CFTC Provides Relief from Large Trader Rule

Terry Flanagan

Order applies to large trader reporting of physical commodity swaps.

The Commodity Futures Trading Commission is providing temporary relief from a rule that will enable the agency to efficiently identify significant market participants and collect data on their trading activity so it can reconstruct market events, conduct investigations, and bring enforcement actions.

The CFTC’s Division of Market Oversight is providing temporary relief from the requirements of the Commission’s regulations regarding large trader reporting of physical commodity swaps.

Because this is the first time that swaps data is being collected, this temporary relief is intended to provide sufficient time to enable both the industry and the Commission to develop and refine systems and processes that will be able to report these complex transactions.

“The reforms currently under consideration, including formation of various entities to monitor and oversee the rules and regulations being put into place, are to have certain impact on the trading environment that could be a serious game changer for many companies not prepared to handle such sweeping moves,” Sean Carnahan, global director of commodities and energy at SuperDerivatives, told Markets Media.

“The consideration of monitoring and making publicly available various companies trading positions, amounts and volumes, while needed for transparency, is very new to the market,” he said.

The CFTC’s action comes as the International Organization of Securities Commissions (IOSCO) has published principles for the regulation and supervision of commodity derivatives markets, including design of physical commodity derivatives contracts; surveillance of commodity derivatives markets, including monitoring large positions; and enhancing price discovery and transparency, including allowing regulators to impose position limits and the reporting of OTC derivatives to trade repositories.

On July 22, the CFTC published large trader reporting rules for physical commodity swaps and swaptions.

The rules require daily reports from clearing organizations, clearing members and swap dealers, and become effective on September 20, 2011.

The CFTC is providing temporary relief from reporting, as long as parties are making a good faith attempt to comply with the reporting requirements, until November 21, 2011, for cleared swaps, and January 20, 2012, for uncleared swaps.

There are major areas each company will need to review and evaluate in regards to technology and infrastructure impacts on their business: collection and distribution of data, internal and external reporting capabilities, strategy and methods of trading within intraday position limits while staying within new business conduct rules.

“The new monitoring of intraday position limits could change and entire companies business model,” said Carnahan. “The idea of real-time, intraday reporting is going to change the operational aspects, technology, and conduct of the front office, change that could have major front to back impact on the overall strategy of many companies.”

The CFTC has proposed anti-manipulation and anti-fraud rules issued by the CFTC under the Dodd-Frank Act.

The rules are based on a proposed interpretive order issued by the CFTC in May that provides guidance on disruptive practices enumerated under Dodd-Frank, such as violating bids and offers, demonstrating intentional or reckless disregard of the orderly execution of transactions during the closing period, or spoofing, i.e., bidding or offering with the intent to cancel before execution.

Under the SEC’s large trader reporting rule, large traders, defined as anyone whose trades equal or exceed two million shares or 20 million during any calendar day, will be required to identify themselves to the SEC and their broker-dealers will be required to monitor their transactions under a large trader reporting regime.

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