleared derivatives” of July 2012.  Specifically, ISDA expressed its concern that the severe application of the proposals, as presented in the consultation, has the potential to undermine systemic resiliency by significantly affecting liquidity in financial markets and the general economy.


Lofchie Comment:  ISDA’s response to IOSCO, and IOSCO’s reaction, also has significance for U.S. regulation.  For example, the U.S. banking regulators recently extended the comment period for their margin regulations in light of the issues raised by IOSCO. 

View letter in full here (links externally to PDF).

ISDA v. CFTC: Court Vacates Position Limits Rule

The CFTC’s position limit rules were vacated in their entirety by the Court.  Under the Court’s decision, the CFTC is able to re-adopt the prior rules, amend them, or drop them, subject to the requirement discussed below.

The argument between the CFTC, on the one hand, and ISDA, on the other, turned on their respective interpretations of Section 4a of the CEA.  

Essentially, the CFTC argued that the Section was unambiguous in requiring the CFTC to set position limits on commodities without regard to any finding by the CFTC that such position limits were in the public interest.  Conversely, ISDA argued that the Section was unambiguous in authorizing the CFTC to set position limits only if it found that such limits were in the public interest. 

As a matter of statutory interpretation, the Court did not in fact fully side with either party.  Rather, the Court held that the Section was ambiguous and might reasonably be read in either the manner favored by the CFTC or in the manner favored by ISDA.  The Court then went on to find that because the CFTC had mistakenly read the Section as being unambiguous, the CFTC had mistakenly failed to use its regulatory authority to interpret the statute.  In short, the Court did not find that the CFTC had to find that position limits served the social good before imposing them.  Rather, the Court gave the CFTC two possible directions: (1) the CFTC can find that, although the CEA is ambiguous, the CFTC reasonably interprets the statute to impose position limits without consideration of whether they produce a social good, in which case it follows that the CFTC would then adopt position limits without further consideration of whether they provide a social benefit; or (2) the CFTC can find that the CEA requires the CFTC to make some determination that position limits will achieve a social good before adopting them, in which case the CFTC would presumably study the issue for the purpose of determining whether position limits will be to the good before determining what action to take. 

The CFTC must now either appeal the decision or proceed to analyze the statute and determine its meaning.


Lofchie Comment: : Although the CFTC was the formal “loser” of the Court’s decision, as a financial regulatory lawyer, I view the outcome as a long-term victory for the CFTC as a financial regulator, for regulators generally, and for those who desire to see the U.S. regulatory system as serving a social purpose.
       The argument advanced by the CFTC in support of the position limit rules — that the CFTC was required to make rules without regard to any finding of social good — is an intellectual and regulatory policy dead-end.  The CFTC’s position that the benefit of the rules is essentially irrelevant, so long as rules are made, results in the conclusion that the substance or quality of the rules is irrelevant. For the regulatory function to be reduced to the manufacture of rules that are not subject to any test of advancing social policy, I would see as a defeat for not only CFTC, but for all those who work to adopt, implement and explain financial regulation.
        In short, the Court’s decision has rescued the CFTC from being reduced to adopting rules that may be fundamentally detrimental to the country without considering the consequences of such adoptions.  While some at the CFTC may view the decision as reducing the agency’s authority, the case should be viewed as increasing the CFTC’s authority to act only after exercising its expertise for the purpose of serving the public good.   

Click here to view the court’s ruling in full. We have highlighted some of the key aspects of the Judge’s opinion in this copy.
See also: CFTC Chairman Gary Gensler’s statement of oppositionISDA Comment on the decision.

SEC Issues Report on Brokerage Firms’ Handling of Confidential Information

The SEC issued a staff report intended to help broker-dealers safeguard confidential information from insider trading and other forms of misuse.  The report — issued by their Office of Compliance Inspections and Examinations (OCIE) — describes strengths and weaknesses identified in examinations into how broker-dealers keep material nonpublic information from being misused.

Lofchie Comment:  All firms that receive inside information must review this report carefully.  It contains a very full discussion of the various ways that broker-dealers may receive inside information and the steps that they should take to control that information.

View report in full here (links externally to SEC website). 

ISDA Comments on the Recommendations of the UK’s Financial Services Authority on Libor

In its comment letter to the Wheatley Review, ISDA stated that it fully supports the view of, and recommendation by, the Financial Services Authority to comprehensively reform Libor, rather than replacing it.  ISDA believes that economically, Libor continues to be hugely relevant to, and necessary for the proper functioning of, the OTC derivatives market and the underlying markets to which the derivatives relate.

View letter in full here (links externally to PDF).  To view the consultation to which ISDA is responding, click here to the related news item, which will take one to a summary page in regard to the consultation, from which one may link to the consultation itself. 

CME Open Letter to CME Group Customers and Market Participants

CME Group released a letter to its clients, addressing whether customers can continue to use CME ClearPort after October 12, 2012 in the customary manner.    CME Group stated that it will continue to offer the full suite of services currently available.  The gist of the CME’s message is that it calls its products “futures,” not “swaps,” so that its products are not hit by many of the Title VII requirements.

Lofchie Comment:  This is one of a number of new product developments that demonstrates the illogic of a regulatory system that treats fundamentally similar products (futures and swaps) in fundamentally different ways, with swaps being treated as inherently of a higher risk level even when that is not the case.  While this approach to financial regulation is not likely to result in more safety, it will result in an increased number of products that are called futures.

