FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Approves Final Regulations Governing Dual and Multiple Associations of Associated Persons of Swap Dealers and Major Swap Participants
Washington, DC — The Commodity Futures Trading Commission (Commission) has approved final regulations governing dual and multiple associations of associated persons (APs) of swap dealers (SDs), major swap participants (MSPs) and other Commission registrants. The regulations make clear that each SD, MSP and other Commission registrant with whom an AP is associated is required to supervise the AP and is jointly and severally responsible for the activities of the AP with respect to customers common to it and any other SD, MSP or other Commission registrant.
The CFTC voted 5 to 0 via seriatim to approve the final regulations, which will become effective 60 days after publication in the Federal Register.
FROM: COMMODITY FUTURES TRADING COMMISSION
CFTC Orders Florida Firms, Joseph Glenn Commodities LLC and JGCF LLC, and Owners Scott Newcom and Anthony Pulieri to Pay over $1 Million in Restitution and Penalties for Fraudulent Off-Exchange Transactions in Precious Metals with Retail Customers
Washington DC – The U.S. Commodity Futures Trading Commission (CFTC) today issued an Order filing and settling charges against two Boca Raton, Fla., companies, Joseph Glenn Commodities LLC (Joseph Glenn) and JGCF LLC (JGCF), and their sole owners and principals, Scott Newcom and Anthony Pulieri (the Respondents) for engaging in illegal, fraudulent off-exchange financed transactions in precious metals with retail customers.
The CFTC Order, filed on March 27, 2013, requires Joseph Glenn, JGCF, Newcom, and Pulieri to pay approximately $635,000 in restitution to customers for their losses and to return approximately $330,000 remaining in customers’ accounts. The Order requires Pulieri to pay a civil monetary penalty of $100,000. The Order also permanently prohibits the Respondents from registering with the CFTC and imposes a five-year trading ban on trading for others. In addition, the Order prohibits the Respondents from violating the Commodity Exchange Act, as charged, and requires them to comply with certain undertakings, including fully and expeditiously cooperating with the CFTC.
The Illegal and Fraudulent Transactions
The CFTC Order finds that from July 2011 through June 2012, the Respondents solicited retail customers, generally by telephone or through Joseph Glenn’s website, to buy physical precious metals such as gold, silver, copper, platinum, or palladium in what are known as off-exchange leverage transactions. According to the Order, the customers paid the Respondents a portion of the purchase price for the metals, and Joseph Glenn and JGCF purportedly financed the remainder of the purchase price, while charging the customers interest on the amount they purportedly loaned to customers.
The CFTC Order states that such financed off-exchange transactions with retail customers have been illegal since July 16, 2011, when certain amendments of the Dodd-Frank Wall Street and Consumer Protection Act of 2010 (Dodd-Frank Act) became effective. As explained in the Order, financed transactions in commodities with retail customers like those engaged in by the Respondents must be executed on, or subject to, the rules of an exchange approved by the CFTC. Since the Respondents’ transactions were done off-exchange with retail customers, they were illegal.
Furthermore, the CFTC Order states that when Joseph Glenn and JGCF engaged in these illegal transactions they were acting as dealers for a metals merchant called Hunter Wise Commodities, LLC (Hunter Wise), which the CFTC charged with fraud and other violations in federal court in Florida on December 5, 2012 (see CFTC Press Release 6447-12). Hunter Wise was purportedly Joseph Glenn’s and JGCF’s source for the metal and the loans. As alleged in the CFTC Complaint against Hunter Wise and according to the CFTC Order in this case, however, neither Joseph Glenn, JGCF, nor Hunter Wise purchased or held metal on the customers’ behalf, or disbursed any funds to finance the remaining balance of the purchase price. The Order finds that the Respondents’ customers thus never owned, possessed, or received title to the physical commodities that they believed they purchased.
The Order also finds that the Respondents defrauded their customers by misrepresenting the profitability of the financed off-exchange transactions and failing to disclose associated commissions, service, and interest fees.
CFTC staff responsible for this matter are Jon J. Kramer, Joy H. McCormack, Elizabeth M. Streit, Scott R. Williamson, Rosemary Hollinger, and Richard Wagner.
