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U.S. COMMODITY FUTURES TRADING COMMISSION.
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U.S. COMMODITY FUTURES TRADING COMMISSION.
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FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
April 9, 2013
CFTC Orders Florida-based Forex Global Solutions Inc., Forex Global Solutions Ltd., Barry Sendach, and Joshua Kershner to Pay $750,000 for Foreign Currency (Forex) Fraud and Violating CFTC Registration Requirements
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against Barry Sendach of Boca Raton, Fla., Joshua Kershner of Boynton Beach, Fla., and their Boca Raton-based companies, Forex Global Solutions Inc. and Forex Global Solutions Ltd. (together, Forex Global), for fraudulently soliciting customers to trade foreign currency (forex) and violating CFTC registration requirements. The Order requires Forex Global, Sendach, and Kershner, jointly and severally, to pay a $750,000 civil monetary penalty and imposes permanent trading and registration bans against them.
The CFTC Order finds that since October 18, 2010, Forex Global fraudulently solicited customers to open off-exchange forex trading accounts and grant discretionary trading authority over those accounts to Forex Global. In its solicitations, Forex Global published false historical performance returns on its website and in its solicitation emails and failed to disclose that it calculated the performance returns inaccurately, including by reflecting only one of the three fees that customers are charged, the Order finds.
The Order also finds that since October 18, 2010, Forex Global, Sendach, and Kershner failed to register with the CFTC as required under comprehensive new CFTC forex rules that became effective on that date.
Under those rules — which are designed to protect individual investors that buy forex contracts from or sell forex contracts to forex firms — entities that obtain or exercise discretionary trading authority over forex trading accounts must be registered with the CFTC as Commodity Trading Advisors (CTAs), and entities that solicit or accept forex trades must be registered with the CFTC as Introducing Brokers (IBs). The CFTC forex rules also require certain persons associated with a CTA or IB to be registered as Associated Persons (APs) of the CTA or IB. The Order finds that Forex Global violated those rules by acting as a CTA and IB without registering in those capacities, and further finds that Sendach and Kershner violated those rules by acting as APs of Forex Global without registering as APs.
The CFTC Division of Enforcement staff responsible for this action are Stephanie Reinhart, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard Wagner.
CFTC Customer Protection Information
The CFTC strongly urges members of the public to check with the National Futures Association (NFA) whether a company is registered before investing funds. If a company is not registered, an investor should be wary of providing funds to that company.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in Nevada Orders Charles Leroy Timberlake and Trans Global Investments, LLC to Pay $340,000 to Settle Commodity Pool Fraud Charges
Defendants permanently barred from the commodities industry
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring defendants Trans Global Investments, LLC (Trans Global), a Nevada company and unregistered Commodity Pool Operator (CPO), and its President, Charles Leroy Timberlake, a Texas resident, to pay $200,000 in restitution and a $140,000 civil monetary penalty to settle CFTC charges of commodity pool fraud.
The consent order of permanent injunction, entered on January 14, 2013, by Judge Gloria M. Navarro of the U.S. District Court for the District of Nevada, also imposes permanent trading and registration bans against Timberlake and Trans Global and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.
The CFTC had sued Trans Global and Timberlake, along with CIS Commodities LLC of Henderson, Nev., and its founder and president, Allen Nicholas Ward, of Aspen, Colo., on June 29, 2011 (see Related Link: CFTC Press Release 6068-11). As to Timberlake and Trans Global, the CFTC complaint alleged that Timberlake fraudulently solicited at least $220,000 from five individuals for the purpose of trading commodity futures and option contracts through the Trans Global pool. The complaint further alleged that Timberlake falsely represented that he was registered with the CFTC as a CPO when, in fact, he has never been registered with the CFTC in any capacity. Finally, the complaint also alleged that Timberlake made false representations of material facts and issued false statements to Trans Global pool participants regarding the profitability and value of their investments.
The litigation continues as to the remaining defendants.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
"The End-User Bill of Rights"
Statement of Commissioner Bart Chilton
April 3, 2013
We are one week away from an important date in Dodd-Frank implementation: the April 10 compliance date for Dodd-Frank swap reporting rules for end-users. This date represents the first major compliance date for the end-user community, a class of market participants that includes many who have not been regulated by the CFTC until now.
As we move one step closer to the full implementation of Dodd-Frank, I’m reminded of another important transition, one from over 220 years ago, the transition of this great nation from a colonial monarchy to a national democracy. At the dawn of the United States of America, the founding fathers set out ten principles, the "Bill of Rights" that would bind the new national democratic government. Similarly, today I am setting out ten principles to guide the Commission as we move into a new, more transparent Dodd-Frank regulatory regime. I believe these principles best protect our consumers and end-users who help move our economy forward—and let's keep in mind that these end-users were not the cause of the financial crisis that lead to financial reform. In fact, end-users were among the many victims of the crisis and much of Dodd-Frank was drafted with their interests in mind.
The futures and swaps markets wouldn't exist without end-users. The primary public benefit of derivatives markets is that they provide end-users risk management opportunities that, in turn, allow them to more easily fund operations and investments and thereby generate economic growth. The ability of end-users to fund their operations is directly related to the prices paid by consumers and the overall well-being of our economy; so protecting the end-users is akin to protecting the every-day consumer. The End-User Bill of Rights therefore focuses on what I believe should be the inalienable rights of end-users:
1. Right to reasonable Dodd-Frank implementation. Dodd-Frank needs to be implemented and needs to be implemented quickly, but that does not mean it should be done so harshly. Back in December 2012, I supported the Commission providing good faith forbearance relief for swap dealers (SDs) and major swap participants (MSPs) until July 31, 2013 (under certain circumstances) when trying in earnest to come into compliance with new CFTC Dodd-Frank rules. Consistent with that six month forbearance relief, I will not approve an action against end-users seeking to comply with CFTC Dodd-Frank rules in good faith, provided they act in ways consistent with a good faith intention to comply, until after October 31, 2013.
2. Right to legal certainty. The Commission and the Commission staff need to provide the market as much legal certainty as possible as we move through a challenging implementation period. End-users and other market participants should have little doubt as to the status of their activities and the Commission and staff should respond thoughtfully and diligently to requests for legal certainty. When an answer isn’t easy to provide, then the Commission or staff should be as transparent as possible with the public. The Commission or staff should strive to provide the market relief or clarity well in advance of a compliance date—last minute relief and clarification should be avoided. Finally, during this implementation of Dodd-Frank, I will not support an action against an end-user, exchange, or anyone else on an issue deserving clarity that is the subject of an outstanding request for interpretive guidance.
To provide a specific example of where the Commission could assist the end-user community with additional legal clarity, take the legal status of trade options. The Commission should tighten our guidance on commodity contracts with volumetric optionality, consistent with Commission precedent. At the same time, the Commission should focus on implementing Dodd-Frank for non-trade option swaps and broaden the trade option exemption in order to minimize any market disruptions in the trade options market. We should give end-users the opportunity to meet their statutory obligation to report trade options through an annual Form TO so that the Commission can monitor these markets for problems or evasion.
3. Right to compete in the markets. End-users should be able to hedge without getting mauled by cheetahs or crushed by Massive Passives. To protect end-users' right to compete in the markets, the Commission should start with two common sense rulemakings: First, we need high-frequency trader registration and conduct rules to prevent cheetahs from going feral. We should also provide the public market quality metrics designed to help end-users and other non-cheetahs from distinguishing between false cheetah liquidity and true liquidity. Second, we need caps on speculation so that the commodity markets return to their principal role as risk management markets for end-users. The commodity markets worked best when end-users were the predominant players. The Commission should move quickly on a new proposal on speculation limits by May 1.
4. Right to safe accounts. We need strong rules and rigorous auditing to ensure that futures commission merchants (FCMs) don't abuse their role as intermediaries while not imposing undue burdens on FCMs that provide end-users access to critical risk management markets (including a sensible compromise on residual interest). End-users should also have the right to choose between full segregation or to have their money at an FCM. If we require the availability of this option, the market will provide end-users better and more competitively-priced access to full segregation. Congress should also act to give end-users backstop protection through federally-mandated insurance.
5. Right to have confidence in the commodity markets. End-users should be confident that their intermediaries, FCMs and SDs in particular, are appropriately regulated and supervised. The Commission needs to establish rules that do this and ensure they are being enforced. The Commission needs bigger penalties to deter the abuses that threaten the health and stability of the markets. I have called for raising civil monetary penalty maximums to $10 million for entities and $1 million for individuals. The current $140,000 maximum civil monetary penalty is simply an inadequate deterrence for an agency tasked with, among other things, deterring manipulation and preventing systemic risk. Today’s regulatory infractions can spawn tomorrow’s financial meltdown and the Commission should be able to seek penalties to deter the malfeasance and negligence that can contribute to systemic problems.
6. Right to clear (or not to clear). The right to clear or not to clear should be protected for end-users. Central hedging units for non-financial end-users should be free to clear or not to clear on transactions that mitigate commercial risks for their corporate group. End-users that use inter-affiliate swaps to centralize and manage risk across a corporate group through a central hedging unit should be given the flexibility to clear or not to clear. End-users’ inter-affiliate swaps should also be exempt from transaction-by-transaction reporting. The Commission should move quickly to provide relief from reporting requirements for inter-affiliate transactions for end-users.
7. Right to margin flexibility and reasonable capital rules. Under-collateralization has not been an end-user problem. Accordingly, I support the latest February 2013 IOSCO/Basel consultation that would exempt non-financial entities that are not systemically important from prescriptive margin requirements. The Commission also needs to come up with a sensible compromise on capital requirements for non-financial SDs. The Commission should encourage non-financial SDs to register. Non-financial SDs provide competition to financial SDs and their presence lets end-users hedge their risks on more competitive terms. On the one hand, Commission capital rules should ensure non-financial SDs have adequate capital to fall back on in the event of market or portfolio stresses. On the other hand, these rules should not put non-financial SDs at a competitive disadvantage.
