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Industry Updates

Inside and outside the CFTC concerns are raised over new swaps regulation

Thursday, July 07, 2011

John Damgara
Opalesque Industry Update –Futures Industry Association (FIA) President John Damgara released a statement following the CFTC approval of extensive changes in rules prohibiting fraud and manipulation in futures, swaps and cash commodity markets, and the FIA is clearly unsatisfied with the new regulation.

“"We are disappointed that the final rules do not reflect the extensive comments submitted to the CFTC by the FIA and other interested parties, and we are concerned that the CFTC did not provide more guidance on how it intends to apply the sweeping new powers that these rules will implement. We strongly support the CFTC's authority to pursue any and all deliberate attempts to manipulate prices or defraud participants in these markets, but the lack of clarity on how the broad new standards in the final rules will be applied has the potential to chill legitimate trading and reduce market liquidity."

On Thursday the CFTC voted through nearly 50 rules that would fall under Dodd Frank Regulation requirements. One of the most significant rules (according to Gary Gensler, CFTC Chairman) is the new requirement that they agency would only require one standard of proof that a trader acted recklessly, and it would allow the CFTC the ability to prosecute fraud-based manipulation. This particular rule is expected to have a great impact because prior to this the agency brought few cases against manipulators and won only a single won (after a decade long fight). Source).

Scott O’Malia, CFTC Commissioner spoke at the opening of the public hearing and requested that further transparency be adopted in adopting regulations. O’Malia noted that he has requested final regulation verbiage be posted on the CFTC website a full 7 days before proceedings, but has not heard whether or not that practice will be adopted. He also noted that while the ruling for stronger manipulation regulation would see the agency focused on pursuing such cases, O’Malia noted that without transparency through on all rules and changes, the duty (of sorting out who was confused by rules to who is flagrantly breaking them) would fall upon the shoulders of the enforcement staff.

“Briefly stated, the problem is: how can the Commission move forward on a final regulation implicating “swap dealers,” when the Commission has not determined if the term captures end-users? I recognize that the Commission will obtain the lion’s share of data from financial swap dealers. My concern is with those end-users that may be characterized as non-financial swap dealers. Even though the Commission is voting on Large Trader Reporting today, the Commission cannot determine the full benefits and costs of this regulation until the Commission defines “swap dealer” and “swap.” As I have stated previously, end-users did not cause the 2008 financial crisis. Every dollar of cost that the Commission imposes on end-users may translate into increases in energy or food costs or squeeze farmers and other industrial producers who are unable to pass on these increased costs,” said O’Malia. (Full statement available: Source)

Kirsten Bischoff

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