FROM: U.S. COMMODITY FUTURES TRADING COMMISSION
Federal Court in California Orders Victor Yu and His Company to Pay over $3.2 Million in Foreign Currency Fraud Action
Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today announced that it obtained a federal court Order requiring Defendants Victor Yu of San Jose, Calif., and his company, VFRS, LLC (VFRS), to pay restitution of nearly $2.15 million, disgorgement of more than $270,000, and a civil monetary penalty of over $800,000. The Order also imposes permanent trading and registration bans against Yu and VFRS and permanently prohibits them from further violations of federal commodities law, as charged.
The Order for Default Judgment and Permanent Injunction was entered on March 26, 2013, by Judge Yvonne Gonzales Rogers of the U.S. District Court for the Northern District of California. The Order stems from a CFTC Complaint filed on July 26, 2012, that charged Yu and VFRS with defrauding clients in connection with off-exchange foreign currency (forex) trading and failing to register with the CFTC as a Commodity Trading Advisor (CTA).
The court’s Order finds that the Defendants fraudulently induced more than 100 individuals to open forex trading accounts. In their client solicitations, the Defendants misrepresented that they had developed trading software that made forex trading "extremely safe" and that would prevent clients from ever reaching certain loss thresholds, the Order finds. The Defendants also misrepresented to some prospective clients that their trading software had shown positive returns on every trade it ever made and had successfully predicted activity in the currency markets back to the 1920s, according to the Order.
The Order further finds that, from 2009 to the present, the Defendants induced their clients to invest over $5 million in forex trading accounts, and clients lost almost $2.15 million during the same period. The Defendants received over $270,000 in service fees from those clients, the Order finds.
Once clients opened forex trading accounts, the Order finds that Yu and VFRS instructed them to give Defendants their log-in and password information so that the Defendants could place trades in their accounts. By this conduct, Yu acted as a CTA without being registered as such, according to the Order.
CFTC Division of Enforcement staff members responsible for this case are Robert Howell, Jennifer Smiley, Joseph Patrick, Susan Gradman, Scott Williamson, Rosemary Hollinger, and Richard Wagner.
FROM: U.S. SECURITIES AND EXCHANGE COMMISSION
Key Note:
Symposium on Building the Financial System of the 21st Century: An Agenda for Europe and the United States
by
Commissioner Daniel M. Gallagher
U.S. Securities and Exchange Commission
Washington, D.C.
March 21, 2013
Rüschlikon, Switzerland
March 21, 2013
Thank you very much, Hal [Scott] for that kind introduction and for inviting me to speak here today. It is a great pleasure to be here at a conference devoted to promoting trans-Atlantic dialogue between the U.S. and Europe.
Before I start, let me keep my chief ethics officer happy and advise you that my remarks here today are my own and do not necessarily represent the views of the SEC or my fellow Commissioners.
We in America have been blessed with a wonderful combination of geography, natural resources, and free market principles. These and other factors have allowed our economy and our financial system, including our capital markets, to thrive in the post-World War II era.
Although the United States has suffered its share of financial crises, most recently the one that erupted in 2008, our free market economy and robust capital markets have conferred an enviable prosperity on our people over a period of many years, and few in America can remember a time when the United States did not have strong and competitive capital markets.
However, the very strength and resilience of our capital markets could lead us to fall into the trap of believing that we are somehow entitled to such prosperity. Indeed, such a sense of complacency may well have taken root in our government and may threaten to jeopardize that prosperity. The reality is that we live in a world in which we must be constantly vigilant — sometimes taking affirmative action, but more often choosing not to act — in order to preserve the vitality of our markets.
An important part of my job, and that of my colleagues on the Commission, is to ensure that America’s capital markets remain strong, vibrant, and competitive. That’s not just good for U.S. investors, but also for other investors around the world. And, conversely, the rise of robust capital markets in other parts of the world has the potential to benefit the United States and the American people as well.
Today, financial services firms and investors are able to transact their business in markets around the world without leaving the confines of their homes or offices, much less their home jurisdictions. Companies are increasingly eschewing traditional venues like London or New York and instead turning to rising markets in Asia, Latin America, the middle east, and elsewhere for their capital needs.
Indeed, policymakers, business and financial industry representatives, and other market participants in the United States have been concerned about these developments for some time. In a November 2006 opinion piece in the Wall Street Journal, U.S. Senator Charles Schumer of New York and New York City Mayor Michael Bloomberg sounded the alarm about challenges to New York City’s status as the financial capital of the world.
