In a speech titled "Transitions Present Opportunities," CFTC Commissioner Sharon Y. Bowen outlined her views on Regulation Automated Trading ("AT"), cybersecurity, position limits and diversity.
Appearing before the Commodity Markets Council "Global State of the Industry" Meeting, Commissioner Bowen addressed:
- Regulation AT. Commissioner Bowen stated that the supplemental proposal was revised to establish that firms using Direct Electronic Access to connect to commodities markets will not be required to register automatically, subject to certain conditions and that the second major revision of the supplemental proposal "would require that all electronic trading, algorithmic as well as non-algorithmic, . . . have two separate layers of pre-trade risk controls on it."
- Cybersecurity. Commissioner Bowen asserted that recent CFTC rulemakings are a "great first step" because they establish a comprehensive testing regime, require heightened risk management measures, focus on governance and are based on "well-regarded, accepted best practices for cybersecurity."
- Position Limits. Commissioner Bowen stated that "having position limits is essential," and urged industry groups to help regulators "make one last push to get rules finalized that will help prevent the negative impacts of excessive speculation while allowing commercial end users to manage their risks."
- Diversity. Commissioner Bowen urged companies to "get buy-in from all relevant stakeholders for the diversity initiative and foster an environment that lends itself to inclusion."
Commentary / Steven Lofchie
One benefit of transitions is that they allow us to let go of the past. A preference for holding onto a failed theory is not unique to those in government. Indeed, one of the most famous works on the theory of knowledge and the course of scientific progress, Thomas Kuhn's " The Structure of Scientific Revolution," deals with precisely this issue (see Emory University Professor Frank Pajares' Study Guide). If, after eight years of dedication to the proposition, proponents of position limits regulation could find no evidence that it served any purpose, then it is time to move on.
Commentary / Bob Zwirb
When considering a proposed rule, especially in the financial markets, the most important thing to consider might be the purported rationale for regulation. In the case of position limits, the rationale has meandered often and, as a result, never has been clear. For example, prior to the financial crisis, the CFTC sought to impose limits on oil and gas based on the never-proven ground that energy derivatives were artificially inflating the price of oil and natural gas. However, that rationale was abandoned in 2008, when the CFTC's own economists found that oil prices rose inversely to swap dealer and index fund activity in energy derivatives; i.e., that speculation actually was beneficial.
Following the crisis, the CFTC stated that limits were necessary to prevent "systemic risk" in the financial markets, notwithstanding the fact that the targets for the initial implementation of such limits – energy and metals – had nothing to do with the financial crisis.
Then the CFTC seized on the rationale that limits were necessary because Congress authorized the CFTC to impose limits for "prophylactic" reasons – a rationale that didn't help very much when the rule was challenged in court.
Now Commissioner Bowen has come up with a fourth rationale – that such limits are necessary to "encourage[] public confidence in these markets" – and has noted that although commodity prices now are substantially down from their peaks, "they will inevitably go up, and questions will be raised about the role of speculation." This last rationale begs several questions. For example, why is public confidence threatened only when prices go up? Aren't farmers hurt when they go down? Again, why are commodity prices a problem only when they go up? Why are "questions" raised only about speculation for one price direction? Does this mean that speculation occurs only in that direction? Does all of this strike potential decision-makers as a sound basis for imposing such a crude tool on the markets, one that potentially can harm liquidity for end users and hedgers alike?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.