CFTC Commissioner Chilton Talks DF Rulemaking, High Frequency Traders and Enforcement

In a speech at the 2012 Allegro Customer Summit in Dallas, CFTC Commissioner Bart Chilton generally discussed the following topics:

  • transparency,
  • lowering systemic risk,
  • accountability,
  • market integrity,
  • betting limits for speculators,
  • issues with electronic trading, and
  • the need for a culture change in the financial sector. 

Among other things, Commissioner Chilton argued the need to have “Cheetahs” (High Frequency Traders) register with the CFTC.

As to enforcement, Commissioner Chilton urged a rethink of the term “per violation” in determining fines, and effectively suggested a shift from a fines-per-day model to a fines-per-second model, stating:  “if you’re making millions in seconds, then you should be liable for fines for bad conduct, counted in seconds.”

Lofchie Comment:  Many of Commissioner Chilton’s remarks repeated previous themes of his, in particular the comments that he had previously made that high-frequency traders should be required to register with the CFTC.  It is implicit in Commissioner Chilton’s remarks that there is no current requirement that such traders should be registered with the CFTC.  Accordingly, Commissioner Chilton’s suggestion would require legislation. 
       Some of the remarks in the Commissioner’s statements were, although less prominently featured than his statements on high-frequency traders, equally worth attention.  As to the implementation of the CFTC’s rules, Commissioner Chilton said
                    ” . . . [the CFTC had received] a couple hundred requests for clarification and or regulatory relief in some fashion on approximately three dozen distinct issues. . . .  It was truly intense, but our staff pulled through in a miraculable manner, bustin’ long hours and doing not just adequate, but superlative work.  Quite frankly, this was a fulcrum point for Dodd-Frank as far as the CFTC goes.  If we had not crafted these responses, the guidance and clarity of the new law could have been stymied, but we have crossed the Rubicon and we are on our way.  Since clarity has been provided, compliance with all final rules is required.”  [Emphasis supplied.]
        In substance, Commissioner Chilton’s statement could be contrasted with separate statements made the prior day by CFTC (i) Commissioner Summers and (ii) Commissioner O’Malia, each of whom sounded a more measured knell as to the quality of the CFTC’s rulemaking.  What is perhaps of more concern to market participants is that Commissioner Chilton seems to have been reversing an earlier statement in which he conceded that because many of the rules were so unclear, it would not be appropriate for the CFTC to insist on strict compliance. 

 

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

 

CFTC Commissioner Sommers Outlines Fundamental Concerns with Current Regulatory Approach

CFTC Commissioner Jill E. Sommers delivered a speech before the Cadwalader Energy Conference to discuss her perspective on the energy markets and the CFTC’s role in the oversight and regulation of swap markets.  Commissioner Sommers criticized the CFTC for abandoning its principles-based regulatory approach in favor of a prescriptive one-size-fits-all regime, which has led to a morass of confusion and uncertainty as a result of attempting to regulate for potential loopholes.  In an effort to close every conceivable loophole, rather than to regulate for the general markets, Sommers argues that the CFTC has finalized rules which are vague, inconsistent and subject to legal challenge.  This (which Sommers describes as “death by a thousand cuts”) is costing market participants untold time and expense.

Commissioner Sommers stated that she believes a principles-based regulatory umbrella would address systemic risk and allow markets to continue to serve their intended purposes.  In addition to the need to improve its cost-benefit analysis, the Commission also faces several challenges with regard to the cross-border application of its swaps regulation.  In her speech, Sommers outlined four fundamental concerns which she believes the Commission should address:

  1. Contrary to Chairman Gensler’s interpretation of Dodd-Frank Section 722 that cross-border regulation is merely appropriate whenever “financial institutions operating outside the United States transmit risk directly into the United States through swap transactions with U.S. Persons,” Sommers argued that the jurisdiction as written should be followed.  The jurisdiction explicitly states that a swap transaction must have a direct and significant connection to the U.S.
  2. The Commission should revisit the definition of a “U.S. person” as soon as possible to allow entities to adjust their business models and behaviors.
  3. The Commission should avoid rule-by-rule comparisons for the purpose of comparability determinations because, according to Sommers, they’re too vague.  The Commission should instead take into account the fact that many non-U.S. SDs and MSPs will be subject to home country regulation which seeks to achieve the same goals as Dodd-Frank.  Thus, overlapping regulations create compliance costs without counterbalancing benefits.
  4. The Commission should not make the cross-border guidance more confusing than necessary.

Finally, Commissioner Sommers concluded by affirming that it is the responsibility of all five Commissioners to ensure that the rules can stand the test of time and be implemented in a reasonable fashion.

View speech here (links externally to CFTC website).