1 In the preface to a consulting report commissioned by New York on this issue, Senator Schumer and Mayor Bloomberg acknowledged other international financial centers’ challenges to New York’s status, warning that "we can no longer take our preeminence in the financial services industry for granted."2
In March 2007, a report issued by a bipartisan commission established by the U.S. Chamber of Commerce identified and analyzed a number of these emerging challenges for U.S. capital markets.3 The report cited more than 70 years of capital markets excellence enjoyed by the United States and the "unmatched prosperity" that came with it, but also noted that the United States was steadily losing market share to other international financial centers.4 The report drew a distinction between two types of causes for this shift in market share. On the one hand, the report explained, this shift was "a reflection of natural economic and market forces that cannot, and should not, be reversed" and that indeed the development of European and Asian markets was a "positive development for the United States."5 However, the report also cited internal, self-inflicted factors — such as an increasingly costly regulatory environment and the burdensome level of civil litigation — as negatives that should be corrected.6 Later, in March 2008, the Chamber’s Center for Capital Markets Competitiveness issued a report calling for a modern, coherent regulatory structure and fair legal, regulatory, and enforcement processes.7 In this report, they cited "robust global competition from overseas markets" and noted that "[t]he reality is that America is no longer the sole capital markets superpower."8
In November 2006 and December 2007, the Committee on Capital Markets Regulation, an independent and nonpartisan research organization led by Hal Scott, issued a pair of reports calling attention to the declining competitiveness of the U.S. public equity markets.9 Among other things, the Committee cited a significant decline in the U.S. share of equity raised in global public markets, a precipitous decline in the U.S. share of the twenty largest global IPOs, and a legion of statistics indicating that foreign and domestic issuers were taking steps to raise capital either privately or in overseas markets rather than in the U.S. public equity markets.10
In November 2007, the non-partisan Financial Services Roundtable added its voice to this growing chorus, issuing a detailed blueprint for maintaining U.S. financial competitiveness.11 This blueprint noted the decades-long prosperity enjoyed by U.S. financial markets and firms, but concluded that this landscape was changing dramatically.12 The report went on to cite the relentless growth of foreign capital markets and the development of modern regulatory regimes in foreign jurisdictions. The report concluded that the United States should make changes to its regulatory system that would enable it to adapt and respond to "growing global competition," "innovative market developments," and "the dynamic financial needs of all consumers."13
In March 2008, then-U.S. Treasury Secretary Hank Paulson neatly summed up these concerns in the Treasury Department’s blueprint for reshaping the U.S. financial regulatory system:
Due to its sheer dominance in the global capital markets, the U.S. financial services industry for decades has been able to manage the inefficiencies in its regulatory structure and still maintain its leadership position. Now, however, maturing foreign financial markets and their ability to provide alternate sources of capital and financial innovation in a more efficient and modern regulatory system are pressuring the U.S. financial services industry and its regulatory structure. The United States can no longer rely on the strength of its historical position to retain its preeminence in the global markets.
14
That same month, the financial crisis in the U.S. began in earnest with the bailout of Bear Stearns, followed by the bankruptcy of Lehman Brothers in September 2008 and the low point of the U.S. equities markets in March 2009. In July 2010, well before the complex causes of the financial crisis were sorted out and understood by policymakers, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act as its reaction to the meltdown.
Unfortunately, this legislative response to the financial crisis bore little resemblance to the competitiveness-enhancing regulatory reform contemplated by pre-crisis regulators and market participants. The Dodd-Frank Act was not a carefully crafted product of bipartisan compromise, as opposed to the Congressional response to the stock market crash of 1929. Rather, Congress — having been exhorted not to let a crisis go to waste — allowed the urgent need for regulatory reform to be overwhelmed by a grab bag of disparate wish-list items, many of which had nothing to do with the financial crisis but were derived instead from long-held ambitions of policymakers, bureaucrats, and special interest groups.
What continues to amaze me about Dodd-Frank is not only what it covers in its 2319 pages, but also the crucial regulatory issues that it failed to address. For example, the act mandates that the SEC create unprecedented new disclosure rules relating to conflict minerals from the Congo — but it omits any mention of money market mutual funds, which Dodd-Frank’s own FSOC tells us are ticking time bombs of systemic risk. The Act requires disclosure of extractive resource payments made by U.S.-listed oil, gas, and mining companies — but it leaves the reform of Fannie Mae and Freddie Mac for another day. The Act was intended to end "too big to fail," but in reality it enshrined that concept by creating an entire system of special regulation for financial institutions that are "systemically important." This system threatens to aggravate the problem by conferring a competitive advantage on these already "too big to fail" institutions.
