Timothy Massad, Chairman of the Commodity Futures Trading Commission, disclosed last week before the US Senate Committee on Agriculture, Nutrition and Forestry that the CFTC has begun “step two” of a retrospective regulatory review to determine which CFTC rules “may need to be modified or rescinded.”

As part of this review, said Mr. Massad, the Commission will solicit public input and “follow-up with rulemaking proposals as necessary.” The Chairman provided no insight into the potential areas for rulemaking.

According to Mr. Massad, the CFTC’s reflective review is in response to Executive Order 13563 of President Obama (January 18, 2011). That order required agencies to

consider how best to promote retrospective analysis of rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned.

(Click here to access Executive Order 13563.)

Mr. Massad said that the first phase of the CFTC’s retrospective review was its consideration of rules adopted in response to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. He claimed that, in response, the Commission modified a number of rules “to reflect market developments and to codify standard or commonly accepted industry practices.”

In his testimony, Mr. Massad also indicated that the Commission is looking at ways to improve its rules related to swap execution facilities. He indicated that, although SEF volumes “are growing,” and that one SEF already reports participation by 700 firms,

[w]e are looking at a number of additional issues concerning SEFs, such as the made available for trade determination process and concerns about the lack of post-trade anonymity for certain types of trades.

Mr. Massad acknowledged the input of Commissioner Giancarlo to the debate on SEFs, but rejected his proposal that “we should throw out the rules and start over.” However, he indicated that Mr. Giancarlo and he “had already found common ground on a number of changes that will improve the framework, and I expect that we will continue to do so.” (Click here for details of Mr. Giancarlo’s white paper of SEFs in the article, “CFTC Commissioner Laments Flawed US Swaps Trading Model” in the February 1, 2015 edition of Bridging the Week.)

Mr. Massad also noted the Commission is currently considering comments received in response to its September 2013 concept release on automated trading environments and is considering “what further steps may be necessary to further reduce risks in electronic and automated trading.” He provided no insight into a time frame for completion of this review other than "in the near future."

Separately, Commissioner J. Christopher Giancarlo severely criticized the CFTC’s proposed position limit rules before the EnergyRisk Summit in Houston, Texas.

In his presentation, Mr. Giancarlo argued that, because the run-up in oil prices prior to the 2008-2009 financial crisis “did not bear any of the signs of excessive speculation”, there is no evidence to support additional federal position limits in the energy markets. Indeed, because liquidity may be decreasing outside of the spot month, “the current problem [may not be] one of excessive speculation [but] of inadequate speculation.”

Mr. Giancarlo also criticized elements of the Commission’s proposal to eliminate storage transactions, merchandising and anticipatory hedging, cross-commodity hedges and gross versus net hedging from the categories of permissible hedges. According to Mr. Giancarlo,

I am very concerned that the overall effect of the CFTC’s bona fide hedging framework is to impose a federal regulatory edict in place of business judgment in the course of risk hedging activity by commercial enterprises. I believe that the CFTC must allow greater flexibility. It must encourage – not discourage – commercial enterprises to adapt to developments and advances in hedging practices.

Mr. Massad also told the Senate Committee that cybersecurity, information security and business continuity by clearinghouses, exchanges and SEFs represent a new challenge and risk to marketplaces that is being addressed by the CFTC. He said the CFTC currently requires clearinghouses and execution marketplaces to maintain adequate system safeguards and risk programs and to have recovery procedures; conducts system safeguard examinations to ensure exchanges’ and clearinghouses’ compliance with their requirements; and makes sure they conduct tests themselves of their cyber protections.