8. Right to hedge. Speculative position limits should encourage and not unduly complicate prudent commercial risk management practices. Public power end-users using swaps to hedge commercial risk should have the same access to risk management markets as privately-owned utilities. This should be done preferably through regulatory relief.
9. Right to smart regulation. As we move through implementation, we are going to find smarter ways to accomplish regulatory policy goals. The Commission owes the end-user community a commitment that it will amend its rules when these smarter ways become apparent. For example, there may be more prudent ways to implement Part 46 historical swaps reporting for end-users that the Commission should consider. In the interim, the Commission should give end-users a six month reprieve, through October 2013, for historical swaps reporting requirements.
10. Right to be heard. SDs and MSPs are, by definition, big boys and girls who’ve seen the writing on the wall for years. As Commission registrants and as large financial conglomerates, they can go to the NFA or industry organizations like ISDA for guidance on how to comply with our rules. NFA and ISDA and similar organizations have experience orchestrating change on an industry-wide basis. Many end-users, on the other hand, are not used to having their swaps activity subject to CFTC regulation. During and after Dodd-Frank implementation we need a venue for end-users to air their concerns. I call for an End-User Advisory Committee (EUAC) with regularized meetings. End-users face an array of unique compliance challenges and legitimate business and regulatory concerns that warrant the Commission’s focused attention.
Just like the Constitution is subject to amendment (some of the best amendments came almost eighty years after the first ratified draft), so is this document. I look forward to working with end-users, consumers, SDs, MSPs, FCMs, and others as we move through an exciting and challenging implementation period and invite their comments on this End-User Bill of Rights. If we do our jobs as regulators and implement Dodd-Frank quickly and reasonably, the markets will improve for the benefit of end-users and the American public. That was the goal of Congress and that continues to be my goal.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in New York Orders Madison Dean, Inc. and Its Principal, George Athanasatos, to Pay over $1.4 Million to Settle Forex Fraud Charges in CFTC Enforcement Action
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order against Defendants Madison Dean, Inc. (Madison Dean), of Wantagh, N.Y., and its principal, George Athanasatos, also of Wantagh, requiring them jointly to pay nearly $250,000 in restitution to defrauded customers. The Consent Order of Permanent Injunction, entered by Judge Joseph F. Bianco of the U.S. District Court for the Eastern District of New York, also imposes a $1 million civil monetary penalty on Madison Dean and a penalty of $210,000 on Athanasatos. The Order imposes permanent trading and registration bans against both defendants and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act, as charged.
The Order stems from a CFTC Complaint filed on May 8, 2012, charging Madison Dean, Athanasatos, and another Madison Dean principal, Laurence Dodge of Fresh Meadows, N.Y., with fraudulently soliciting approximately 19 persons to invest approximately $415,000 in managed trading accounts to trade off-exchange foreign currency (forex) contracts on a leverage or margined basis (see CFTC Press Release 6254-12).
The Order finds that Madison Dean and Athanasatos — through an internet website, written solicitation materials, and oral solicitations — misrepresented and omitted material facts about the history of Madison Dean, the performance record of Madison Dean, the nature of the Madison Dean’s clients, and the background and qualifications of the Madison Dean’s employees to create a false impression that Madison Dean was a well-established and successful company. The Order further finds that after being in operation for a little over one year — during which time customers lost approximately $250,000 and Madison Dean collected approximately $112,000 in commissions and fees — Madison Dean shut down its operation with no notice to its customers and no way for customers to contact the company or any of its associates.
The CFTC’s litigation continues against Defendant Laurence Dodge.
The CFTC appreciates the assistance of the United Kingdom’s Financial Services Authority in this matter.
CFTC Division of Enforcement staff members responsible for this case are Alan I. Edelman, James H. Holl, III, Michelle Bougas, Gretchen L. Lowe, and Vincent McGonagle.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Charges CME Group’s New York Mercantile Exchange and Two Former Employees with Disclosing Material Nonpublic Information about Customer Trades
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed an enforcement action charging the New York Mercantile Exchange, Inc. (CME NYMEX), which is owned and operated by the CME Group, and two former CME NYMEX employees, William Byrnes and Christopher Curtin, with violating the Commodity Exchange Act and CFTC Regulations through the repeated disclosures of material nonpublic customer information over of period of two and one-half years to an outside commodity broker who was not authorized to receive the information.
The CFTC’s Complaint, filed on February 21, 2013, in the U.S. District Court for the Southern District of New York, alleges that Byrnes and Curtin worked on the CME ClearPort Facilitation Desk and were responsible for facilitating customer transactions reported for clearing through the CME ClearPort electronic system. The Complaint alleges that at least from in or about February 2008 to September 2010, Byrnes knowingly and willfully disclosed material nonpublic information about CME NYMEX trading and customers, including about trades cleared through CME ClearPort, to a commodity broker on at least 60 occasions. The Complaint further alleges that between May 2008 and March 2009, Curtin knowingly and willfully disclosed the same type of information to the same commodity broker on at least 16 additional occasions. The nonpublic customer information unlawfully disclosed by Byrnes and Curtin in conversations — often captured on tape — included details of recently executed trades, the identities of the parties to specific trades, the brokers involved in trades, the number of contracts traded, the prices paid, the structure of particular transactions, and the trading strategies of market participants, according to the Complaint.
The Complaint alleges that the CME NYMEX and the two former employees violated the Commodity Exchange Act and CFTC Regulations, which specifically prohibit the disclosures of this type of customer information.
The CFTC’s Complaint also alleges that in July 2009, a market participant complained to CME NYMEX that the participant believed nonpublic information about trades cleared through CME ClearPort had been disclosed by a CME NYMEX employee named "Billy." Although a CME NYMEX Managing Director who investigated the market participant’s complaint identified "Billy" to be William Byrnes, CME NYMEX did not then question Byrnes, and Byrnes’s illegal disclosures continued for over a year, until at least September 2010. Ultimately, CME NYMEX terminated Byrnes’s employment in December 2010 after yet another market participant complained to CME NYMEX about disclosures of nonpublic customer information. Curtin had previously left CME NYMEX voluntarily.
In its continuing litigation, the CFTC seeks civil monetary penalties, trading and registration bans, and a permanent injunction prohibiting further violations of the federal commodities laws, as charged.
CFTC Division of Enforcement staff responsible for this case include Patrick Daly, James Wheaton, David W. MacGregor, Lenel Hickson, Stephen J. Obie, and Vincent A. McGonagle.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Enskilda Futures Limited to Pay a $125,000 Civil Monetary Penalty for Failing to Meet Minimum Capital Requirements Due to Margin Errors
Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and simultaneously settling charges against Enskilda Futures Limited (EFL), a London-based Futures Commission Merchant (FCM), for failing to meet the minimum capital requirements as set forth in Section 4f(b) of the Commodity Exchange Act (CEA) and CFTC Regulation 1.17. The failure to meet the minimum capital requirements was a result of EFL’s failure to call for sufficient margin collateral on an intra-month basis from its ultimate parent, Skandinaviska Enskilda Banken, AB (SEB), which holds an omnibus account at EFL, the Order finds. The CFTC Order requires EFL to pay a $125,000 civil monetary penalty and to maintain the remedial measures adopted following discovery of the error.
The CFTC Order finds that during the period of July 14 to August 2, 2011 (the Relevant Period), EFL collected only net margin collateral from SEB on an intra-month basis and not gross margin collateral as required. At month end, EFL and SEB settled up and EFL called for gross margin; thus, there was no effect on EFL’s monthly capital. However, because EFL failed to collect adequate margin collateral on an intra-month basis from SEB, EFL incurred charges to its adjusted net capital. As a result of these charges, EFL failed to meet the minimum capital requirements on 11 days in violation of Section 4f(b) of the CEA, 7 U.S.C. § 6f(b) (2006), and CFTC regulation 1.17, 17 C.F.R. § 1.17 (2011), according to the Order.
The error was discovered during a routine risk-based audit conducted by CME Group, Inc. (CME) on or about November 8, 2011, the Order finds. On November 9, 2011, EFL filed notice with the CFTC, the National Futures Association, and the CME, pursuant to CFTC regulation 1.12(a) and (f)(3), 17 C.F.R. §1.12(a) and (f)(3) (2011), advising of its failure to meet the net capital requirements during the relevant period. EFL immediately undertook measures to revise its policies and procedures and collect adequate margin collateral from its customer, the Order further finds.
EFL has cooperated fully with CFTC staff, according to the Order. Further, it appears that at all times during the Relevant Period, SEB possessed ample funds to satisfy any intra-month collateral call from EFL. EFL need only have collected such funds to have remained in compliance with CFTC regulations, the Order finds.
The CFTC thanks the CME for its cooperation.
The CFTC Division of Enforcement staff responsible for this matter are Allison Baker Shealy, Timothy J. Mulreany and Joan Manley, with assistance from CFTC Division of Swap Dealer and Intermediary Oversight staff Kevin Piccoli, Robert Laverty, Ronald Carletta, and Linda Santiago.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in Nebraska Orders Omaha Resident Michael J. Welke to Pay $387,000 to Settle Commodity Pool Fraud Charges
Welke permanently barred from the commodities industry
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring Defendant Michael J. Welke, of Omaha, Neb., to pay $257,000 in disgorgement and a $130,000 civil monetary penalty to settle CFTC charges of fraud, failure to register with the CFTC, and failure to comply with disclosure and reporting requirements. The Consent Order of permanent injunction, entered on February 12, 2013, by Chief Judge Laurie Smith Camp of the U.S. District Court for the District of Nebraska, also imposes permanent trading and registration bans against Welke and prohibits him from violating provisions of the Commodity Exchange Act and CFTC Regulations, as charged.