Rather than responding appropriately to the crisis, which would include developing a modern regulatory system with the flexibility to adapt to changes in the global financial system, we instead have been saddled with an increasingly prescriptive and inflexible regulatory environment that is characterized far more by more regulation than by smart regulation. Put another way, Congress, in fact, did let a crisis go to waste. The calls for proactive reform contained in the various reports I mentioned were ignored when the patient was on the operating table. Far from cured, things have, indeed, gotten even worse. To extend the analogy, under the surgeons’ care, the patient’s infection turned into sepsis.
Rather than addressing the competitive concerns raised before the crisis by policymakers and business leaders, the Dodd-Frank Act represents a vast increase in precisely the type of regulation that raised those concerns in the first place. Indeed, Dodd-Frank marked a tremendous expansion of prescriptive financial regulation, with much of the law’s rulemaking burden, including about 100 of its 400 rulemaking mandates, falling on the SEC. The very volume of Dodd-Frank’s prescriptive mandates to the SEC has had the unintended effect of significantly limiting the agency’s ability to bring its traditional expertise and judgment fully to bear in the rulemaking process. In that sense, it has had a negative impact on the Commission’s ability to develop sound, sensible regulation and to adapt quickly and flexibly to the continuing transformation of global capital markets.
Given these limitations, how can the Commission and other capital markets regulators best approach the challenges of this brave new world? Recognizing that capital markets and their participants are becoming increasingly de-localized in a world where new and complex financial products are traded around the clock and across the globe, it is certain that financial products and the entities that trade them will be regulated in different ways in different countries. As products cross international borders and move from one jurisdiction to another, simultaneously satisfying each of the overlapping regulatory requirements of multiple jurisdictions can be costly to investors, not to mention confusing — and the only ones smiling are the lawyers.
In the past, the standard response to cross-border jurisdictional conflicts was to seek to negotiate one-size-fits-all norms for all to implement. That approach is increasingly seen as impractical and obsolete. Certainly, it cannot hope to keep pace with product development, trading techniques, and even national regulation. Still, we must recognize the significant impediment to global trading posed by duplicative regulation of the same transaction or activity.
The key, it seems to me, is for regulators to accept the reality that, as to any given financial product or activity, there are likely to be high quality regulatory regimes other than ours — or, for that matter, yours. With that in mind, it seems that the best way to ensure high quality, but not layered and oppressive, regulation of those products and activities will be for one jurisdiction to defer to another’s regulatory approach, at least in certain situations.
This is not a new idea — but implementing it effectively will require new approaches. Academics as well as regulators have developed formulations like "substantial equivalence" and "mutual recognition" to describe a situation in which one country’s securities regulators would defer to another’s when their securities regulations were, in substance, largely the same. The goal under such an approach is to allow one regulator to accept as sufficient the regulatory actions of a different regulator with respect to financial services activities and participants that span multiple jurisdictions. Accordingly, this deference would have to be mutual, not unilateral, to have any hope of achieving its objective.
Notwithstanding the complexities involved, exploring this concept strikes me as a matter of common sense, given the pace of change in our financial services world, with investment products evolving before regulations can be written to cover them.
The SEC began to explore concepts of regulatory equivalence about five years ago, an effort that yielded limited success. The financial crisis of 2008 forced the agency to shelve this initiative. Two years later, the extraordinary expansion of financial regulation stemming from the Dodd-Frank Act further clouded the regulatory landscape, even as it made conspicuous the point that a one-size-fits-all approach had become utterly impractical.
The issue of extraterritorial application of laws and rules is best illustrated by the current debate over how U.S. regulators will apply the OTC derivatives provisions of the Dodd-Frank Act to activities that cross national borders. Given the complexity of the overall regulatory scheme for derivatives set forth in Title VII of the Act, the question of how to apply that regime to cross-border transactions is significant. Because derivatives are perhaps the most global and mobile financial products that exist, with dealers and other intermediaries spread across the world trading products for widely dispersed clients, the SEC staff is, of necessity, discussing this matter with foreign regulators. We must, in addition, coordinate our efforts with our domestic colleagues at the CFTC, who were given responsibility for swaps that are not security-based — the vast majority of the market.
