If you were wondering how Senate Banking Committee chairman Chris Dodd’s proposed bill on financial regulation might affect commodity trading, John Kemp at Reuters has done much of the hard work for us.
In a note sent out on Tuesday, the tenacious former Sempra economist explains how the rules appear to echo and enforce many of the CFTC’s own recommendations, while adding more clarification on matters like OTC swap regulation.
Key proposals on that latter subject include obligatory clearing submissions for swap dealers, depository registration as well as minimum capital and margining requirements.
Swap trades that go uncleared, meanwhile, would under the proposed bill be hit with “substantially higher” capital requirements to offset the greater risk associated.
Discretionary exemptions may, however, still be granted in the event counterparties are not major swap participants, use swaps only as part of an effective hedge or are predominantly engaged in activities that are not financial.
The corporate, or “physical loop-hole” therefore seems intact, but only for those who really do qualify as physical operators. As Kemp explains:
Section 717 preserves the cherished right to have un-margined swap deals with corporate end-users, for which Wall Street and corporate treasurers have been lobbying hard. But it makes it clear the exemption is at the discretion of the regulators and will only be available to real industrial firms and not financial institutions.
Which, we would say, could possibly blur the regulatory picture for hedge funds and other financials operating in the physical commodity realm slightly.
On a different note, Kemp also points to Dodd’s proposals on commodity research which seek to toughen the current rules governing conflict of interest.
Under the proposals, swap dealers, major market participants and futures commission merchants would be required to “implement systems to manage conflicts of interest in the publication of price and market analysis”. Specifically, they would also be required to:
…establish structural and institutional safeguards to assure that the activities of any person within the firm relating to research or analysis of the price or market for any commodity are separated by appropriate informational partitions within the firm from the review, pressure or oversight of those whose involvement in trading or clearing activities might potentially bias their judgment.
Which, of course, might seem relatively frightening to some large swap-dealing financial entities known for their timely commodity-market calls.
All in all, however, what Dodd’s proposals really appear to be are a ringing endorsement of those already set out by CFTC chairman Gary Gensler back in January. As Kemp concludes:
The Dodd bill gives the CFTC the comprehensive authority it needs to impose an effective system of position limits and to force as many swap transactions as possible into clearing systems. It significantly strengthens CFTC Chairman Gary Gensler’s hand negotiating with his fellow commissioners and Britain’s FSA about position limits.
Related links:
The “Eddie Murphy” rule - FT Alphaville
Is the CFTC trying to restrict physical traders after all? – FT Alphaville
CFTC targets funds in position-limit clampdown – FT Alphaville
Goldman Sachs’ visionary WTI performance – FT Alphaville