CFTC Commissioner J. Christopher Giancarlo delivered a speech before the Commodity Markets Council titled, “End-Users Were Not the Source of the Financial Crisis: Stop Treating Them Like They Were.”
Commissioner Giancarlo said he is a proponent of what he considers to be the three “key pillars” of Dodd-Frank: (i) central counterparty clearing; (ii) swap data reporting; and (iii) regulated swaps execution. He stated that his opinions are founded on the view that well-regulated markets are good for business and job creation. He explained, however, that end-users, unfortunately, have become collateral damage of certain Dodd-Frank reforms, even though they “were not the source of the financial crisis.”
One rule Commissioner Giancarlo identified as burdensome to end-users is revised CFTC Rule 1.35 (“Records of Commodity Interest and Related Cash or Forward Transactions”), which requires the keeping of oral and written records. Commissioner Giancarlo explained that it is simply not “feasible technologically” to keep pre-trade text messages in a form that the rule requires. Therefore, the rule misses the intended benefit and instead imposes “senseless costs that fall especially hard” on among others, U.S. futures markets.
Commissioner Giancarlo also criticized the CFTC’s process regarding the final rule defining a “swap dealer.” He noted that the final rule could cause “many non-financial companies to curtail or terminate risk hedging activities with their customers, limiting risk management options for end-users, and ultimately consolidating marketplace risk in only a few large swap dealers,” running counter to the goals of Dodd-Frank to reduce systemic risk in the marketplace.
Commissioner Giancarlo additionally expressed his concern that the bona fide hedging framework in the CFTC’s position limits proposal imposes a “federal regulatory edict,” rather than allowing market participants to assess the risk of hedging activity. He encouraged the CFTC to “carefully consider” concerns raised by market participants regarding the position limits proposal, including:
- updating and modernizing deliverable supply estimates;
- carving out ERISA plans;
- modifying or eliminating the limitations on cross-commodity hedging;
- restoring bona fide hedging status to anticipatory merchandising hedges; and
- creating an aggregation policy that focuses on effective control over trading decisions, rather than primarily on ownership.
As the Commissioner points out, Dodd-Frank is having numerous “undesirable” consequences, including materially raising costs for end-users and exacerbating whatever the consequences of “too big to fail” may be by creating a costly regulatory structure that drives medium-sized firms out of regulated activities. (We use the term “undesirable” rather than “unintended” because, even if these consequences are not intended, they were so predictable that “unintended” seems too generous a word choice, as it carries some implication of “unforeseeable.”)
The Commissioner had pointed remarks on how the CFTC is imposing a “federal regulatory edict” in its position limits proposal. We have long questioned the CFTC process. In the absence of presenting convincing economic studies, the CFTC asserted that its rules could be justified by referencing the supposed wrongdoings of oil hoarders who were manipulating prices upward. As energy prices have recently crashed driven by world events, it behooves the CFTC to re-examine what now seems to be a weak intellectual foundation to impose such limits. In retrospect, it now seems likely that the prior increases in oil prices were also driven by world events (such as threats of war and the booming Asian economies), and not merely by the trading of oil speculators.