Public Statements & Remarks

Statement of Commissioner Kristin N. Johnson In Support of Notice of Proposed Rulemaking on Large Trader Reporting Requirements

June 07, 2023

I strongly support issuing the proposal on Large Trader Reporting Requirements.  Large trader reports “effectuate the Commission's market and financial surveillance programs by providing information concerning the size and composition” of Commission regulated markets and the accounts that hold the largest positional exposures.[1]  The Commission’s large trader reporting system has been foundational to protecting market integrity and the price discovery and hedging utility of futures contracts for commercial end-users.  Despite technology-based formatting limitations, the large trader reporting system has admirably supported the Commission’s market surveillance and position limits enforcement programs for decades.

A “use-case” application of the Commission’s large trader reporting system to Amaranth Advisors L.L.C. (“Amaranth”), a hedge fund whose manipulation of natural gas prices closely preceded the beginning months of the global financial crisis, perfectly illustrates the prophylactic significance of the reporting framework to market integrity.[2]  Amaranth manipulated natural gas prices through building massive derivatives positions in CFTC regulated markets subject to large trader reporting as well as opaque energy markets that were not regulated by the Commission and therefore not subject to large trader reporting until 2008.[3]  The expansive manipulation temporarily distorted prices that could have impacted the entirety of the economy’s natural gas physical marketing chain.[4]  In a retrospective exercise, the Commission concluded that aggregate position limits – which would have been enforced through large trader reports – would have deterred Amaranth’s reckless accumulation of excessive risk and could have prevented the hedge fund’s spectacular $6.6 billion collapse in late 2006.[5]

I commend staff – Owen Kopon and Paul Chaffin from the Division of Market Oversight, James Fay from the Division of Data, and Daniel Prager from the Office of the Chief Economist – for bringing to the Commission a thoughtful proposal for modernizing large trader reports. Requiring reporting in an extensible markup language (“XML”) protocol as proposed is consistent with current regulatory practices and reconciles the format for transmitting large trader reports with the Commission’s transactional reporting structures for designated contract markets, derivatives clearing organizations, physical commodity swaps and swap data repositories.[6] This harmonization, if properly implemented, should unlock surveillance synergies and allow the Commission’s Integrated Surveillance System, where large trader reports are housed, to interact with other reporting frameworks including Ownership and Control Reports, which are triggered when accounts exceed volume thresholds,[7] and Trade Capture Reports, which contain transaction level and related order book data.[8]

Although the proposal preserves the core data that large trader reports collect today, it also measuredly proposes to capture complementary data that is not fully reflected in current reports.  Importantly, the proposal would require enhanced reporting of exchanges of futures to capture information on the non-futures leg of these transactions.[9]  Exchanges of futures at times have been associated with prohibited trading practices and attempts to circumvent the Commission’s on-exchange trading requirement.[10]  The Commission has aggressively pursued enforcement actions against market participants that entered into “non-bona fide” exchanges of futures to the detriment of their counterparties,[11] and futures commission merchants that may have facilitated these prohibited practices.[12] Access to more fulsome and reliable data will improve the Commission’s understanding of how traders employ these transactions and serve as an additional deterrent to potential abusive trading practices.

The proposal would also require reporting data elements that capture “Contracts Bought” and “Contracts Sold” instead of reporting aggregated positions that do not presently consider the amount of buying and selling associated with a particular special account from one trading day to the next.[13]  Proposed regulation 17.00(g) would capture relative changes in positions from one reporting period to another, including with respect to contracts bought or sold via block trades[14] which implicate pre-trade transparency and liquidity concerns and may if not well calibrated significantly dampen centralized trading liquidity.[15]  The proposal would give the Commission the ability to differentiate between large position holders that are passive and active traders, and better understand the transparency and liquidity impacts of block thresholds in specific markets.[16]

Despite my support for this proposal, I fully understand and appreciate that amendments to data systems can create unintended consequences that impose unanticipated material burdens.  These potential burdens may be accentuated given the how ingrained the large trader reporting ecosystem is within the technology stacks of reporting brokers.  I am heartened by the proposal’s one-year compliance period,[17] and I encourage stakeholders to meaningfully engage with this proposal to enhance the Commission’s regulatory mandate without placing undue burdens on the firms that potentially would have to comply with new requirements.

[1] Notice of Proposed Rulemaking, Position Limits for Derivatives, 78 FR 75680, 75741 (Dec. 12, 2013) (hereinafter “2013 Position Limits Proposal”).

[2] See Hillary Till, The Amaranth Collapse: What Happened and What Have We Learned Thus Far?, Commodity Insights Digest (2007).

[3] See 2013 Position Limits Proposal at 75691 to 75696; see also CFTC Reauthorization Act of 2008, incorporated as Title XIII of the Food, Conservation and Energy Act of 2008, Public Law 110-246, 122 Stat. 1624 (June 18, 2008).

[4] See 2013 Position Limits Proposal at 75691.

[5] See 2013 Position Limits Proposal at 75692.

[6] Notice of Proposed Rulemaking, Large Trader Reporting Requirements at 14 (Jun. 7, 2023), (hereinafter “Large Trader Proposal”).

[7] 17 CFR 17.01.

[8] 17 CFR 16.02.

[9] Large Trader Proposal at 30.

[10] See In re Michael Pucciarelli and Badge Trading, CFTC No. 16-12, 2016 WL 1381854 (April 5, 2016).

[11] See id.

[12] See In re SG Americas Securities, LLC, as successor to Newedge USA, LLC, CFTC No. 16-33, 2016 WL 5682204 (Sept. 28, 2016).

[13] Large Trader Proposal at 29 to 30.

[14] Id.

[15] See Notice of Proposed Rulemaking, Core Principles and Other Requirements for Designated Contract Markets, 75 FR 80572, 80591 to 80593 (Dec. 22, 2010).

[16] See id.

[17] Large Trader Proposal at 34.