Comment Text:
David A. Stawick, Secretary
Commodity Futures Trading Commission
Three Lafayette Center
1155 21st Street, NW
Washington, DC 20581
Re: CFTC Rulemakings as Required by the Dodd-Frank Wall Street Reform Act
Dear Mr. Stawick:
I am writing to urge the Commission and its staff to consider the following comments on several key areas requiring rulemakings under Title VII of the Dodd-Frank Wall Street Reform Act.
This legislation seeks to reverse irresponsible deregulation of the derivatives markets that has occurred over the past two decades. This deregulation has resulted in opaque markets that cater to the needs of financial speculators rather than bona-fide hedgers and consumers for which futures, options and swaps were created in the first place.
Robust implementation and vigorous enforcement of the regulatory initiatives under the Dodd-Frank Act is vital if the legislation is to have its desired effects, including increased confidence, security and stability in the derivatives markets while preserving market liquidity, competition, and hedging and price discovery functions.
I. Definitions
1. Commercial Risk
The definition of “commercial risk” should be narrowly tailored to apply only to those entities whose business activities expose them to risk from physical commodity price fluctuations. “Commercial risk” should not include risks that are purely financial in nature, including balance sheet risk.
2. Major Swap Participant
It was the intent of Congress to require that only large market participants be captured under this definition. I am supportive of the exclusion for “positions held for hedging or mitigating commercial risk,” but again, this should not be defined so broadly as to create a new loophole for financial speculators to avoid requirements under the new law.
3. Captive Finance Affiliates
The major swap participant definition also includes an exception for captive finance affiliates. I similarly encourage the Commission not to allow the exception to be abused or too broadly interpreted.
4. Swap
The legislative definition excludes forward delivery contracts (and options on such contracts) for commodities that are intended to be “physically settled.” Any exemption for forward delivery contracts and options should be limited to benefit only bona fide commercial end-users.
IV. New Registration Requirements for Foreign Boards of Trade (FBOTs)
I support the requirement that FBOTs register with the CFTC and make their trading data available as well as requiring that they adopt position limits and implement prohibitions on manipulation and excessive speculation. They should also be subject to ownership caps as described above.
V. Anti-Manipulation & Disruptive Trading Practices
I strongly support prohibitions on “insider trading” based on nonpublic information, strengthened prohibitions on manipulation, and new authority provided to the CFTC under the Act that allows them to identify swaps that are “abusive” by virtue of being potentially detrimental to either the stability of the market or its participants. I urge the CFTC to be thorough in its interpretation and enforcement of these new authorities.
I also encourage the Commission to scrutinize the use of computerized/algorithm-based trading programs to determine if their application and use in the commodities markets has a disruptive affect on market stability or function.
VI. Position Limits, Aggregate Position Limits & the Bona Fide Hedging Definition
I support enforcement of the strongest possible speculative position limits as required under the Dodd Frank Act. Further, the Act requires that such limits be established and enforced within 180 days from enactment for exempt commodities (including energy commodities), not simply that the commission promulgate formulae for such limits and then impose them at some later date, as has been suggested.
Due to their passive approach to commodity trading, Exchange Traded Funds and Notes (including index funds) treat finite commodities such as energy as an “asset class” and a long-term investment rather than as vital resources to American industries, businesses and consumers. I believe the Commission should establish separate and more aggressive limits on the positions of Exchange Traded Funds and Notes, including index funds.
I also have concerns regarding the bona fide hedging exemption that are similar to my concerns regarding the definition of “commercial risk” and the end-user exemption. Too broad of a definition would allow continued watering down of the hedging exemption and provide additional incentives for financial speculators to enter the market under the guise of legitimate hedgers, thereby evading position limits and other requirements.
VI. Conclusion
American businesses and consumers are relying on CFTC Commissioners and their staffs to read and vigorously enforce these rules in such a manner as to restore confidence, stability and transparency to the derivatives markets - especially in the energy commodities markets. Americans of all stripes are depending on you to protect energy consuming businesses and individuals, as well as the broader economy, from fraud, manipulation, and disruptive/abusive trading practices and from excessive volatility, speculation and unwarranted price spikes.
This legislation gives the Commission powerful tools in this regard, and I hope that you will use them to their fullest extent.
Thank you in advance for your consideration.
Thomas F. Sullivan
Tobin, Sullivan, Fay & Grunebaum
60 William Street, Suite 330
Wellesley, Massachusetts 02481
Telephone: (781) 237-0877, ext. 19
Fax: (781) 237-1101
[email protected]