As most of you know, this has not been an easy exercise. As has been widely reported, the CFTC has taken a very aggressive approach, attempting to extend the reach of its OTC derivatives rules deeply into foreign jurisdictions. Not surprisingly, key foreign regulators have expressed serious reservations at the CFTC’s approach. You may recall that leading policymakers from the European Commission, the United Kingdom, France, and Japan wrote a joint letter to the CFTC requesting that it refrain from taking action that would risk fragmenting and damaging the derivatives market, arguing instead for an approach grounded in principles of regulatory equivalence and substituted compliance.15
Subsequently, in a joint statement issued after their November 2012 meeting, the leaders of twelve national and supranational entities responsible for regulating OTC derivatives expressed interest in regulatory approaches that included voluntary regulatory deference. In their statement, this diverse group of regulators agreed that some form of limited regulatory "recognition," acceptance of "substituted compliance," or specific "exemptions" "should be considered" in crafting regulatory regimes applicable to OTC derivatives, given the "need to prevent the application of conflicting rules and the desire to minimize … the application of inconsistent and duplicative rules."16 I, too, believe it will be critical to incorporate some sort of regulatory deference into any cross-border approach to regulating security-based swaps.
Reaching beyond derivatives, you will also know that the European Union has adopted an "equivalence"-based approach to enable deference to non-EU regulators in various areas, including the regulation of credit rating agencies. In the United States, the SEC’s rules implementing the Credit Rating Agency Reform Act of 2006 established a registration and oversight regime for CRAs that register with the SEC. Three years later, in the wake of the global financial crisis, the EU adopted a directive establishing its own regulatory scheme applicable to CRAs. The EU directive included a provision allowing for non-duplicative regulation where the CRA is subject to a regulatory regime the EU has found "equivalent" to its own.17 After some serious bumps and bruises during the early stages of the equivalency determination process, the European Securities and Markets Authority concluded that U.S. regulation of CRAs was, in fact, equivalent to that under the applicable EU regulations. This prompted the European Commission to follow with its own equivalency determination several months later.18
While this experience was not, from a U.S. standpoint, a shining endorsement of the equivalency experiment, I do not think the problem lies in the concept of "substituted compliance," so much as in the manner of its implementation. To succeed as it surely must, all involved will have to proceed without preconceptions, with clarity of vision, and perhaps with unaccustomed levels of restraint.
In other words, because the equivalency determination is the precondition to one jurisdiction’s acceptance of the regulatory actions of any other jurisdiction, it is inherently subject to misuse of a sort that would fly in the face of the very purpose of substituted compliance. It could, for example, be used as a chokepoint to force the other jurisdiction to regulate in the same way or to the same degree as the determining jurisdiction; it could be used as a protectionist tool, wielded for parochial and anti-competitive reasons.
So I want to stress: If "equivalency" and "substituted compliance" are to have a future — if international commerce in derivatives are not to be dragged down in regulatory confusion and cost — equivalency determinations must be made in good faith and with openness to approaches other than those of the evaluating entity or its political organs. Speaking on this topic, my colleague, CFTC Commissioner Jill Sommers, stressed the key point: "It is important that assessments of comparability be made at a high level, keeping in mind the core policy objectives … rather than a line-by-line comparison of rulebooks."19
And, I am very happy to report, a bipartisan bill introduced in the House of Representatives just two days ago strikes precisely the appropriate balance, requiring that the SEC and CFTC jointly issue rules on OTC derivatives that show deference to broadly equivalent foreign regulatory regimes. The House bill provides, in pertinent part, that the joint SEC-CFTC rules "shall provide that a non-U.S. person in compliance with the swaps regulatory requirements of a G20 member nation, or other foreign jurisdiction as jointly determined by the Commissions, shall be exempt from United States swaps requirements … unless the Commissions jointly determine that the regulatory requirements of the G20 member nation or other foreign jurisdiction are not broadly equivalent to United States swaps requirements."
Returning to my larger point: Much of America’s post-war prosperity has been driven by our free market economy and vibrant capital markets. More recent experience in other parts of the world, Europe included, underscores that connection. We must not take the vitality of our capital markets for granted. We must instead foster them, and in the process protect investors, whether large or small, domestic or foreign. We must all regulate in a balanced manner — smartly.
Smart regulation today requires, at a minimum, that we keep pace with the evolution of global markets, but that we do so without adding unnecessary costs — that we avoid imposing layers of complex, overlapping, and, to that extent, incoherent regulation. We must not look in isolation at the potential benefits of regulation, but also in each instance at whether they are sufficient to justify the costs that they entail. And we can, I submit, increasingly keep pace with developments in the industries and markets we regulate, while reducing the burdens we impose on those we regulate, by deferring to our peer regulators in appropriate situations.
