CFTC’s Massad on End-Users
CFTC Chair Timothy G. Massad delivered a speech on the importance of providing flexibility in the CFTC’s regulations to accommodate hedging by commercial end-users of derivatives. Mr. Massad highlighted the following:
- Last September the CFTC amended its rules so that local, publicly-owned utility companies could continue to effectively hedge their risks in the energy swaps market. The CFTC unanimously approved a change to the swap dealer registration threshold for transactions with special entities which will make that possible.
- He expects the CFTC to finalize changes in the near future on customer-protection matters to address a concern of many in the agricultural community and many smaller customers regarding the posting of collateral. The rules were adopted in the wake of the MF Global insolvency. Market participants have asked the CFTC to modify one aspect of the rules regarding the deadline for futures commission merchants to post “residual interest,” which, in turn, can affect when customers must post collateral.
- The CFTC has proposed to clarify when forward contracts with embedded volumetric optionality – a contractual right to receive more or less of a commodity at the negotiated contract price – will be excluded from being considered swaps so that commercial companies can continue to conduct their daily operations efficiently.
- The CFTC has proposed to revise certain recordkeeping requirements to lessen the burden on commercial end-users and commodity trading advisors.
- The CFTC staff has taken action to make sure that end-users can use the Congressional exemption given to them regarding clearing and swap trading if they enter into swaps through a treasury affiliate.
- He noted the CFTC staff also recently granted relief from the real-time reporting requirements for certain less liquid, long-dated swap contracts, recognizing that immediate reporting can undermine a company’s ability to hedge. Here I believe he was referring to narrow no-action relief granted to Southwest Airlines to permit a 15 calendar day delay in reporting oil derivative transactions.
- He has asked the CFTC staff to look at the usefulness of information required in Form TO and the CFTC will consider changes to reduce the reporting currently required for trade options.
Chair Massad then turned his attention to the pending margin rules. Among other things he referred to the December 2014 TRIA legislation that makes it clear that end-users are to be exempted from the requirement to post margin in connection with swaps that are not cleared. He observed that the CFTC is working to implement these statutory end-user margin protections quickly through an interim final rule, as Congress intended.
He also discussed the importance that position limit rules continue to permit commercial end-users to continue to engage in bona fide hedging transactions.
Other CFTC Commissioners also believe more work needs to be done to accommodate end-users. In January 2015, CFTC Commissioner J. Christopher Giancarlo delivered remarks where he stated “Unfortunately, caught up in some of the collateral damage surrounding the Dodd-Frank reforms were the traditional commodity and energy markets and the end-users who depend on them for a variety of uses. Yet, end-users were not the source of the financial crisis. That is why Congress undertook to exempt end-users from the reach of swap trading regulation. It is our job at the CFTC to make sure that our rules do not treat them like they were the cause of the crisis.”
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