Statement of Commissioner Jill Sommers on Meeting to Discuss on Significant Price Discovery Contracts
April 27, 2010
The appropriate regulatory treatment of contracts traded on Exempt Commercial Markets (ECMs) has been an important and evolving issue for the Commission from the time Congress authorized their existence in 2000. Initially ECMs were subject to basic recordkeeping and reporting requirements for contracts averaging five trades per day or more, and the Commission could demand the production of additional information under its special call authority when appropriate. The Commission was also authorized to determine that an ECM contract performed a significant price discovery function for an underlying cash market. Such a finding did not, however, trigger any self-regulatory responsibilities for the ECM or any additional oversight authority for the Commission. In addition, while the information received from ECMs was somewhat useful to the Commission, it was not transmitted in a form that could facilitate regulatory oversight such as our large trader reporting system does.
As ECM markets developed over the past decade, the Commission recognized that additional oversight authorities were needed or potentially needed for price discovery contracts traded on ECMs, particularly those linked to fully regulated contracts traded on designated contract markets (DCMs). The Commission found that a similar level of regulation was appropriate for these contracts, not only to give both the Commission and ECMs proper policing authority, but to eliminate possible competitive disparities that could unfairly advantage an ECM listing a contract that competed with a DCM contract, but was not subject to the same regulatory restrictions. In 2007 the Commission recommended that Congress amend the Commodity Exchange Act to correct this gap in the law, which Congress did in the 2008 Reauthorization Act.
None of the 24 contracts the Commission will vote on today are linked to or serve as look-alikes for contracts traded on a DCM. Nonetheless, staff recommends that the Commission declare seven of these contracts significant priced discovery contracts. Staff has determined that these particular contracts are referenced or consulted on a frequent or recurring basis by cash market participants when pricing transactions, and thus meet the material price reference criterion for a significant price discovery determination. Comments filed during the public comment process have questioned, among other things, whether these contracts are liquid enough to serve as true price discovery vehicles. While that is a debatable point, I agree with the staff’s analysis that not all of the price discovery criteria set forth in the statute must be present to declare a contract a significant price discovery contract, and that the material price reference element is sufficient for the seven contracts that staff recommends the Commission declare to be significant price discovery contracts today.
I will close by saying that I appreciate all of the hard work by our staff, especially DMO, in making these determinations, and I look forward to the presentations.
Last Updated: June 14, 2010