Thank you very much for your kind attention, and I wish you a productive and successful conference.
1 Hon. Charles E. Schumer & Hon. Michael R. Bloomberg, Op-Ed., To Save New York, Learn From London Wall St. J., Nov. 1, 2006, http://online.wsj.com/article/SB116234404428809623.html.
2 Hon. Michael R. Bloomberg & Hon. Charles E. Schumer, Sustaining New York’s and the US’ Global Financial Services Leadership, at i (2007).
3 Commission on the Regulation of U.S. Capital Markets in the 21st Century, Report and Recommendations (2007) [hereinafter 21st Century Report].
4 21st Century Report, at 11, 15.
5 21st Century Report, at 11 and 17.
6 21st Century Report, at 16.
7 Center for Capital Markets Competitiveness, Strengthening U.S. Capital Markets: A Challenge for All Americans, at 4, 23-26 (2008) [hereinafter Strengthening U.S. Capital Markets].
8 Strengthening U.S. Capital Markets, at 3.
9 Committee on Capital Markets Regulation, Interim Report of the Committee on Capital Markets Regulation (2006); Committee on Capital Markets Regulation, The Competitive Position of the U.S. Public Equity Market (2007).
10 See, e.g., The Competitive Position of the U.S. Public Equity Market, at 1-5.
11 The Financial Services Roundtable, The Blueprint for U.S. Financial Competitiveness (2007).
12 See The Blueprint for U.S. Financial Competitiveness, at 7.
13 The Blueprint for U.S. Financial Competitiveness, at 8.
14 The Department of the Treasury, Blueprint for a Modernized Financial Regulatory Structure, at 2 (2008).
15 See Letter from Hon. George Osborne, Hon. Michel Barnier, Hon. Ikko Nakatsuka, and Hon. Pierre Moscovici to Hon. Gary S. Gensler (Oct. 17, 2012), available at http://www.fsa.go.jp/en/news/2012/20121018-1.html.
16 See "Joint Press Statement of Leaders on Operating Principles and Areas of Exploration in the Regulation of the Cross-Border OTC Derivatives Market" (Dec. 4, 2012) (relating to Nov. 28, 2012 meeting), SEC Press Release No. 2012-251, at item 4.
17 Regulation (EC) No 1060/2009 (Sept. 16, 2009), Art. 5(6), OJ L 302 (Nov. 17, 2009), at 1.
18 European Commission Implementing Decision 2012/628/EU, October 5, 2012, OJ L 274/32 (9 Oct. 2012). In separate decisions on the same day, the EU also found the CRA regulations of Australia and Canada equivalent to those of the EU.
19 Statement of Commissioner Jill E. Sommers at a hearing of the Subcommittee on General Farm Commodities and Risk Management, Committee on Agriculture, U.S. House of Representatives, Dec. 12, 2012.
FROM: COMMODITY FUTURES TRADING COMMISSION
Remarks of Chairman Gary Gensler Before the International Monetary Fund Conference
March 20, 2013
Good afternoon. Thank you, José, for the kind introduction. I also want to thank the International Monetary Fund and Christine Lagarde for the invitation to speak today at your conference on commodity markets.
Derivatives Markets
Farmers, ranchers, producers, commercial companies and other end-users across the globe depend on well-functioning derivatives markets. These markets are essential so that end-users seeking to hedge a risk can lock in a future price of a commodity and thus focus on what they do best – efficiently producing commodities and other goods and services for the economy.
Derivatives markets have existed in the United States since the time of the Civil War. Initially, there were futures on agricultural commodities, including wheat, corn and cotton.
Futures allowed farmers to get price certainty on their crops. As they were planting their fields, farmers could lock in a price for harvest time. Farmers and producers also benefited from prices established in a central market, rather than just relying on competition for their harvested crops among local merchants.
In these central markets, hedgers seeking to reduce risk may meet other hedgers, but often meet speculators on the other side of the transaction.
In the 1920s, Congress brought the first federal oversight to the futures market. These reforms included bringing transparency to the marketplace by requiring that all grain futures be traded on central exchanges.
A federal regulator was established within the U.S. Department of Agriculture to oversee the grain futures market.