The Order stems from a CFTC Complaint filed on May 23, 2011, against Welke, along with Defendants Jonathan W. Arrington, Michael B. Kratville, and their companies, Elite Management Holdings Corp. (Elite Management) and MJM Enterprises LLC (MJM) (see CFTC Press Release 6045-11). The CFTC Complaint alleged that from approximately August 2005 until at least July 2008, Welke and the other Defendants operated a fraudulent scheme that solicited at least $4.7 million from more than 130 commodity pool participants, mostly from the Omaha area, to trade commodity futures contracts and off-exchange foreign currency contracts. The CFTC Complaint further charged that Welke acted as a reference to prospective pool participants without disclosing his status as an owner and officer of Elite Management and MJM and that Welke, along with the other Defendants, misappropriated more than $1.5 million of pool participants’ funds, made false representations of material facts, and issued false statements to the pool participants regarding the profitability and value of their accounts.
The CFTC has previously obtained entries of default against Arrington, Elite Management, and MJM. The CFTC’s litigation continues against Kratville.
CFTC Division of Enforcement staff members responsible for this case are Christopher Reed, Margaret Aisenbrey, Stephen Turley, Charles Marvine, Rick Glaser, and Richard Wagner.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony of Gary Gensler, Chairman, Commodity Futures Trading Commission before the U.S. Senate Banking, Housing and Urban Affairs Committee, Washington, DC
February 14, 2013
Good morning Chairman Johnson, Ranking Member Crapo and members of the Committee. I thank you for inviting me to today’s hearing on implementation of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) swaps market reforms. I am pleased to testify along with my fellow regulators. I also want to thank the CFTC Commissioners and staff for their hard work and dedication.
The New Era of Swaps Market Reform
This hearing is occurring at an historic time in the markets. The CFTC now oversees the derivatives marketplace – across both futures and swaps. The marketplace is increasingly shifting to implementation of the common-sense rules of the road for the swaps market that Congress included in the Dodd-Frank Act.
For the first time, the public is benefiting from seeing the price and volume of each swap transaction. This post-trade transparency builds upon what has worked for decades in the futures and securities markets. The new swaps market information is available free of charge on a website, like a modern-day ticker tape.
For the first time, the public will benefit from the greater access to the markets and the risk reduction that comes with central clearing. Required clearing of interest rate and credit index swaps between financial entities begins next month.
For the first time, the public will benefit from specific oversight of swap dealers. As of today, 71 swap dealers are provisionally registered. They are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation. The full list of registered swap dealers is on the CFTC’s website, and we will update it as more entities register.
An earlier economic crisis led President Roosevelt and Congress to enact similar common-sense rules of the road for the futures and securities markets. I believe these critical reforms of the 1930s have been at the foundation of our strong capital markets and many decades of economic growth.
In the 1980s, the swaps market emerged. Until now, though, it had lacked the benefit of rules to promote transparency, lower risk and protect the public, rules that we have come to depend upon in the securities and futures markets. What followed was the 2008 financial crisis. Eight million American jobs were lost. In contrast, the futures market, supported by earlier reforms, weathered the financial crisis.
Congress and President Obama responded to the worst economic crisis since the Great Depression and carefully crafted the Dodd-Frank swaps provisions. They borrowed from what has worked best in the futures market for decades: transparency, clearing and oversight of intermediaries.
The CFTC has largely completed swaps market rulewriting, with 80 percent behind us. On October 12, the CFTC and Securities and Exchange Commission’s (SEC) foundational definition rules went into effect. This marked the new era of swaps market reform.
The CFTC is seeking to consider and finalize the remaining Dodd-Frank swaps reforms this year. In addition, as Congress directed the CFTC to do, I believe it’s critical that we continue our efforts to put in place aggregate speculative position limits across futures and swaps on physical commodities.
The agency has completed each of our reforms with an eye toward ensuring that the swaps market works for end-users, America’s primary job providers. It’s the end-users in the non-financial side of our economy that provide 94 percent of private sector jobs.
The CFTC’s swaps market reforms benefit end-users by lowering costs and increasing access to the markets. They benefit end-users through greater transparency – shifting information from Wall Street to Main Street. Following Congress’ direction, end-users are not required to bring swaps into central clearing. Further, the Commission’s proposed rule on margin provides that end-users will not have to post margin for uncleared swaps. Also, non-financial companies, other than those genuinely making markets in swaps, will not be required to register as swap dealers. Lastly, when end-users are required to report their transactions, they are given more time to do so than other market participants.
Congress also authorized the CFTC to provide relief from the Dodd-Frank Act’s swaps reforms for certain electricity and electricity-related energy transactions between rural electric cooperatives and federal, state, municipal and tribal power authorities. Similarly, Congress authorized the CFTC to provide relief for certain transactions on markets administered by regional transmission organizations and independent system operators. The CFTC is looking to soon finalize two exemptive orders related to these various transactions, as Congress authorized.
The CFTC has worked to complete the Dodd-Frank reforms in a deliberative way – not against a clock. We have been careful to consider significant public input, as well as the costs and benefits of each rule. CFTC Commissioners and staff have met more than 2,000 times with members of the public, and we have held 22 public roundtables. The agency has received more than 39,000 comment letters on matters related to reform. Our rules also have benefited from close consultation with domestic and international regulators and policymakers.
Throughout this process, the Commission has sought input from market participants on appropriate schedules to phase in compliance with swaps reforms. Now, over two-and-a-half years since Dodd-Frank passed and with 80 percent of our rules finalized, the market is moving to implementation. Thus, it’s the natural order of things that market participants have questions and have come to us for further guidance. The CFTC welcomes inquiries from market participants, as some fine-tuning is expected. As it is sometimes the case with human nature, the agency receives many inquiries as compliance deadlines approach.
My fellow commissioners and I, along with CFTC staff, have listened to market participants and thoughtfully sorted through issues as they were brought to our attention, as we will continue to do.
I now will go into further detail on the Commission’s swaps market reform efforts.
Transparency – Lowering Cost and Increasing Liquidity, Efficiency, Competition
Transparency – a longstanding hallmark of the futures market – both pre- and post-trade – lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition. A key benefit of swaps reform is providing this critical pricing information to businesses and other end-users across this land that use the swaps market to lock in a price or hedge a risk.
As of December 31, 2012, provisionally registered swap dealers are reporting in real time their interest rate and credit index swap transactions to the public and to regulators through swap data repositories. These are some of the same products that were at the center of the financial crisis. Building on this, swap dealers will begin reporting swap transactions in equity, foreign exchange and other commodity asset classes on February 28. Other market participants will begin reporting April 10.
With these transparency reforms, the public and regulators now have their first full window into the swaps marketplace.
Time delays for reporting currently range from 30 minutes to longer, but will generally be reduced to 15 minutes this October for interest rate and credit index swaps. For other asset classes, the time delay will be reduced next January. After the CFTC completes the block rule for swaps, trades smaller than a block will be reported as soon as technologically practicable.
To further enhance liquidity and price competition, the CFTC is working to finish the pre-trade transparency rules for swap execution facilities (SEFs), as well as the block rule for swaps. SEFs would allow market participants to view the prices of available bids and offers prior to making their decision on a transaction. These rules will build on the democratization of the swaps market that comes with the clearing of standardized swaps.
Clearing – Lowering Risk and Democratizing the Market
Since the late 19th century, clearinghouses have lowered risk for the public and fostered competition in the futures market. Clearing also has democratized the market by fostering access for farmers, ranchers, merchants, and other participants.
A key milestone was reached in November 2012 with the CFTC’s adoption of the first clearing requirement determinations. The vast majority of interest rate and credit default index swaps will be brought into central clearing. This follows through on the U.S. commitment at the 2009 G-20 meeting that standardized swaps should be brought into central clearing by the end of 2012. Compliance will be phased in throughout this year. Swap dealers and the largest hedge funds will be required to clear March 11, and all other financial entities follow June 10. Accounts managed by third party investment managers and ERISA pension plans have until September 9 to begin clearing.
Consistent with the direction of Dodd-Frank, the Commission in the fall of 2011 adopted a comprehensive set of rules for the risk management of clearinghouses. These final rules were consistent with international standards, as evidenced by the Principles for Financial Market Infrastructures (PFMIs) consultative document that had been published by the Committee on Payment and Settlement Systems and the International Organization of Securities Commissions (CPSS-IOSCO).
In April of 2012, CPSS-IOSCO issued the final PFMIs. The Commission’s clearinghouse risk management rules cover the vast majority of the standards set forth in the final PFMIs. There are a small number of areas where it may be appropriate to augment our rules to meet those standards, particularly as it relates to systemically important clearinghouses. I have directed staff to work expeditiously to recommend the necessary steps so that the Commission may implement any remaining items from the PFMIs not yet incorporated in our clearinghouse rules. I look forward to the Commission considering action on this in 2013.
I expect that soon we will complete a rule to exempt swaps between certain affiliated entities within a corporate group from the clearing requirement. This year, the CFTC also will be considering possible clearing determinations for other commodity swaps, including energy swaps.
Swap Dealer Oversight - Promoting Market Integrity and Lowering Risk
Comprehensive oversight of swap dealers, a foundational piece of Dodd-Frank, will promote market integrity and lower risk to taxpayers and the rest of the economy. Congress wanted end-users to continue benefitting from customized swaps (those not brought into central clearing) while being protected through the express oversight of swap dealers. In addition, Dodd-Frank extended the CFTC’s existing oversight of previously regulated intermediaries to include their swaps activity. Such intermediaries have historically included futures commission merchants, introducing brokers, commodity pool operators, and commodity trading advisors.
