Dissent of Commissioner Jill E. Sommers and Commissioner Scott D. O’Malia
December 1, 2010
We respectfully dissent from the action taken today by the Commission to issue proposed regulations relating to “Core Principle and Other Requirements for Designated Contract Markets” (DCMs). While we each dissent for a number of reasons, we join in writing to express our disagreement with the Commission’s narrow interpretation of Core Principle 9 – Execution of Transactions, and request comment on the implications of such a narrow interpretation of Core Principle 9 for markets and market participants.
In relevant part, Core Principle 9 states: “The board of trade shall provide a competitive, open, and efficient market and mechanism for executing transactions that protects the price discovery process of trading in the centralized market of the board of trade.” Core Principle 9 does not say that every contract listed for trading on the board of trade must trade in the centralized market. Nor does it require that every contract listed for trading serve a price discovery function. Rather, it requires a mechanism for protecting the price discovery function for those contracts that do trade in the centralized market. With these proposed regulations, the Commission is interpreting Core Principle 9 in a way that does not comport with the plain language of the statute.
Over the past decade, a long list of non-standardized, illiquid contracts in the energy sphere have been executed off-exchange and cleared on-exchange through the exchange of futures for swaps (EFS) mechanism. The availability of clearing for these contracts added a level of safety, soundness and transparency to the marketplace that did not exist before. If the Commission had not permitted these contracts to be listed for clearing through the EFS process it is highly doubtful that the level of clearing that exists today for these contracts would have been achieved, and highly likely that this activity would have remained opaque to market participants and regulators. Congress was aware of this specialized marketplace when it amended Core Principle 9. If Congress had intended to outlaw this activity it could have done so by explicitly requiring all DCM contracts to trade in the centralized market. It did not do so. In fact, Core Principle 9 explicitly allows boards of trade to authorize certain types of contracts that have traditionally been traded off the centralized market, including EFS.
Finally, the full ramifications of the Commission’s overly-restrictive reading of Core Principle 9 are not yet known, but are likely to be of great consequence to many market participants. Clearing helps mitigate risk, and the movement of illiquid contracts into a cleared environment was a positive development for our markets and market participants. Clearing contracts listed on a DCM also permits market participants to take advantage of certain efficiencies, like portfolio margining. Now, hundreds of contracts that are listed for trading on DCMs and cleared likely will no longer enjoy that status. The assumption appears to be that these contracts will simply be listed for trading on a swap execution facility (SEF) and cleared, without any disruption to markets or market participants. We are not willing to make such a bold assumption, especially when the Commission has not yet proposed regulations relating to listing and trading requirements for SEFs.
We would have preferred that the proposed regulations preserve the functioning of this specialized marketplace; a marketplace that has not adversely affected price discovery for any contract currently traded in the centralized market.
Last Updated: March 3, 2011