At a public hearing on November 3, the Commodity Futures Trading Commission proposed three measures intended to avoid unintended consequences arising from previously adopted rules. These proposals were to:
- eliminate the current, automatic acceleration, set to go into effect on December 21, 2018, from 6 p.m. to 9 a.m. each day, by when future commission merchants must use their own funds (so-called “residual interest”) to cover the aggregate margin deficiencies of their customers in certain customer protected account environments. Instead, such change would only occur after a formal rulemaking process;
- eliminate a rule provision that on its face requires commodity trading advisors to record oral communications regarding their futures and swaps transactions, and to clarify that oral and written communications leading to the execution of transactions do not need to be maintained in a form that permits identification of particular transactions (although they must be searchable); and
- clarify that certain non-speculative forward contracts that provide for variations in delivery amounts (so-called “volumetric optionality”) are excluded from the definition of swaps.
According to Timothy Massad, CFTC Chairman, these measures, if approved, will “involve fining tuning our rules to make sure they work as intended.”
In recommending issuance of the proposal to delay the automatic change in time FCMs are required to contribute residual interest, Commissioner Mark Wetjen appeared to acknowledge the challenging economic situation many FCMs currently face. According to Mr. Wetjen,
[c]learly, while the commission must weigh the costs to FCMs of its risk-management requirements, it need not scope them to ensure that every FCM that exists today has systems and practices in place to comply with them. Going forward, the commission should strive to ensure adequate accessibility to the marketplace knowing its importance to market liquidity, but remain vigilant in enforcing current FCM requirements under its rules.
Commissioner J. Christopher Giancarlo, in his opening remarks, more expressly acknowledged the financial plight of many FCMs and the impact on them of more CFTC rules.
Without healthy FCMs serving their customers, the everyday costs of groceries and winter heating fuel will rise for American families. Yet, today we have around half the number of FCMs serving our farmers than we did a few years ago. FCMs, particularly small FCMs, are being squeezed by the current environment of low interest rates and increased regulatory burdens. They are barely breaking even. We should not be squeezing them further with increased compliance costs if we can avoid it and still effectively oversee the markets.
Mr. Giancarlo also argued that, not only should the automatic change in time provision related to residual interest be cancelled, as proposed, but other automatic provisions in CFTC rules too—such as the automatic lowering of the de minimis threshold to become a swap dealer from US $8 billion to $3 billion in 2016. “Like today’s proposal, the Commission should only adjust the de minimis threshold after it has considered the data and weighed public comments,” said Mr. Giancarlo.
Proposed rules regarding residual interest and recordkeeping were issued the day of the hearing. Comments will be due by 60 days after formal publication in the Federal Register.
(Click here for more information on the CFTC’s residual interest proposal in the article “CFTC Proposes to Revise Residual Interest Deadline for FCMs” and here for more information on the Commission’s recordkeeping proposal in the article “CFTC Proposes to Amend Recordkeeping Requirements,” both in the November 7 edition of Corporate & Financial Weekly Digest by Katten Muchin Rosenman LLP.)
My View: The political landscape will change radically in January as a result of the election this past week. Although some might hope that the Dodd-Frank Wall Street Reform and Consumer Protection Act might be repealed, it won’t be. However, it is possible that, to avoid the possibility of endless hearings on the Hill as well as a nod to political reality, the Commission will continue its new path of tweaking existing regulations to minimize unintended (if not foreseen) consequences. The Commission also needs to rely on the self-regulatory organizations more—even for the enforcement of some market offenses—to ensure it has the resources to address what it considers its priority issues. Finally, the Commission should consider periodically and formally identifying and issuing a proposed schedule of its anticipated initiatives—such as the likely timing of its re-release of its position limits rule.