As the result of CFTC rules completed in the first half of last year, 71 swap dealers are now provisionally registered. This initial group of dealers includes the largest domestic and international financial institutions dealing in swaps with U.S. persons. It includes the 16 institutions commonly referred to as the G16 dealers. Other entities are expected to register over the course of this year once they exceed the de minimis threshold for swap dealing activity.
In addition to reporting trades to both regulators and the public, swap dealers will implement crucial back office standards that lower risk and increase market integrity. These include promoting the timely confirmation of trades and documentation of the trading relationship. Swap dealers also will be required to implement sales practice standards that prohibit fraud, treat customers fairly and improve transparency. These reforms are being phased in over the course of this year.
The CFTC is collaborating closely domestically and internationally on a global approach to margin requirements for uncleared swaps. We are working along with the Federal Reserve, the other U.S. banking regulators, the SEC and our international counterparts on a final set of standards to be published by the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). The CFTC’s proposed margin rules excluded non-financial end-users from margin requirements for uncleared swaps. We have been advocating with global regulators for an approach consistent with that of the CFTC. I would anticipate that the CFTC, in consultation with European regulators, would take up a final margin rules, as well as related rules on capital, in the second half of this year.
Following Congress’ mandate, the CFTC also is working with our fellow domestic financial regulators to complete the Volcker Rule. In adopting the Volcker rule, Congress prohibited banking entities from proprietary trading, an activity that may put taxpayers at risk. At the same time, Congress permitted banking entities to engage in certain activities, such as market making and risk mitigating hedging. One of the challenges in finalizing a rule is achieving these multiple objectives.
International Coordination on Swaps Market Reform
In enacting financial reform, Congress recognized the basic lessons of modern finance and the 2008 crisis. During a default or crisis, risk knows no geographic border. Risk from our housing and financial crisis contributed to economic downturns around the globe. Further, if a run starts on one part of a modern financial institution, almost regardless of where it is around the globe, it invariably means a funding and liquidity crisis rapidly spreads and infects the entire consolidated financial entity.
This phenomenon was true with the overseas affiliates and operations of AIG, Lehman Brothers, Citigroup, and Bear Stearns.
AIG Financial Products, for instance, was a Connecticut subsidiary of New York insurance giant that used a French bank license to basically run its swaps operations out of Mayfair in London. Its collapse nearly brought down the U.S. economy.
Last year’s events of JPMorgan Chase, where it executed swaps through its London branch, are a stark reminder of this reality of modern finance. Though many of these transactions were entered into by an offshore office, the bank here in the United States absorbed the losses. Yet again, this was a reminder that in modern finance, trades booked offshore by U.S. financial institutions should not be confused with keeping that risk offshore.
Failing to incorporate these basic lessons of modern finance into the CFTC’s oversight of the swaps market would fall short of the goals of Dodd-Frank reform. It would leave the public at risk.
More specifically, I believe that Dodd-Frank reform applies to transactions entered into by overseas branches of U.S. entities with non-U.S. persons, as well as between overseas affiliates guaranteed by U.S. entities. Failing to do so would mean American jobs and markets may move offshore, but, particularly in times of crisis, risk would come crashing back to our economy.
Similar lessons of modern finance were evident, as well, with the collapse of the hedge fund Long-Term Capital Management in 1998. It was run out of Connecticut, but its $1.2 trillion swaps were booked in its Cayman Islands affiliate. The risk from those activities, as the events of the time highlighted, had a direct and significant effect here in the United States.
The same was true when Bear Stearns in 2007 bailed out two of its sinking hedge fund affiliates, which had significant investments in subprime mortgages. They both were organized offshore. This was just the beginning of the end, as within months, the Federal Reserve provided extraordinary support for the failing Bear Stearns.
We must thus ensure that collective investment vehicles, including hedge funds, that either have their principal place of business in the United States or are directly or indirectly majority owned by U.S. persons are not able to avoid the clearing requirement – or any other Dodd-Frank requirement – simply due to how they might be organized.
We are hearing, though, that some swap dealers may be promoting to hedge funds an idea to avoid required clearing, at least during an interim period from March until July. I would be concerned if, in an effort to avoid clearing, swap dealers route to their foreign affiliates trades with hedge funds organized offshore, even though such hedge funds’ principle place of business was in the United States or they are majority owned by U.S. persons. The CFTC is working to ensure that this idea does not prevail and develop into a practice that leaves the American public at risk. If we don’t address this, the P.O boxes may be offshore, but the risk will flow back here.
Congress understood these issues and addressed this reality of modern finance in Section 722(d) of the Dodd-Frank Act, which states that swaps reforms shall not apply to activities outside the United States unless those activities have "a direct and significant connection with activities in, or effect on, commerce of the United States." Congress provided this provision solely for swaps under the CFTC’s oversight and provided a different standard for securities-based swaps under the SEC’s oversight.
To give financial institutions and market participants guidance on 722(d), the CFTC last June sought public consultation on its interpretation of this provision. The proposed guidance is a balanced, measured approach, consistent with the cross-border provisions in Dodd-Frank and Congress’ recognition that risk easily crosses borders.
Pursuant to Commission guidance, foreign firms that do more than a de minimis amount of swap-dealing activity with U.S. persons would be required to register with the CFTC within about two months after crossing the de minimis threshold. A number of international financial institutions are among the 71 swap dealers that are provisionally registered with the CFTC.
Where appropriate, we are committed to permitting, foreign firms and, in certain circumstances, overseas branches and guaranteed affiliates of U.S. swap dealers, to comply with Dodd-Frank through complying with comparable and comprehensive foreign regulatory requirements. We call this substituted compliance.
For foreign swap dealers, we would allow such substituted compliance for requirements that apply across a swap dealer’s entity, as well as for certain transaction-level requirements when facing overseas branches of U.S. entities and overseas affiliates guaranteed by U.S. entities. Entity-level requirements include capital, chief compliance officer and swap data recordkeeping. Transaction-level requirements include clearing, margin, real-time public reporting, trade execution, trading documentation and sales practices.
When foreign swaps dealers transact with a U.S. person, though, compliance with Dodd-Frank is required.
To assist foreign swap dealers with Dodd-Frank compliance, the CFTC recently finalized an exemptive order that applies until mid-July 2013. This Final Order for foreign swap dealers incorporates many suggestions from the ongoing consultation on cross-border issues with foreign regulatory counterparts and market participants. For instance, the definition of "U.S. person" in the Order benefited from the comments in response to the July 2012 proposal.
Under this Final Order, foreign swap dealers may phase in compliance with certain entity-level requirements. In addition, the Order provides time-limited relief for foreign dealers from specified transaction-level requirements when they transact with overseas affiliates guaranteed by U.S. entities, as well as with foreign branches of U.S. swap dealers.
The Final Order provides time for the Commission to continue working with foreign regulators as they implement comparable swaps reforms and as the Commission considers substituted compliance determinations for the various foreign jurisdictions with entities that have registered as swap dealers under Dodd-Frank.
The CFTC will continue engaging with our international counterparts through bilateral and multilateral discussions on reform and cross-border swaps activity. Just last week, SEC Chairman Walter and I had a productive meeting with international market regulators in Brussels.
Given our different cultures, political systems and legislative mandates some differences are unavoidable, but we’ve made great progress internationally on an aligned approach to reform. The CFTC is committed to working through any instances where we are made aware of a conflict between U.S. law and that of another jurisdiction.
Customer Protection
Dodd-Frank included provisions directing the CFTC to enhance the protection of swaps customer funds. While it was not a requirement of Dodd-Frank, in 2009 the CFTC also reviewed our existing customer protection rules for futures market customers. As a result, a number of our customer protection enhancements affect both futures and swaps market customers. I would like to review our finalized enhancements, as well as an important customer protection proposal.
The CFTC’s completed amendments to rule 1.25 regarding the investment of customer funds benefit both futures and swaps customers. The amendments include preventing in-house lending of customer money through repurchase agreements.The CFTC’s gross margining rules for futures and swaps customers require clearinghouses to collect margin on a gross basis. Futures commission merchants (FCMs) are no longer able to offset one customer’s collateral against another or to send only the net to the clearinghouse.
Swaps customers further benefit from the new so-called LSOC (legal segregation with operational comingling) rules, which ensure their money is protected individually all the way to the clearinghouse.
The Commission also worked closely with market participants on new rules for customer protection adopted by the self-regulatory organization (SRO), the National Futures Association. These include requiring FCMs to hold sufficient funds for U.S. foreign futures and options customers trading on foreign contract markets (in Part 30 secured accounts). Starting last year, they must meet their total obligations to customers trading on foreign markets computed under the net liquidating equity method. In addition, FCMs must maintain written policies and procedures governing the maintenance of excess funds in customer segregated and Part 30 secured accounts. Withdrawals of 25 percent or more would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and the CFTC.
These steps were significant, but market events have further highlighted that the Commission must do everything within our authorities and resources to strengthen oversight programs and the protection of customers and their funds.
In the fall of 2012, the Commission sought public comment on a proposal to further enhance the protection of customer funds.
The proposal, which the CFTC looks forward to finalizing this year, would strengthen the controls around customer funds at FCMs. It would set new regulatory accounting requirements and would raise minimum standards for independent public accountants who audit FCMs. And it would provide regulators with daily direct electronic access to the FCMs’ bank and custodial accounts for customer funds. Last week, the CFTC held a public roundtable on this proposal, the third roundtable focused on customer protection.
Further, the CFTC intends to finalize a rule this year on segregation for uncleared swaps.
Benchmark Interest Rates
I’d like to now turn to the three cases the CFTC brought against Barclays, UBS and RBS for manipulative conduct with respect to the London Interbank Offered Rate (LIBOR) and other benchmark interest rate submissions. The reason it’s important to focus on these matters is not because there were $2.5 billion in fines, though the U.S. penalties against these three banks of more than $2 billion were significant. What this is about is the integrity of the financial markets. When a reference rate, such as LIBOR – central to borrowing, lending and hedging in our economy – has been so readily and pervasively rigged, it’s critical that we discuss how to best change the system. We must ensure that reference rates are honest and reliable reflections of observable transactions in real markets.
