Liquidity

Acting CFTC chairman Mark Wetjen announces three actions to protect liquidity

The Commodity Futures Trading Commission’s acting chairman Mark Wetjen and commissioner Scott O’Malia have announced three actions to benefit utility special entities, further consider certain hedging practices for commercial market participants, and promote end-user trading on swap execution facilities (SEFs) and designated contract markets (DCMs). 

Wetjen says: “I am pleased the Commission is acting to address the impact the special entity de minimis threshold is having on utility special entities and the markets in which they operate and to further consider the appropriate treatment of hedging practices in the marketplace today.
 
“I am equally pleased that the Divisions are acting to promote trading on SEFs and DCMs and give certain members of these important exchanges and platforms additional time to come into compliance with Regulation 1.35(a).
 
“These proposals collectively reflect our continuing efforts to ensure that market regulations accomplish their intended function without creating negative, unintended consequences, in particular for commercial end-users.”
 
”Today marks a significant victory for the end-user community and for the Commission’s rulemaking process.  End-users will win today, with the proposal fixing the Special Entity rule and further relief from rule 1.35, which applied unworkable and costly recording requirements.  The relief will remain effective until the Commission revisits the rule to appropriately tailor the rule’s requirements to the relevant entities and more carefully consider the costs and technological feasibility of compliance with the rule.  I am pleased that the Commission has chosen to confront the shortcomings in its rules by using the proper process that is consistent with the Administrative Procedure Act,” says O’Malia.
  
The Commission has issued a proposed rule amendment to adjust the de minimis threshold for determining if an entity that enters into swaps with utility special entities must register as a swap dealer.
 
The proposal would amend the Commission’s swap dealer definition to permit a person dealing in “utility operations-related swaps” with “utility special entities” to exclude those swaps in determining whether that person has exceeded the de minimis threshold specific to dealing with special entities.  Under the proposal, however, such swaps would be counted for determining whether the general dealing de minimis threshold applies.
 
The Commission is seeking comments from the public on the proposal.  The comment period will close 30 days after the proposal is published in the Federal Register.
  
Wetjen, with the support of O’Malia, previously directed the staff to hold a public roundtable on 19 June 2014 to consider certain hedging issues relating to market practices in physical commodity derivatives. 
 
In order to provide interested parties with an opportunity to comment on the issues to be discussed at that roundtable, the Commission is opening comment periods for two previous proposals, the Position Limits Proposal and the Aggregation Proposal, for a three-week period starting 12 June 2014 (one week before the roundtable) and ending 3 July (two weeks following the roundtable). 
 
The Commission specifically asked market participants to comment on the following issues: hedges of a physical commodity by a commercial enterprise, including gross hedging, cross-commodity hedging, anticipatory hedging, and the process for obtaining a non-enumerated exemption; the setting of spot month limits in physical-delivery and cash-settled contracts and a conditional spot-month limit exemption; the setting of non-spot limits for wheat contracts; the aggregation exemption for certain ownership interests of greater than 50 per cent in an owned entity; and aggregation based on substantially identical trading strategies. 
  
To incentivise trading on SEFs and DCMs, the Commission’s Division of Swap Dealer and Intermediary Oversight and Division of Market Oversight has issued a no-action letter that provides relief with respect to compliance with certain recordkeeping provisions of Regulation 1.35(a) to members of designated contract markets or swap execution facilities that are not registered or required to be registered with the Commission. 
 
The letter provides relief, pending further Commission action, to covered members with respect to complying with the requirements under Regulation 1.35(a) to keep electronic text messages and to keep records in a form and manner identifiable and searchable by transaction. 

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