During the 1930s, President Roosevelt and Congress strengthened the common-sense rules of the road for these markets by adopting new prohibitions against manipulation, protections for customer funds and speculative position limits to promote market integrity.
By the 1970s, the futures market had expanded to include contracts on additional agricultural commodities, as well as metals.
Market participants also were considering further innovations to trade contracts on other risks in the economy, such as on energy products and financial instruments.
Congress understood this and broadened oversight of the futures markets to all commodities, including any that might be developed in the future.
The Commodity Futures Trading Commission (CFTC) was established as in independent regulator in 1975, and took on this broader role from our predecessor in the Department of Agriculture.
The word commodity in our oversight regime covers agricultural, metals, energy and financial commodities, as well as any other future to manage risk based on any "services, rights and interests."
Thus, the word "commodity" in our oversight regime is more expansive than you are generally discussing at this conference.
In 1981, a new derivatives product emerged. These derivatives, called swaps, were initially transacted bilaterally, off-exchange. While the futures market has been regulated by the CFTC, the swaps marketplace in the United States, Europe and Asia lacked oversight.
What followed was the 2008 financial crisis. Eight million American jobs were lost. In contrast, the futures market, supported by the 1930s reforms, weathered the financial crisis.
President Obama and Congress responded and crafted the swaps provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act).
They borrowed from what has worked best in the futures market for decades – clearing, oversight of intermediaries and transparency. The law gave the CFTC responsibility for swaps and the Securities and Exchange Commission responsibility for security-based swaps.
CFTC Mission
As of last year, the CFTC is charged with overseeing both the commodity futures market and the swaps market.
The CFTC is not a price-setting agency.
The mission of the CFTC is to ensure market transparency – both pre- and post-trade. Transparency lowers costs for investors, consumers and businesses. It increases liquidity, efficiency and competition.
The mission of the CFTC is to promote market integrity – to ensure that that the price discovery process is open, competitive and efficient.
The mission of the CFTC is to police the derivatives markets for fraud, manipulation and other abuses.
The mission of the CFTC is to lower the risks to the economy of clearinghouses and intermediaries, as well as ensuring for the protection of customer funds.
And the mission of the CFTC is to ensure these markets work for the real economy – the non-financial side that employs 94 percent of private sector jobs – so that hedgers and investors may use them with confidence.
Three years after the passage of the Dodd-Frank Act, the CFTC is nearly complete with the law’s swaps market reforms. The swaps marketplace is increasingly shifting to implementation of these common-sense rules of the road. For the first time, the public is benefiting from:
Greater access to the swaps market and the risk reduction that comes from centralized clearing.
Oversight of swap dealers; and
The transparency of seeing the price and volume of each swap transaction, available free of charge on a website like a modern-day tickertape.
Looking forward, it’s a priority that the Commission finishes rules to promote pre-trade transparency, including those for a new swaps trading platform, called swap execution facilities (SEFs), and the block rule for swaps.
Pre-trade transparency will allow buyers and sellers to meet and compete in the marketplace, just as they do in the futures and securities marketplaces. SEFs will allow market participants to view the prices of available bids and offers prior to making their decision on a swap transaction.
It’s also a priority that the Commission ensures the cross-border application of swaps market reform appropriately covers the risk of U.S. affiliates operating offshore.
If a run starts in one part of a modern financial institution, whether it's here or offshore, the risk comes back to our shores. That was true with Bear Stearns, which failed five years ago this month, AIG, Lehman Brothers, Citigroup and Long-Term Capital Management.
Thus, as the CFTC completes guidance regarding the cross-border application of swaps market reform, I believe it’s critical that the Dodd-Frank Act’s swaps reform applies to transactions entered into by branches of U.S. institutions offshore, between guaranteed affiliates offshore, and for hedge funds that are incorporated offshore but operate in the U.S. Where there are comparable and comprehensive home country rules and enforcement of those rules abroad, we can look to substituted compliance, but the transactions would still be covered.
Changing Markets
Since the 1980s, the swaps market has grown in size and complexity. It is now eight times as big as the futures market. From total notional amounts of less than $1 trillion in the 1980s, the notional value now ranges around $250 trillion in the United States.
Together, the notional value of the U.S. futures and swaps markets is approximately $300 trillion – or roughly$20 of derivatives for every dollar of goods and services produced in the U.S. economy.
The futures market has changed dramatically as well.