The three cases shared a number of common traits. Foremost, at each institution the misconduct spanned multiple years, involved offices in multiple cities around the globe, included numerous people, and affected multiple benchmark rates and currencies. In each case, there was evidence of collusion among banks. In both the UBS and RBS cases, one or more inter-dealer brokers were asked to paint false pictures to influence submissions of other banks, i.e., to spread the falsehoods more widely. At Barclays and UBS, the banks also were reporting falsely low borrowing rates in an effort to protect their reputation.
Why does this matter?
The derivatives marketplace that the CFTC oversees started about 150 years ago. Futures contracts initially were linked to physical commodities, like corn and wheat. Such clear linkage ultimately comes from the ability of farmers, ranchers and other market participants to physically deliver the commodity at the expiration of the contract. As the markets evolved, cash-settled contracts emerged, often linked to markets for financial commodities, like the stock market or interest rates. These cash-settled derivatives generally reference indices or benchmarks.
Whether linked to physical commodities or indices, derivatives – both futures and swaps – should ultimately be anchored to observable prices established in real underlying cash markets. And it’s only when there are real transactions entered into at arm’s length between buyers and sellers that we can be confident that prices are discovered and set accurately.
When market participants submit for a benchmark rate that lacks observable underlying transactions, even if operating in good faith, they may stray from what real transactions would reflect. When a benchmark is separated from real transactions, it is more vulnerable to misconduct.
Today, LIBOR is the reference rate for 70 percent of the U.S. futures market, most of the swaps market and nearly half of U.S. adjustable rate mortgages. It’s embedded in the wiring of our financial system.
The challenge we face is that the market for interbank, unsecured borrowing has largely diminished over the last five years. Some say that it is essentially nonexistent. In 2008, Mervyn King, the governor of the Bank of England, said of Libor: "It is, in many ways, the rate at which banks do not lend to each other."
The number of banks willing to lend to one another on such terms has been sharply reduced because of economic turmoil, including the 2008 global financial crisis, the European debt crisis that began in 2010, and the downgrading of large banks’ credit ratings. In addition, there have been other factors that have led to unsecured, interbank lending drying up, including changes to Basel capital rules and central banks providing funding directly to banks.
Fortunately, much work is occurring internationally to address these issues. I want to commend the work of Martin Wheatley and the UK Financial Services Authority (FSA) on the "Wheatley Review of LIBOR." Additionally, the CFTC and the FSA are co-chairing the International Organization of Securities Commissions (IOSCO) Task Force that is developing international principles for benchmarks and examining best mechanisms or protocols for transition, if needed. On January 11, the IOSCO Task Force published the Consultation Report on Financial Benchmarks.
The consultation report said: "The Task Force is of the view that a benchmark should as a matter of priority be anchored by observable transactions entered into at arm’s length between buyers and sellers in order for it to function as a credible indicator of prices, rates or index values." It went on to say: "However, at some point, an insufficient level of actual transaction data raises concerns as to whether the benchmark continues to reflect prices or rates that have been formed by the competitive forces of supply and demand."
Among the questions for the public in the report are the following:
What are the best practices to ensure that benchmark rates honestly reflect market prices?
What are best practices for benchmark administrators and submitters?
What factors should be considered in determining whether a current benchmark’s underlying market is sufficiently robust? For instance, what is an insufficient level of actual transaction activity?
And what are the best mechanisms or protocols to transition from an unreliable or obsolete benchmark?
On February 20, we are holding a public roundtable in London. On February 26, the CFTC is hosting a second roundtable to gather input from market participants and other interested parties. A final report incorporating this crucial public input will be published this spring.
Resources
The CFTC’s hardworking team of 690 is less than 10 percent more in numbers than at our peak in the 1990s. Yet since that time, the futures market has grown five-fold, and the swaps market is eight times larger than the futures market.
Market implementation of swaps reforms means additional resources for the CFTC are all the more essential. Investments in both technology and people are needed for effective oversight of these markets by regulators – like having more cops on the beat.
Though data has started to be reported to the public and to regulators, we need the staff and technology to access, review and analyze the data. Though 71 entities have registered as new swap dealers, we need people to answer their questions and work with the NFA on the necessary oversight to ensure market integrity. Furthermore, as market participants expand their technological sophistication, CFTC technology upgrades are critical for market surveillance and to enhance customer fund protection programs
Without sufficient funding for the CFTC, the nation cannot be assured this agency can closely monitor for the protection of customer funds and utilize our enforcement arm to its fullest potential to go after bad actors in the futures and swaps markets. Without sufficient funding for the CFTC, the nation cannot be assured that this agency can effectively enforce essential rules that promote transparency and lower risk to the economy.
The CFTC is currently funded at $207 million. To fulfill our mission for the benefit of the public, the President requested $308 million for fiscal year 2013 and 1,015 full-time employees.
Thank you again for inviting me today, and I look forward to your questions.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in Florida Imposes over $22.8 Million in a Monetary Sanction and Restitution against Floridian David Merrick and His Company, Trader’s International Return Network
In a parallel criminal action, Merrick was convicted on fraud charges and sentenced to 97 months imprisonment
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that Judge Charlene Edwards Honeywell of the U.S. District Court for the Middle District of Florida entered an order requiring defendants David Merrick, previously of Apopka, Fla., and his company, Trader’s International Return Network (TIRN), to jointly pay a civil monetary penalty of over $11.4 million for fraud in connection with a foreign currency trading program that victimized more than 700 customers. The order also requires TIRN, a Panamanian corporation, to pay restitution of $11,437,573 to defrauded customers.
The CFTC order, entered on January 22, 2013, stems from a complaint filed by the CFTC in 2009, charging the defendants with solicitation fraud and misappropriation of customer funds involving at least $22.5 million. The complaint alleged that the defendants provided customers and prospective customers with written and/or electronic documents that contained materially false and misleading statements and omissions regarding the actual investment of customer funds, the risks of trading, and profits achieved (see CFTC Press Release 5733-09, October 15, 2009).
The court previously entered consent orders of permanent injunction against Merrick on April 22, 2010 and TIRN on September 8, 2010, finding that they violated the anti-fraud provisions of the Commodity Exchange Act, as charged. Both orders reserved the issue of monetary sanctions for future order.
In a related criminal case, United States v. David Merrick, No. 10-cr-00109-MSS-DAB (M.D. Fla.), on January 19, 2012, Merrick was found guilty of one count of conspiracy to commit wire fraud, money laundering, and securities fraud and one count of money laundering. He was sentenced to 97 months imprisonment and ordered to pay $11,437,573.15 in restitution to 735 customer-victims.
The CFTC thanks the U.S. Attorney’s Office for the Middle District of Florida, the Federal Bureau of Investigation, and the Securities and Exchange Commission for their assistance in this matter.
CFTC staff members are responsible for the action are William P. Janulis, Barry R. Blankfield, Scott Williamson, Rosemary Hollinger, and Richard B. Wagner.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Chairman Gary Gensler’s Opening Remarks at CFTC Roundtable
January 31, 2013
Welcome to the Commodity Futures Trading Commission (CFTC). Thank you, Rick, and thanks to the team for putting together this roundtable. This is the CFTC’s 21st public roundtable since the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). Next week, we'll be holding the 22nd roundtable, the third focused on customer protection.
Today’s roundtable is occurring at an historic time in the markets. The marketplace is increasingly shifting to implementation of common-sense rules of the road for the swaps market.
For the first time, the public will benefit from the greater access to the markets and the risk reduction that comes with central clearing. Required clearing of interest rate and credit index swaps between financial entities begins in March.
For the first time, the public is benefiting from seeing the price and volume of each swap transaction. This post-trade transparency builds upon what has worked for decades in the futures and securities markets. The new swaps market information is available free of charge on a website, like a modern-day ticker tape.
For the first time, the public will benefit from specific oversight of registered swap dealers. As of the end of this week, there will be 71 provisionally registered swap dealers. They are subject to standards for sales practices, recordkeeping and business conduct to help lower risk to the economy and protect the public from fraud and manipulation.
An earlier crisis led to similar common-sense rules of the road for the futures and securities markets. I believe these critical reforms of the 1930s have been at the foundation of our strong capital markets and many decades of economic growth.
In the 1980s, the swaps market emerged. Until now, though, it lacked the benefit of such rules to promote transparency, lower risk and protect investors. What followed was the 2008 financial crisis. Eight million American jobs were lost. In contrast, the futures market, supported by earlier reforms, weathered the financial crisis.
President Obama and Congress responded and crafted the swaps provisions of Dodd-Frank by borrowing from what has worked best in the futures market for decades: clearing, transparency and oversight of intermediaries.
Given that we have largely completed swaps market rulewriting, with 80 percent behind us, today is a good opportunity to hear from market participants on where we are and where we ought to go from here. As we have asked throughout this process, we'd like to hear from market participants today on what provisions for swaps should mirror those for futures and when is it appropriate for there to be differences. I would note that Congress included a number of provisions in Dodd-Frank recognizing appropriate differences. For instance, it is critical that farmers, ranchers, merchants and other end users continue to benefit from using customized swaps that are not cleared.
Now that the entire derivatives marketplace -- both futures and swaps – has comprehensive oversight, it's the natural order of things for some realignment to take place.
The notional open interest of the futures market ranges around $30 trillion. There are various estimates for the notional size of the U.S. swaps market, but it ranges around $250 trillion. Though the futures market trades more actively, just one-ninth or so of the combined open interest in the derivatives marketplace is futures. Approximately eight-ninths of the combined derivatives marketplace is swaps, which until recently were unregulated.
