Securities Regulation Daily Berkovitz trains his eagle eye on undertakings the CFTC should embrace to achieve Dodd-Frank Act objectives
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Tuesday, June 11, 2019

Berkovitz trains his eagle eye on undertakings the CFTC should embrace to achieve Dodd-Frank Act objectives

By Brad Rosen, J.D.

The CFTC commissioner advocated establishing speculative position limits, with appropriate exemptions for bona fide hedging activities, as well as pursuing ways to foster greater competition in the derivative markets in a Houston speech.

Speaking to an audience at the FIA Commodities Symposium in Houston, Texas, CFTC Commissioner Dan Berkovitz took on the controversial issue of position limits, as well initiatives to promote greater market competition, in a speech titled "Take It to the Limit, One More Time" (Again)In so doing, Berkovitz honored the memory of former Commissioner Bart Chilton, a strong proponent of speculative position limits, who had previously quoted the similarly-titled Eagles song in a 2013 official statement supporting speculative position limits measures called for by the Dodd-Frank market reforms. Chilton passed away in April of this year at the age 58.

Position limits: a never-ending saga. At the onset, Berkovitz acknowledged the long and controversial history surrounding speculative position limits. Specifically, he noted that since the passage of the Dodd-Frank Act in 2010, position limits have been the subject of a final rule, a court decision vacating that final rule, a new proposal, a supplemental proposal, and then a re-proposal. Currently, the CFTC is again of trying come up with a new proposed rule addressing speculative positive limits called for by Dodd-Frank.

Berkovitz stated that it is best consider a new position limits rule during times of less turbulent market conditions than those faced in the summer of 2008. Nonetheless, he observed that uncertainty over whether, when, and what the Commission will do about position limits is a constant concern for market participants. Presently, the CFTC is still looking to address the federal court that vacated the prior final rule and remanded the issue back to the Commission. That court directed the Commission to "fill in the gaps and resolve the ambiguities" as to whether the law mandated the agency to impose position limits or required such limits only upon a finding of necessity and appropriateness. CFTC staff is currently working to address the court’s directive.

A framework to address speculative position limits. Acknowledging vastly differing viewpoints, Commissioner Berkovitz offered what he characterized as "common-sense principles" that should guide the CFTC’s position limits rulemaking, and which he believes all should be able to agree. This includes:

  • The factors in determining appropriate limits must be current. Just as the Commission requires up-to-date swaps data to inform its policy determinations on implementing OTC derivatives reforms, it also needs a current deliverable supply information to inform the methodology for updated position limits;
  • The exchanges must play an integral role in the administration of the position limits regime. He Exchanges know their markets, and they know the hedging practices of traders in their markets. Accordingly, the CFTC must rely on that knowledge and expertise in order to make the position limits regime work effective; and
  • One size will not fit all. Not all futures markets are the same. The Commission cannot impose position limits on energy and metals transactions solely on the basis of how it has imposed limits in agricultural commodities over the years.

Berkovitz’s core view on position limits. According to Commissioner Berkovitz, meaningful position limits are critical to preventing manipulation or distortion of the price discovery process due to excessively large speculative positions. However, he believes in developing these limits, the Commission must also craft appropriate bona fide hedge exemptions. He asserted, "Properly calibrated position limits, coupled with bona fide hedge exemptions, are pro-market regulations. They help to maintain the integrity of price discovery for all market participants, while also preserving the ability of producers, end-users, and others to enter into bona fide hedges to manage their commercial risks." Berkovitz noted that has carefully read many of the comment letters received by the CFTC’s on prior proposals, and he is committed to getting both position limits and hedge exemptions "done right."

Fostering greater competition in the derivative markets. Another set of initiatives Berkovitz explored were proposed measures he recommends the Commission pursue to increase competition. As a preliminary matter, the commissioner observed the increase in concentration in the trading and clearing of swaps among the bank swap dealers. He noted that high levels of concentration present systemic risks and provide fewer choices for end-users. Specifically, he noted that for swaps trading, five registered bank swap dealers are party to 70 percent of all swaps. Moreover, the eight largest firms clear 96 percent of cleared swaps. In order to address these concerns, Berkovitz believes the CFTC has taken or should take a number of steps to enhance participation and diversity in our derivatives markets. Some of these measures include:

  • De minimis swap dealing. Last November, the Commission set the swap dealer registration threshold at $8 billion. The regulation required the threshold to drop to $3 billion in the event the Commission did not act. Analysis of swap trading data showed that lowering the threshold to $3 billion would not materially increase the amount of swap activity covered by dealer regulation. If the lower threshold took effect, the result would be fewer dealers and less competitive pricing;
  • FloorTrader registration. The floor trader provision in the swap dealer definition should be expanded. Fixing this existing rule will allow proprietary trading firms to trade on swap execution facilities as registered floor traders rather than registering as swap dealers. Proprietary trading firms can be a source of substantial liquidity for the swaps market. This additional liquidity can enhance price discovery and reduce spreads; and
  • Name give-up. The practice of name give-up for anonymously traded and cleared swaps should be abolished. Traders should only be required to disclose their identities when necessary for counterparty risk management. Name give-up discourages non-dealers from participating in exchange-style markets, causing market fragmentation and hindering competitive price formation.

Unfinished business. In conclusion, Commissioner Berkovitz acknowledged that nearly nine years have passed since Congress passed the Dodd-Frank Act. While noting great progress in achieving the goals of the Act to reduce systemic risks and improve market integrity have been achieved, he is mindful that speculative position limited remains one of the important pieces of unfinished business before the Commission. He is hopeful it will reach completion soon.

MainStory: TopStory CFTCNews CommodityFutures Derivatives DoddFrankAct ExchangesMarketRegulation Swaps

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