Joint Statement of Commissioners
Michael V. Dunn and Jill E. Sommers
Commissioners Seek Public Comment on
Market Transparency Issues
September 4, 2009
On September 2, 2009, the CFTC announced two new transparency efforts to promote market integrity: the disaggregation of data in its weekly Commitments of Traders (COT) reports into four categories of traders and the quarterly release of index investment data. We applaud Chairman Gensler's efforts to increase transparency in the futures markets and sincerely hope that the new disaggregated COT (DCOT) reports and quarterly index data provide the public with a better view of trading activities in these markets. While the new DCOT reports may bring greater transparency to the nature of the activity occurring on exchanges, we are concerned that the lack of public input surrounding the methodology for reclassifying traders may compromise its usefulness.
As the Explanatory Notes to the new DCOT report explain, the starting point for classifying traders is Form 40 data. One of the recommendations in the Commission's September 2008 Staff Report on Commodity Swap Dealers & Traders (2008 Staff Report) was to develop "Long Form" reporting for certain large traders to more accurately assess their trading activity. The report observed:
As swap dealers and other large traders on regulated futures exchanges conduct a mix of both commercial and noncommercial activity, the current "either/or" classification system for commercial and noncommercial entities has become less useful and meaningful. This imprecision has led to significant misunderstandings about the nature and scope of participation in the futures markets. Because of this ambiguity in classification categories, it is difficult and unreliable for the CFTC to make estimates on the true nature of transactions occurring on exchanges without improvements to the current system. As a result, the Commission has instructed staff to develop a supplemental information form for certain large traders on regulated futures exchanges that would collect additional information regarding the underlying transactions of these traders so there is a more precise understanding of the type and amount of trading occurring on these regulated markets.
While we agree that the commercial/noncommercial classification system led to confusion, reclassifying this trading as either Producer/Merchant/Processor/User or Swaps Dealer activity prior to refinements in the Form 40 data, or at a minimum seeking public comment—as we are doing now—may lead to a different type of confusion. Importantly, neither the old classification system nor the new one reveal with any precision how much of the underlying activity is related to hedging physical market exposure.
The Commission's failure to seek public comment on potential changes to the COT reports is a radical deviation from its historical practice and one we hope does not become common. The public has previously described the COT reports as one of the most important services that the Commission provides. In fact, the last time changes to the COT reports were contemplated the Commission received 4,659 comments, the largest total in the agency's 31-year history. It was clear from the public's reaction that the COT reports were important and that investors of all types relied upon the information presented. More importantly, the comments we received helped to shape subsequent enhancements to the COT reports, specifically the supplemental commodity index report. The Commission's acceptance of the 2008 Staff Report should not be construed as an abdication of our responsibility to continue to seek timely public comment in this area.
Since the Commission has not sought public comment regarding the formulation of the new DCOT reports before their release, we are concerned that the agency has missed an opportunity to publish a report that will engender the confidence of those who use it the most. Although the Commission is seeking public comment after the fact and is concurrently working on improvements to the Form 40 data, we would have preferred to have gathered this important information prior to the revisions. We support the creation of a new swaps dealer category for reporting purposes, as was also recommended in the 2008 Staff Report, and believe Chairman Gensler is committed to refining and improving the DCOT reports based upon subsequent public comment and refinements to the Form 40 data. We think the better course of action in this instance, however, would have been to take the time needed for public input.
The public comment process serves not only to inform the Commission regarding potential pitfalls and solutions prior to taking a given action, but also to minimize misunderstandings and confusion on the part of the public that may result when they are not involved in the dialogue beforehand. It is only then that we can achieve true transparency.
We encourage everyone with an interest in the COT/DCOT reports to provide comments on: 1) the new data and accompanying explanatory notes; 2) ways to improve the agency's Form 40; and 3) possible methodologies to improve the accuracy of trader classifications. Comments should be e-mailed to the Commission at email@example.com by October 1, 2009. It is our sincere hope that with the public's help, the Commission will eventually be able to bring about the highest degree of market transparency possible.
Last Updated: June 11, 2010