This roundtable also provides an opportunity to hear from market participants on the recent actions of the two largest exchanges. Last fall, IntercontinentalExchange converted power and natural gas-related swaps into futures contracts. In addition, the CME Group's ClearPort products, which were cleared as futures, including those that were executed bilaterally as swaps, are now being offered for trading on Globex or on the trading floor. CME also adopted new block trading rules for its ClearPort energy contracts, as well as began trading a futures contract where the underlying product is an interest rate swaps contract.
It’s important to note that whether one calls a product a standardized swap or a future, both markets now benefit from central clearing. Since the late 19th century, central clearing in the futures market has lowered risk for the public. It also has fostered access for farmers, ranchers, merchants, and other participants and allowed them to benefit from greater competition in the markets. In March, swap dealers and the largest hedge funds will be required, for the first time, to clear certain interest rate swaps and credit index swaps. Compliance will be phased in for other market participants throughout this year.
In addition, transparency has been a longstanding hallmark of the futures market –both pre-trade and post-trade. Now, for the first time, the swaps market is benefitting from post-trade transparency. On December 31, registered swap dealers began real-time reporting for interest rate and credit index swap transactions. Building on this, swap dealers will begin reporting swap transactions in equity, foreign exchange and other commodity asset classes on February 28. Other market participants will begin reporting April 10. The time delays for reporting currently range from 30 minutes to longer, but will generally be reduced to 15 minutes this October for interest rate and credit index swaps. For other asset classes, the time delay will be reduced next January. After the CFTC completes the block rule for swaps, trades smaller than a block will be reported as soon as technologically practicable.
Oversight of intermediaries and the protection of customer funds have long been integral parts of futures market regulation. Futures commission merchants, introducing brokers and commodity pool operators have been CFTC-registered intermediaries. Dodd-Frank extended oversight of these intermediaries to include their swaps activity, and to promote market integrity and lower risk to taxpayers, brought oversight to another category of intermediaries called swap dealers. The initial group of provisionally registered swap dealers includes the largest domestic and international financial institutions dealing in swaps with U.S. persons. It includes the 16 institutions commonly referred to as the G16 dealers. Reforms the CFTC has finalized to enhance the protection of customer funds, as well as proposed enhancements, consistently cover both futures and swaps.
Looking ahead, to further enhance liquidity and price competition, the CFTC must finish the pre-trade transparency rules for swap execution facilities, as well as the block rules for swaps. It is also critical that we preserve the pre-trade transparency that has been at the core of the futures market. In that context, I am looking forward to hearing from panelists today about recent actions by exchanges to lower their minimum block sizes for certain energy futures.
Thank you again for coming, and we look forward to your input.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Chicago-Based R.J. O’Brien & Associates, LLC Sanctioned $300,000 for Supervision Violations
RJO failed to diligently supervise the handling of customer orders over four years
Washington, DC ― The U.S. Commodity Futures Trading Commission (CFTC) today issued an order filing and settling charges against R.J. O’Brien & Associates, LLC (RJO), of Chicago, Ill., a registered Futures Commission Merchant, for failing to diligently supervise its employees in connection with the handling of commodity futures orders of a Guaranteed Introducing Broker (GIB) of RJO and the GIB’s Associated Person (AP), sole principal, and owner.
The CFTC order finds that, from at least January 2003 through February 2007, the GIB’s AP engaged in an unlawful trade allocation scheme for his personal benefit and to the detriment of both the GIB’s customers and a commodity futures pool operated by the AP through accounts held at RJO. The AP was able to allocate trades post-execution, allocating the more profitable trades to his personal accounts, and the unprofitable, or less profitable trades to either the GIB customer accounts or the pool account, the order finds. The GIB’s and AP’s customers sustained losses of up to $183,000, according to the order.
In addition, RJO failed to follow procedures it had in place concerning the placement of bunched orders by account managers, the order finds. For example, RJO failed to ensure that it always received a post-allocation plan prior to, or contemporaneously with, the GIB’s AP’s filing of bunched orders. The order also finds that RJO did not employ adequate procedures to monitor, detect, and deter unusual activity concerning trades that were allocated post-execution, or for supervision of its employees’ handling and processing of bunched orders. By such acts, RJO failed to diligently supervise the handling of customer orders in violation of CFTC regulation 166.3, 17 C.F.R. § 166.3 (2011).
The CFTC order imposes a $300,000 civil monetary penalty and requires RJO to cease and desist from further violations of CFTC regulation 166.3, as charged.
CFTC Division of Enforcement staff was responsible for this case are Kevin S. Webb, Michelle S. Bougas, Heather N. Johnson, James H. Holl, III, Gretchen L. Lowe, and Vincent A. McGonagle.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION,
CFTC Settles Charges against Virginia Resident Alexander Giap for Engaging in Two Fraudulent Commodity Futures Trading Schemes
Federal Court in Virginia orders Giap to pay over $700,000 in restitution and penalties and permanently bars him from the commodities industry
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court order requiring defendant Alexander Giap of Falls Church, Va., to pay $456,743 in restitution to defrauded customers and a $250,000 civil monetary penalty for violating the anti-fraud provisions of the Commodity Exchange Act (CEA) (see CFTC Press Release 6191-12, February 27, 2012, as a Related Link). The consent order of permanent injunction, entered on December 17, 2012, by the Honorable Claude M. Hilton of the U.S. District Court for the Eastern District of Virginia, also imposes permanent trading and registration bans against Giap and prohibits him from violating the CEA, as charged.
The order finds that Giap engaged in two schemes in which he acted as an unregistered Commodity Trading Advisor (CTA). In the first scheme, which took place in 2009, Giap solicited customers to participate in iTRADE, a purported "school" that Giap used to conduct his CTA business, according to the order. iTRADE "students" provided Giap with "tuition" ranging from $4,000 to $20,000 and traded under Giap’s direction, the order finds. Giap and iTRADE offered a money back guarantee under which the iTRADE students would retain all profits from trading until they had recovered their initial deposit, the order finds. However, Giap’s trading resulted in substantial losses, losing money seven out of the nine months from January 2009 through September 2009, according to the order.
Furthermore, the order finds that Giap made a number of material misrepresentations and failed to disclose material facts when he solicited customers to engage his services, including that he was a convicted felon who still owed restitution relating to his criminal conviction and was subject to Internal Revenue Service liens for delinquent taxes. Giap also failed to disclose the full extent of his history of losses incurred trading commodity futures, that he was not registered with the CFTC as a CTA, and that he had never traded commodity futures prior to January 2009, according to the order.
In Giap’s second commodity futures trading scheme, which began in October 2009, he defrauded three additional customers through the same material omissions as his first scheme, and his trading resulted in substantial financial losses to customers, according to the order.
The CFTC thanks the Virginia Corporation Commission for its assistance.
CFTC Division of Enforcement staff members responsible for this matter are Allison Baker Shealy, Jason Mahoney, Timothy J. Mulreany, George Malas, Rainey Perez, John Einstman, Paul G. Hayeck, and Joan Manley.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony Before the US House of Representatives Committee on Agriculture Subcommittee on General Farm Commodities and Risk Management
Commissioner Jill E. Sommers
December 13, 2012
Good morning Chairman Conaway, Ranking Member Boswell and members of the Committee. Thank you for inviting me to testify on the challenges facing U.S. and international markets resulting from the Dodd-Frank derivatives reforms. I have worked in the derivatives industry for over fifteen years and have been a Commissioner at the Commodity Futures Trading Commission (CFTC or Commission) since August of 2007. During my time at the Commission I have served as the Chairman and sponsor of the CFTC’s Global Markets Advisory Committee (GMAC) and have represented the Commission at meetings of the International Organization of Securities Commissions (IOSCO), one of the principal organizations formed to develop, implement and promote internationally recognized and consistent standards of regulation, oversight and enforcement in the securities and derivatives markets. I am pleased to give you my perspective on the many challenges facing regulators across the globe in their quest to meet the commitments on over-the-counter (OTC) derivatives reform made by the G20 Leaders in 2009 and, in particular, the challenges presented in interpreting the cross-border scope of Dodd-Frank. The views I present today are my own and not those of the Commission.
Section 722(d) of the Dodd-Frank Act, which added Section 2(i) to the Commodity Exchange Act, provides that the Act shall not apply to activities outside the United States unless those activities have a direct and significant connection with activities in, or effect on, commerce of the United States, or contravene rules or regulations prescribed by the Commission designed to prevent evasion. In 2011 the Commission acknowledged the growing uncertainty surrounding the extraterritorial reach of Dodd-Frank and in August of that year held a two-day roundtable, followed by a public comment period. In July 2012 the Commission published proposed guidance setting forth an interpretation of how it might construe Section 2(i), followed by another round of public comment. The guidance included a proposed definition of "U.S. person," the types and levels of activities that would require foreign entities to register as U.S. swap dealers or major swap participants (swap entities), and the areas in which such swap entities might be required to comply with U.S. law and those in which the Commission might recognize substituted compliance with the law of an entity’s home jurisdiction.
On November 7, 2012 I convened a meeting of the GMAC to further discuss the Commission’s proposed interpretive guidance and to identify questions and areas of concern in implementing the CFTC’s proposed approach. A number of foreign jurisdictions were represented, including regulators from Australia, the European Commission, the European Securities and Markets Authority, Hong Kong, Japan, Quebec and Singapore. Representatives of the U.S. Securities and Exchange Commission (SEC) also attended to discuss the SEC’s perspective. A common theme that emerged was concern over the breadth of CFTC’s proposed definition of "U.S. person," the implications of having to register in the U.S., the uncertainty of the Commission’s proposal on substituted compliance, and the need to identify areas where complying with a particular U.S. requirement might conflict with the law of a foreign swap entity’s home country regime.