There has been a significant increase in electronic trading. Instead of face-to-face trading on an exchange floor, more than 85 percent of the futures volume in 2012 was traded electronically.
In addition, the makeup of the market has changed. While the futures market has always been where hedgers and speculators meet, today a significant majority of the market is made up of financial actors, such as swap dealers, hedge funds, pension funds and other financial entities.
For example, based upon CFTC data as of last week, only about 14 percent of long positions and about 13 percent of short positions in the crude oil market (NYMEX WTI contracts) were held by producers, merchants, processors and other users of the commodity.
Similarly, only about 18 percent of gross long positions and about 27 percent of gross short positions in the Chicago Board of Trade wheat market were held by producers, merchants, processors and other users of the commodity.
Furthermore, CFTC data published in 2011 shows the vast majority of trading volume in key futures markets – more than 80 percent in many contracts – is day trading or trading in calendar spreads.
Only a modest proportion of average daily trading volume results in reportable traders changing their net long or net short futures positions for the day. This means that about 20 percent or less of the trading is done by traders who bring a longer-term perspective to the market on the price of the commodity.
Modern technology has led to other dramatic changes in the markets. With advancements in cell phone technology, a farmer in Africa or Asia can see the world prices for these markets, whether set in Chicago or elsewhere. This technological advancement greatly increases access to the markets. Farmers around the globe can more fully benefit from the competitive market.
But modern technology also more tightly connects us all and highlights why we have to ensure the markets are transparent and free of fraud, manipulation, and other abuses.
Position Limits and Enforcement Authority
Since the reforms of the 1930s, the CFTC’s predecessor and now the CFTC have promoted market integrity with position limits, as well as the agency’s enforcement authority to police manipulative conduct.
Position Limits
Since the 1930s, Congress has prescribed position limits to protect against the burdens of excessive speculation, including those that may be caused by large concentrated positions.
When the CFTC set position limits in the past, the agency sought to ensure that the markets were made up of a broad group of participants.
At the core of our obligations is promoting market integrity, which the agency has historically interpreted to include ensuring that markets do not become too concentrated.
Position limits are a critical tool to ensure that a single trader does not accumulate an outsize position that could potentially affect integrity or liquidity in the marketplace.
As required by Congress in the Dodd-Frank Act, in October 2011 the CFTC finalized a rule to establish position limits for futures, options and swaps on 28 physical commodities.
A group of financial associations is challenging this rule in court. 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.
Enforcement Authority
In the United States, we have strong prohibitions against misconduct that can affect the integrity of our markets, which were further strengthened by Congress in the Dodd-Frank Act.
Our laws prohibit successful manipulations, where the wrongdoer intended to and actually did manipulate a price.
But we also cover a much broader swath of misconduct.
Our laws prohibit all attempts at manipulation, and all manipulative or deceptive schemes, where the wrongdoer acted recklessly. In addition, our laws prohibit the transmission of false information that may tend to affect the price of a commodity.
These laws, aggressively and fairly enforced, are designed to protect market participants and the integrity of our markets. The international community can draw on these provisions to enhance their own regulatory regimes.
International Coordination
Other market jurisdictions have made progress on position limits and attempted manipulation provisions.
In November 2011, the G-20 leaders endorsed an International Organization of Securities Commissions (IOSCO) report noting that market regulators should have and use formal position management authorities, including the power to set position limits, to prevent market abuses.
Most jurisdictions with commodity derivatives markets have subsequently implemented or are moving forward on position management authorities. For instance, the European legislative bodies are considering a position limit regime for the European Union.
In addition, European legislative bodies are considering proposals that would include attempted market manipulation within its regulatory framework.
As the CFTC works with our global counterparts on swaps market reform, we are advocating for a consistent approach with regard to these reforms.
The Importance of an Effective Market Regulator
In conclusion, farmers, ranchers, producers and consumers need to have confidence that derivatives markets are free of fraud, manipulation and other abuses.
The end-users in the non-financial side of the economy benefit from transparency both before and after the trade. End-users benefit from open and competitive markets where no one party has an outsized position.
The CFTC is nearly complete with the swaps market reforms that have brought clearing, oversight of intermediaries and transparency to the once dark swaps market.
But for the CFTC to effectively ensure market integrity, it is critical for the agency to be well-resourced.
At 684 people, we are just 7 percent larger than we were 20 years ago.
Simply put, the CFTC is not the right size for the new and expanded mission Congress has directed it to perform.
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