 

CFTC No-Action Letter Regarding Swaps Calculation by Foreign Entities for SD-MSP Definitions

The Division of Swap Dealer and Intermediary Oversight (“DSIO”) issued a no-action letter effectively providing a temporary definition of the term “U.S. person” for purposes of the calculations necessary to determine whether an entity is an SD or an MSP.  Until the end of the year, or such later date as the CFTC says otherwise, the following are to be treated as U.S. persons:

(i) A natural person who is a resident of the United States;
(ii) A corporation, partnership, limited liability company, business or other trust, association, joint-stock company, fund or any form of enterprise similar to any of the foregoing, in each case that is organized or incorporated under the laws of the United States;
(iii) A pension plan for the employees, officers or principals of a legal entity described in (ii) above, unless the pension plan is exclusively for foreign employees of such entity;
(iv) An estate or trust, the income of which is subject to U.S. income tax regardless of source; or
(v) An individual account (discretionary or not) when the beneficial owner is a person as described in (i) through (iv) above.

The no-action relief will apply where the counterparty to such swap is not a person as described in (i) through (v) above, regardless of whether that counterparty’s obligations under the swap are guaranteed by a person that is described in (i) through (v) above.

Similar relief is also provided concerning certain swap transactions by certain foreign entities when the counterparty is a foreign branch of one of the persons described in (i) through (v) above that intends to register as a swap dealer by March 31, 2013.

Each non-U.S. person is permitted to rely on its counteparty’s representations as to its status as a non-U.S. person.  A non-U.S. person may also rely on the representation of a counterparty that it intends to register as a swap dealer by the end of March. 

 

Lofchie Comment:  Here is a quote from the letter:  “[I]t has come to the attention of the Division, based on information provided by multiple parties, that prior to the Commission’s issuance of final guidance or a final exemptive order setting forth a definition of ‘U.S. person,’ foreign entities may adopt either potentially over-inclusive or potentially under-inclusive categorizations of their counterparties. . . . Either result would not be consistent with the Commission’s intent, in issuing the Proposed Cross-Border Interpretive Guidance for public comment, to establish a uniform and consistent standard . . .”
      In other words, the CFTC has learned through conversations with “multiple parties” (how many I wonder?) that where the CFTC has failed to adopt any rules, no one knows what the rules are (since they don’t in fact exist), or what the rules will be (since they have not been determined), or just what they should do, and different parties therefore end up interpreting the “rules” (or absence thereof) in different ways. 
      I find this statement somewhat comic-although perhaps one does not want the country’s financial regulators to have such a dry sense of humor.

See: CFTC Letter 12-22 PDF Image Regulations 1.3(ggg)(4) and 1.3(hhh); No-Action.

 

CFTC Time-Limited No-Action Letter Regarding FX Swaps for Purposes of SD, MSP and Pool Calculations

The Division of Swap Dealer and Intermediary Oversight issued a no-action letter providing time-limited, and otherwise limited, no-action relief from the obligation to include any forex swap or forex forward for purposes of determining a person’s registration requirement as an SD, MSP or CPO.  Be aware that the relief is quite limited. It applies for purposes of the calculations relevant to determining if a person is a major swap participant or SD, but significant aspects of the relief are only available if the Treasury determines (which is uncertain at this point) to exempt such swaps or forwards from the definition of the term “swap” under the CEA.

The letter also provides similar temporary no-action relief, for the same time period, for persons who would meet the definitions of the terms “CPO” and “CTA” in the CEA solely as a result of their forex swap and foreign forward activity, from registration in those capacities.

 

Lofchie Comment:  This no-action letter states that it is intended to alleviate the uncertainty that has arisen in the FX market because the Secretary of Treasury has not issued any determination as to which FX transactions will constitute “swaps” under Dodd-Frank.  Frankly, I don’t get it.  This no-action letter seems to be drafted so as to provide as little certainty as possible; much of the relief in the letter becomes ineffective if Treasury fails to provide an exemption, thus seemingly rendering the letter moot.  Beyond the extremely limited relief and less certainty provided by the letter, it is drafted in a remarkably confusing manner (see pages 4-5).  I simply do not understand why the CFTC could not issue a one-page letter that says, “until Treasury determines which FX transactions are swaps, then, for purposes of calculations to determine whether one is an SD, MSP, or CPO, one may ignore FX transactions.  Once the Treasury makes such a determination, market participants will be given a reasonable amount of time to include such transactions in their calculations going forward.”  
       Separately, I still question how the CFTC could set its levels for determining whether an entity would be an SD, MSP or CPO without knowing whether FX transactions would be counted in the relevant calculations.  It is not logical to say that “x” dollars of swaps make an entity into an SD if the term “swap” is not yet defined.

See: CFTC Letter 12-21 PDF Image Commission Regulation 1.3(ggg)(4); No-Action.