On November 28, 2012 regulatory leaders from Australia, Brazil, the European Union, Hong Kong, Japan, Ontario, Quebec, Singapore, Switzerland and the United States met in New York to continue the dialogue. In a press statement issued after the meeting the leaders supported the adoption and enforcement of robust and consistent standards in and across jurisdictions, and recognized the importance of fostering a level playing field for market participants, intermediaries and infrastructures, while furthering the G20 commitments to mitigating risk and improving transparency. The leaders identified five areas for further exploration, including:
the need to consult with each other prior to making final determinations regarding which products will be subject to a mandatory clearing requirement and to consider whether the same products should be subject to the same requirements in each jurisdiction, taking into consideration the characteristics of each domestic market and legal regime;
the need for robust supervisory and cooperative enforcement arrangements to facilitate effective supervision and oversight of cross-border market participants, using IOSCO standards as a guide;
the need for reasonable, time-limited transition periods for entities in jurisdictions that are implementing comparable regulatory regimes that have not yet been finalized and to establish clear requirements on the cross-border applicability of regulations;
the need to prevent the application of conflicting rules and to minimize the application of inconsistent and duplicative rules by considering, among other things, recognition or substituted compliance with foreign regulatory regimes where appropriate; and
the continued development of international standards by IOSCO and other standard setting bodies.
The authorities agreed to meet again in early 2013 to inform each other on the progress made in finalizing reforms in their respective jurisdictions and to consult on possible transition periods. Future meetings will explore options for addressing identified conflicts, inconsistencies, and duplicative rules and ways in which comparability assessments and appropriate cross-border supervisory and enforcement arrangements may be made.
The Commission has worked for decades to establish relationships with our foreign counterparts, built on respect, trust, and information sharing, which has resulted in a successful history of mutual recognition of foreign regulatory regimes in the futures and options markets spanning 20-plus years. At the Pittsburg summit in 2009 all G20 nations agreed to a comprehensive set of principles for regulating the OTC derivatives markets. We should rely on their regional expertise. While the pace of implementing reforms among the various jurisdictions has been uneven, I have no reason to believe that comparable or equivalent regulation is unachievable. It is obvious that more time is needed to facilitate an orderly transition to a regulated environment. It is important that assessments of comparability be made at a high level, keeping in mind the core policy objectives of the G20 commitments rather than a line-by-line comparison of rulebooks. It is also important to avoid creating an unlevel playing field for U.S. firms just because the U.S. is ahead of the rest of the world in finalizing reforms. U.S. firms should not be disadvantaged by tight compliance deadlines set by the CFTC. Global coordination is key. It is my hope that in the coming days the Commission will issue clear and concise relief from having to comply with various Dodd-Frank requirements, for both domestic and foreign swap entities, until we have a better sense of the direction in which we are all headed.
I am grateful for the opportunity to speak about these important issues and am happy to answer any questions.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Court finds that defendants fraudulently solicited and accepted over $1.4 million from customers to trade crude oil futures contracts in a commodity pool
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) obtained a federal court order against defendants Christopher D. Daley and his firm, TC Credit Service, LLC doing business as Del-Mair Group, LLC (DMG), both of Houston, Texas, requiring Daley and DMG to jointly pay $654,183 in restitution to defrauded investors and a civil monetary penalty of $1,995,000. The order also imposes permanent trading and registration bans against the defendants and prohibits them from violating the anti-fraud provisions of the Commodity Exchange Act and CFTC regulations, as charged.
The order of default judgment, entered by Judge Keith P. Ellison of the U.S. District Court for the Southern District of Texas, stems from a CFTC enforcement action filed on June 18, 2012, against Daley and DMG, charging them with solicitation fraud and misappropriation in the operation of a commodity pool scheme (see CFTC Press Release 6301-12, July 11, 2012, as a Related Link). Daley was owner and sole employee of DMG, and neither defendant has ever been registered with the CFTC.
The order finds that Daley fraudulently solicited and accepted over $1.4 million from customers to participate in a commodity pool to trade crude oil futures contracts. In soliciting customers, Daley represented that DMG would generate monthly returns of 20 percent and distributed account opening documents that guaranteed 20 percent to 60 percent monthly returns on deposits, the order finds, noting that these representations were false. In reality, Daley’s trading accounts sustained net losses each month. The order also finds that the defendants misappropriated customers’ funds by using those funds to pay other customers’ purported returns, to pay for Daley’s personal expenses, and to trade in Daley’s personal commodity interest accounts. The defendants distributed false account statements to pool participants reporting returns supposedly earned as a result of Daley’s futures trading and acted in capacities requiring registration with the CFTC, the order finds.
CFTC Division of Enforcement staff responsible for this case are Eugene Smith, Patricia Gomersall, Antoinette Chance, Christine Ryall, Paul Hayeck, and Joan Manley.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Testimony Before the U.S. House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises, Washington, DC
Chairman Gary Gensler
December 12, 2012
Good morning Chairman Garrett, Ranking Member Waters and members of the Subcommittee. I thank you for inviting me to today’s hearing on implementation of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) swaps market reforms. I would like to thank Robert Cook from the Securities and Exchange Commission (SEC). I’d also like to thank my friend, Chairman Mary Schapiro, who has been a terrific partner. Our agencies have consistently coordinated on this reform effort. I also want to thank my fellow Commissioners and the CFTC staff for their hard work and dedication.
The New Era of Swaps Market Reform
Swaps market reform is now becoming a reality. The marketplace is increasingly shifting to implementation of the common-sense rules of the road that Congress included in the Dodd-Frank Act.
The financial crisis cost eight million American jobs, millions of people lost their homes, and thousands of businesses closed their doors – in part because of the unregulated swaps market. In the aftermath of the crisis, President Obama convened the G-20 leaders in Pittsburgh in 2009. They came to an international consensus that the opaque swaps market should be brought into the light through transparency and oversight, and that standardized swaps between financial entities should be centrally cleared by the end of 2012.
In 2010, Congress and President Obama came together to pass the historic Dodd-Frank Act. The key objectives of the law’s swaps provisions are:
Lowering the risk of the interconnected financial system by bringing standardized swaps into centralized clearing;
Bringing public transparency to the marketplace; and
Ensuring that swap dealers and major swap participants are specifically regulated for their swaps activity.
The CFTC has made significant progress in each of these areas. October 12, given the completed foundational definition rules, marked the new era of swaps market reform.
As a result of completed reforms:
Standardized swaps between financial entities will be cleared starting in March, fulfilling the U.S. commitment at the G-20 meeting in Pittsburgh;
Initial data reporting to regulators has begun and will be expanded as swap dealers report their transactions. The public will benefit from real-time reporting early next year; and
Swap dealers have begun the process of registering, and we anticipate many dealers will do so later this month.
With 42 finalized swaps market reforms, the CFTC has completed about 80 percent of the Dodd-Frank swaps rules. We are seeking to consider and finalize the remaining rules in the first half of 2013. I believe it’s also critical that we continue our efforts to put in place aggregate speculative position limits across futures and swaps on physical commodities, as Congress directed the CFTC to do.
Throughout this process, the CFTC has worked toward a smooth transition to a transparent, regulated swaps marketplace and has phased in the timing for compliance to give market participants appropriate time to adjust.
I will now go into further detail on the Commission’s swaps market reform efforts.
Lowering Risk and Democratizing the Market through Clearing
Central clearing, the first building block of Dodd-Frank reform, lowers the risk of the highly interconnected financial system. It also broadens access to many more market participants, as they no longer will have to individually determine counterparty credit risk. Now clearinghouses will stand between buyers and sellers. This broadened access through central clearing will help promote greater competition and lower costs to users of swaps.
Clearinghouses have lowered risk for the public and fostered competition in the futures markets since the late 19th century. Now central clearing will do the same for the swaps market.
A key milestone was reached last month with the adoption of the first clearing requirement determinations. This follows through on the U.S. commitment at the G-20 meeting that standardized swaps between financial entities should be brought into central clearing by the end of 2012. The vast majority of interest rate swaps and credit default index swaps will be brought into central clearing. Swap dealers and the largest hedge funds will be required to clear in March, and compliance will be phased in for other market participants through the summer of 2013. Consistent with congressional intent, the CFTC finalized rules to ensure that end-users using swaps to hedge or mitigate commercial risk will not be required to bring swaps into central clearing. The CFTC will continue working with market participants on implementation.
Promoting Transparency
Transparency, the second building block of reform, lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition. It provides critical pricing information to businesses across the country that use swaps markets to lock in a price or hedge a risk.
Bright lights have begun to shine on the swaps market. As a result, swaps transactions are being reported to regulators through swap data repositories. The public also will benefit from real-time reporting of the price and volume of transactions beginning in early 2013, based on rules the CFTC completed in 2011. In addition, the daily valuation over the life of uncleared swaps will be provided to each counterparty. For cleared swaps, it will be provided to the public as well. With these transparency reforms, the public and regulators will have their first full window into the swaps marketplace, a fundamental shift that Congress included in the Dodd-Frank Act.
Looking ahead, Commissioners are now reviewing final rules that would allow market participants to view the prices of available bids and offers. These reforms on trading platforms called swap execution facilities (SEFs) and minimum block sizes will bring pre-trade transparency to the swaps market, further enhancing liquidity and price competition. These rules will build on the democratization of the swaps market that comes with the clearing of standardized swaps.
Promoting Market Integrity and Lowering Risk through Swap Dealer Oversight
Comprehensive oversight of swap dealers, the third building block of reform, will promote market integrity and lower their risk to taxpayers and the rest of the economy.
As the result of CFTC rules completed in the first half of this year, swap dealers have begun the process of registering and, for the first time, will come under comprehensive oversight. We anticipate many dealers will register by the end of this month.