View letter in full here (links externally to CME website).

SEC Commissioner Daniel Gallagher’s Speech at SIFMA Regional Conference:

In a speech at the SIFMA Regional Conference, Gallagher says that the SEC must prioritize its rulemaking in light of the theoretical extent of required rulemaking.  He is moderately explicit that the SEC cannot reasonably adopt all of the rules that Congress has charged it with adopting, and so the SEC must choose the ones on which to focus.  In this regard, he points to the recent releases relating to conflict minerals as being well-intentioned, but essentially relating to matters that are outside of the SEC’s expertise.  He also states that he believes that even within the securities area, there are certain areas to which the SEC should give greater focus (derivatives) and certain areas that are of relative lesser importance (municipal advisors).  The other area that he indicates is of particular significance, but that is not a subject of Dodd-Frank, is the regulation of money market funds. 

Lofchie Comment:   Although far less negative, SEC Commissioner Gallagher’s comments as to the SEC are consistent in direction with the comments made by CFTC Commissioner O’Malia as reported in yesterday’s news.  That is, Commissioner Gallagher essentially says that the SEC does not have time to focus on the genuinely important issues and Commissioner O’Malia says that the CFTC has so much on its plate that it is simply rushing through the rule-making process and churning out badly flawed rules. 

To make matters worse, in reading each Commissioner’s remarks, there is only bleakness on the regulatory horizon: more and more rules are required to be adopted, many of uncertain value, while clear issues of systemic risk (money market funds) go unaddressed. 

View speech in full here (links externally to SEC website).

CFTC Commissioner Scott D. O’Malia’s Remarks on the Problems of “High-Frequency Regulation” and How the CFTC Failed the “Good Government” Test in its Swaps Rulemakings and Cross-Border Guidance

In his speech at the University of Notre Dame Business Law Forum, Commissioner O’Malia provided examples of where the CFTC has failed the “Good Government” test in its rulemakings and “must make immediate corrections”.   In discussing where the CFTC’s rule making process had failed, he focused on the following:

  1. Swap Data Reporting Rules;
  2. The Proposed Cross Border Guidance;
  3. Swap Rules Driving Shift to Regulatory Security of Futures Markets.

Lofchie Comment:  According to Commissioner O’Malia, the CFTC’s rulemaking process has led, or will lead, to “regulatory inconsistencies, blatant mistakes, uncertainty and unexpected outcomes.”  When one of the leaders of a major financial regulatory agency so bluntly bashes (even if using polite words) the regulations produced by the agency he serves, one would think that this would eventually catch the attention of the press.  Add to Commissioner O’Malia’s remarks the hostility to the CFTC’s proposed regulations and cross-border assertions of jurisdiction voiced by non-U.S. regulators, even to the point of threatening a trade war.  At some point, it should become apparent that there is more going on here than just partisan grumbling: something is seriously amiss.

View speech here (links externally to CFTC website).

“Twists and Turns in Tradium” Keynote Address of CFTC Commissioner Bart Chilton.

Commissioner Bart Chilton made a speech (”Twists and Turns in Tradium”) before the Joint Annual Meeting of the Independent Connecticut Petroleum Association and Education Foundation Oil Heat Institute, Inc. of Rhode Island, Mashantucket, CT. Commissioner Chilton stated the need for better business values, standards and ethics. He noted that while Dodd-Frank goes a long way towards establishing some important parameters, only 131 of 398 rules have been finalized by government. Accordingly, Chilton believes that there is still important work to be done.

In particular, Chilton discusses the major loopholes and consequences in the Volcker Rule, suggesting that a clear reading and interpretation of hedging should be incorporated in the final Volcker Rule since the difference between hedging and speculating isn’t always easy to distinguish. Chilton also addressed the consequences of excessive speculation and outlined his concern that position limits will not completely stop the influence of excessive speculation. Last, Chilton discussed placing more requirements on high frequency traders.

Commissioner Chilton believes that these changes, combined with a thoughtful and balanced implementation of Dodd-Frank, will make the financial sector more competitive, provide greater transparency and cultivate increased confidence in the financial system. 

 View speech in full here (links externally to CFTC website).

Back to Basics: A Better Alternative to Basel Capital Rules; Thomas M. Hoenig, Director, FDIC, delivered to The American Banker Regulatory Symposium; Washington, D.C.

Thomas M. Hoenig, FDIC Director, made a speech to the American Banker Regulatory Symposium in Washington, D.C. Director Hoenig addressed: (1) the evolution of the Basel proposal; (2) capital, the safety net and markets; (3) an alternative to Basel; (4) whether a simple measure with a relatively stronger minimum capital level would reduce liquidity in the market, constrain loan growth and undermine the economy.

Director Hoenig recommends delaying implementation and revisiting the Basel proposal. Absent that, Hoenig believes that the U.S. should not implement Basel III, but reject the Basel approach to capital and go back to the basics. By doing this, the U.S. can focus on efforts that will create a well-managed, well-capitalized, well-regulated financial system that actually supports economic growth.

Lofchie Comment:  This speech echoes, to a good extent, a recent speech by Bank of England Governor Haldane, also criticizing complexity in financial regulation, with some particular focus on the Basel Regulations.  I wonder if Basel can be implemented if two such prominent banking regulators are raising such significant criticisms.

View speech in full here (links externally to FDIC website).