October 19, 2010
Mr. Chairman, I would like to thank the teams who have spent many long hours developing the rules we will consider here today. The staff has actively sought input from the Commissioners and worked cooperatively to make improvements to each of these rulemakings.
I would like to commend Don Heitman and his team in developing a thoughtful and well constructed rule making on agricultural swaps. The rulemaking is balanced and the questions are straightforward.
I would also like to extend my thanks to Carl Kennedy and his team for their work on the Fair Credit Reform Act and consumer protections provided for under Gramm-Leach-Bliley Act. Protecting sensitive and personal information is always of paramount importance.
With regard to the Large Trader Reporting proposal, I continue to have concerns with the reporting methodology being developed by the Commission. I do appreciate all the hard work and research Bruce Fekrat and his team have undertaken in drafting this rulemaking.
Mr. Chairman, the other night I watched a television program that profiled the construction of a zero energy home located in Maine. As the name suggests a zero energy home, or “passive house,” means the home requires no external energy source to operate. The home profiled in this segment operates on the same amount of energy as that of a hair dryer. During the show, they discussed how this was possible and it came down to the foundation and how all the parts– the windows, doors, and air handling- worked together to minimize energy use and optimize the solar potential, even in Maine. This new design concept is the first one of its kind built and certified in Maine, and the 12th in the nation.
While I am passionate about energy policy, the reason why I was watching television as opposed to reviewing another proposed rulemaking memo was that the home was designed and built by my younger brother Matt, and his company GO-Logic homes.
This project, however, made me think about what we are doing with these rulemakings. We are attempting to build a foundation for a new form of market oversight and surveillance that is nothing like what we have done before.
In particular, the large trader report is attempting to bring together information from both the swaps and futures market to set position limits applicable to linked contracts. The foundation of the “position limit” is the reporting. However, I am concerned that this foundation will not be robust and that the large trader reports will not effectively support this structure, especially given that they will ultimately be replaced by data from Swap Data Repositories. Furthermore, this temporary system is not up and running yet and the cost borne by industry and the Commission will be considerable.
The large trader reporting scheme will provide greater insight into the OTC market, but it lacks the fidelity required to track an individual’s position across both swaps and futures markets. On July 19th, the Commission proposed a rulemaking on Ownership and Control which was necessitated by the fact that existing large trader reports were insufficient to fully capture for analysis the dynamic and integrated trading and trade practices across regulated futures markets. In particular, the proposed rulemaking stated that OCR is necessary to improve the Commission’s surveillance capabilities by, “linking individual transactions reported on exchange trade registers (TSS) with aggregate positions reported in the large trader data (ISS). DMO would [through OCR] have the data necessary to reconstruct trading based on trade registers, and determine how large traders established their positions as recorded in the large trader reporting system.”1
I fear that we are rushing to implement new reporting methodologies without taking into consideration how each of the new and existing reporting requirements fit together as our foundation. From a technology standpoint, I believe we must undertake a complete overhaul of our reporting system to clarify and streamline the process, and, at a minimum, ensure that all Commission forms are electronic and will automatically populate our trade and market surveillance systems.
Establishing and relying upon a trade reporting system that lacks critical details will undermine the effectiveness of any position limit proposal. The Commission will address the position limit proposal very shortly, and I hope to see a position limit proposal that will: 1) protect bona fide hedgers, including looking through the swap dealer to the actual commercial trader to determine whether or not to issue an exemption; 2) ensure that we establish limits on contracts that have clear price linkages based on empirical data; and 3) not adversely impact commercial interests such as a utility that uses these markets to hedge the multi-year commercial risk of building a new power plant or an airline that uses a variety of futures and swaps to hedge its jet fuel exposure.
Recognizing that the Commission will spend months establishing reporting protocols, agreeing on futures equivalent positions and trying to prevent double counting or filling gaps in the reporting of data; I question whether we would be better off waiting until we build a solid foundation using complete and accurate data from the swap data repositories under a final ownership and control rule before we impose hard position limits on those contracts outside the most liquid swaps and futures contracts being traded today. In addition, because the large trader reports for swaps will be produced by swap dealers, and the swap dealer definition will not be effective until July 2011, it might be wise for the Commission to delay the implementation of the large trader reporting scheme until the Commission rulemaking defining the term swap dealer is finalized; this will avoid confusion over who should report. I encourage the public to comment on this issue.
I would prefer the Commission take an aim, ready, fire approach to position limits, rather than to shoot first and ask questions later. I hope the Commission will think through these concerns before implementing a final reporting rulemaking.
1 Account Ownership and Control, 75 Fed. Reg. 41775, 41778 (proposed July 19, 2010) (to be codified at 17 C.F.R. pt. 16).
Last Updated: January 18, 2011