Once swaps dealers register, they will report their trades with U.S. persons to both regulators and the public. In addition, they will implement crucial back office standards that lower risk and increase integrity. These include promoting the timely confirmation of trades and documentation of the trading relationship. Swap dealers also will be required to implement sales practice standards that prohibit fraud, treat customers fairly and improve transparency. These reforms will be phased in next year.
We are collaborating closely internationally on a global approach to margin requirements for uncleared swaps through the Basel Committee on Banking Supervision and the International Organization of Securities Commissions (IOSCO). I would anticipate that the CFTC, in consultation with European regulators, would take up the margin rules, as well as related rules on capital, next year with the benefit of this international work.
International Coordination on Swaps Market Reform
In enacting financial reform, Congress recognized the basic lessons of modern finance and the 2008 crisis. During a default or crisis, risk knows no geographic border. If a run starts on one part of a modern financial institution, almost regardless of where it is around the globe, it invariably means a funding and liquidity crisis rapidly spreads to the entire consolidated entity. Then finance, rather than serving the rest of the economy, can threaten the rest of the economy.
To give financial institutions and market participants operating outside the U.S. guidance on the cross-border application of Dodd-Frank, the CFTC in June sought public consultation on its interpretation of the Dodd-Frank cross-border provisions. The guidance is a balanced, measured approach, consistent with the cross-border provisions in Dodd-Frank and Congress’ recognition that risk easily crosses borders.
Under the guidance, foreign firms that do more than a de minimis amount of swap-dealing activity with U.S. persons will register with the CFTC two months after crossing the de minimis threshold. Many will do so shortly, with others following later.
For firms that do register with the CFTC, we are very committed to allowing for substituted compliance, or permitting market participants to comply with Dodd-Frank through complying with comparable and comprehensive foreign regulatory requirements.
The guidance includes a tiered approach for foreign swap dealer requirements, which was developed in consultation with foreign regulators and market participants. Some requirements would be considered entity-level, such as for capital, chief compliance officer and swap data recordkeeping. Some requirements would be considered transaction-level, such as clearing, margin, real-time public reporting, trade execution, trading documentation and sales practices.
Entity-level requirements would apply to all registered swap dealers, but in certain circumstances, foreign swap dealers could meet these requirements through substituted compliance. In a separate release, the Commission proposed phased compliance regarding entity-level requirements until July 2013. Such phased compliance will allow time for the CFTC, other regulators and market participants to continue coordinating on regulation of cross-border swaps activity.
Foreign swap dealers would comply with Dodd-Frank for transaction-level requirements facing U.S. persons. The timing of transaction-level compliance with U.S. persons will be determined according to the generally applicable schedule of each of the CFTC’s rules. The timing of compliance would be phased, however, for transactions facing guaranteed affiliates of U.S. persons, as well as foreign branches of U.S. persons, until next summer.
Pending further action on the cross-border guidance, the CFTC issued time-limited relief to certain foreign legal entities regarding the counting of swaps toward the de minimis swap-dealing threshold.
The CFTC also will continue to engage with our international counterparts through bilateral and multilateral discussions on reform and cross-border swaps activity. We are bound to have some differences, given our different cultures and political systems, but we’ve made great progress internationally on an aligned approach to reform. We are committed to working through any instances where the CFTC is made aware of a conflict between U.S. law and that of another jurisdiction.
International regulators met in New York in late November and had a very productive meeting regarding the CFTC’s guidance and how other jurisdictions are handling cross-border application of swaps market reform.
The regulators and policymakers at the meeting agreed to a joint statement regarding our progress so far. In short, the statement said:
Authorities should consult with each other prior to making final determinations regarding which derivatives products will be subject to required clearing;
Robust supervisory cooperation arrangements should be established;
Authorities should have appropriate access to data held in trade repositories;
The application of reforms to market participants should be clear, and jurisdictions should consider reasonable, time-limited transition periods so that market participants have adequate time to comply; and
The authorities agreed to continue working together, including on substituted compliance, and to meet regularly, starting in early 2013.
Market Implementation of Swaps Market Reform
As we near the end of 2012, market participants are moving to implementation of swaps market reform.
Given the magnitude of the crisis, Congress gave the CFTC but one year to complete implementing rules.
The CFTC, however, has been working to complete these rules in a deliberative way - not against a clock. We have been careful to consider significant public input, as well as the costs and benefits of each rule. CFTC Commissioners and staff have met nearly 2,000 times with members of the public, and we have held 19 public roundtables on important issues related to Dodd-Frank reform. The agency has received nearly 37,000 comment letters on matters related to reform. Our rules also have benefited from close consultation with domestic and international regulators and policy makers.
The CFTC has been working on smoothing the transition from a marketplace that lacked regulation to a new era of transparency and common-sense oversight. We have consulted broadly on appropriately phasing in reforms over time. In the spring of last year, we put out a concepts document for public comment and held a roundtable with the SEC on phased implementation. Subsequently, we proposed and finalized rules on implementation phasing. For instance, the clearing determinations will be phased in depending on the type market participant in March, then June, then September of 2013. Other reforms include built-in phasing. For instance, data reporting requirements are phased in depending on asset classes and market participants. Clearinghouses began reporting for interest rate and credit derivatives on October 12. Swap dealers will follow when they register. Reporting for foreign exchange, equity swaps and physical commodity swaps (including agricultural and energy swaps) begins in February 2013 for swap dealers and major swap participants. Reporting for all other market participants begins in April 2013. Extensive information on the compliance schedules for each of the CFTC’s reforms is available on our website.
arket Participant Inquiries
Now that the market is moving to implementation, it’s the natural order of things that market participants have questions and have come to us for further guidance. As it is sometimes the case with human nature, the agency receives many inquiries as compliance deadlines approach.
The Commission has sought to ensure that market participants have time to prepare. It has now been two and a half years since the Dodd-Frank Act passed. It has been a year or more since many CFTC rules have been finalized. In particular, the data rules that will largely go into effect in January were adopted by the Commission in 2011. The swap dealer definition and registration rules were completed in the first half of this year.
The CFTC, however, still welcomes inquiries from market participants, as some fine-tuning is expected. Prior to the milestone of October 12 when the foundational definition rules became effective, my fellow commissioners and I, along with CFTC staff, listened to market participants and thoughtfully sorted through issues as they were brought to our attention. We will continue to do so as we approach other important milestones in the future.
For example, CFTC staff issued a number of time-limited no-action letters while the Commission considers related exemptive petitions. These include exemptive petitions for electricity-related transactions on markets administered by Regional Transmission Organizations and Independent System Operators, as well as transactions among rural electric cooperatives and municipal-owned utilities.
Similarly, yesterday, CFTC staff issued a time-limited no-action letter to allow certain swap trading facilities and trading platforms to continue operating while the Commission completes its final rules for SEFs.
CFTC staff has also issued a number of interpretations and no-action letters regarding the definition of U.S. person and what swap dealing activity would be counted toward the de minimis swap-dealing threshold.
In addition, staff has issued interpretations and letters with regard to registration with the CFTC as commodity pool operators. Before October 12, relief was provided for equity real estate investment trusts, which are real estate investment trusts that own and operate real property; and certain securitization vehicles that issue securities backed by financial assets, are regulated by the SEC and do not use swaps to generate investment exposure.
We also sought public comment regarding other entities with inquiries about commodity pool operator registration. After October 12, guidance was provided for additional securitization vehicles. These letters addressed "legacy" securitization vehicles, backed by cash or synthetic assets, that have not and will not issue securities after October 12, 2012; and mortgage real estate investment trusts, which primarily invest in mortgage-backed securities and mortgages on residential and commercial property. In addition, these letters addressed family offices that are exempt from SEC regulation as investment advisers; business development companies that only engage in a minimal amount of commodity interest trading; and funds of funds on a time-limited basis while staff considers additional guidance for those vehicles.
We have also addressed a number of issues related to data. CFTC staff set a common date for compliance with the data reporting requirement so that a swap dealer that registers early will be subject to this requirement on the same day as one that registers later. We further phased compliance for swaps dealers to report data regarding certain swaps due to disruptions caused by Hurricane Sandy. We also provided additional time for foreign market participants on the reporting of identifying counterparty information in jurisdictions where secrecy or blocking laws forbid such reporting.
Staff is still considering a number of other specific requests for phased compliance. For instance, to facilitate compliance with new documentation requirements, the International Swaps and Derivatives Association (ISDA) has sponsored a number of documentation protocols for its members and other market participants. The Commission is considering the ISDA and its member firms’ petition for additional time to complete the protocol process or any bilateral amendments to trading documentation.
The CFTC makes all of these interpretations, guidance and no-action letters public through our website and press releases.
Resources
With the market moving to implementation, additional resources for the CFTC are all the more essential. We need resources for the people and technology necessary for effective market surveillance and to enhance customer protection programs. We need resources to handle the incoming registration requests from many new market participants. We need resources to answer all of the questions from market participants on implementation of reform.
At 703 on-board staff, the CFTC’s hardworking team is just 10 percent more in numbers than at our peak in the 1990s. Yet since that time, the futures market has grown more than five-fold, and the swaps market is eight times larger than the futures market.
Picture the NFL expanding eightfold to play more than 100 football games in a weekend without increasing the number of referees. This would leave just one referee per game, and, in some cases, no referee. Imagine the mayhem on the field, the resulting injuries to players, and the loss of confidence fans would have in the integrity of the game.
Given this reality, the President has requested additional resources for both staff and investments in technology for this agency. People and technological resources are critical for the CFTC to properly oversee the futures and swaps markets.
Conclusion
The common-sense rules of the road for the swaps market that Congress laid out in the Dodd-Frank Act are now the order of the day. Standardized swaps between financial entities will be cleared starting in March. Initial data reporting to regulators has begun, and the public will benefit from real-time reporting next year. We anticipate many swap dealers will register at the end of this month. I thank you and look forward to your questions.
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