The financial crisis pushed the US congress to introduce the Dodd-Frank Act to avoid a similar collapse in the future. Now the Commodity Futures Trading Commission (CFTC) has taken another step towards ensuring the evolution of derivatives and swap execution facilities (SEF).
The regulator has approved two new rule changes. The first proposed rule regarded position limits for derivatives. The second was a proposed rule amending certain SEFs requirements and real-time reporting requirements. Both of them were poised as a natural evolution and alignment with the Dodd-Frank Act.
The first new approved rule included new and/or amended federal spot month limits for 25 physical commodity derivatives and physically-settled and linked cash-settled futures, options on futures, and economically equivalent swaps for such commodities.
Moreover, it also contained certain exemptions from position limits, such as a revised definition of “bona fide hedging transactions or positions” and an expanded list of enumerated bona fide hedges to cover additional hedging practices.
Additionally, the proposal established a new process that would streamline requests for bona fide hedge exemptions for both exchange-set and federal position limit requirements. The proposal also eliminates multiple duplicative reporting requirements for information currently available to the CFTC from the exchanges.
The second rule updated rules in parts 36, 37, and 43 of CFTC regulations relating to the execution of package transactions on SEFs. The amends had to do with the execution of block trades on SEFs as well as with the resolution of error trades on SEFs.
The first rule had a 90-day comment period ending on April 29 and the second had a 60-day comment period following publication in the Federal Register.
Commenting on the new proposed rule changes, Heath P. Tarbert, chairman of the CFTC, stated that SEFs were first enacted as part of the Dodd-Frank Act. Essentially, the SEFs resemble centralised exchanges, but have more flexibility in execution methods to accommodate the unique trading characteristics of swaps.
“In this regard, Congress took an evolutionary rather than a revolutionary approach, recognising that mandating too much change too quickly could diminish rather than foster liquidity,” he added.
While Tarbert stated that the rules had worked alright so far, he added that “rarely is statutory implementation perfect on the first attempt.”
“Some requirements are suitable for the swaps market as a whole but do not work well for particular types of transactions,” Tarbert argued. “CFTC staff has addressed such issues through a series of no-action letters, many of which have been in place for over six years. With the benefit of this experience, now is the time to begin codifying these no-action letters, with tweaks and refinements where needed.
“Through today’s proposal, we continue to strive for the golden mean that strikes the optimal balance between the features of the old bilateral swaps world and those of the anonymous, exchange-traded futures model. In short, we aim to facilitate a natural progression toward more standardised and liquid products with tighter spreads. At the same time, we recognise that certain products that benefit the market do not lend themselves to the Required Execution Methods.”
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