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Comment for Proposed Rule 75 FR 67258

  • From:
    Organization(s):

    Comment No: 53425
    Date: 11/18/2010

    Comment Text:

    Richard Tonsing
    4742 Bamboo Way
    Fair Oaks, CA 95628-6041


    November 18, 2010

    David Stawick
    Commodity Futures Trading Commission
    Three Lafayette Centre
    1155 21st Street, NW
    Washington, DC 20581


    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 the irresponsible deregulation of
    markets that has occurred over the past two decades. This deregulation
    resulted in an opaque market that catered 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.

    As an energy company that serves thousands of consumers and plays a vital
    role in the health and growth of the American economy, deregulation of the
    derivatives markets has resulted in diminished confidence in these
    markets. The resulting excess volatility and speculation in commodities,
    including energy (e.g., crude oil, gasoline and home heating fuels), has
    skewed price discovery, unhinged these markets from responding to concrete
    economic fundamentals, such as supply and demand, and made it difficult
    for hedgers to insulate themselves and their consumers from risks and
    subjected them to erratic and unwarranted price spikes.

    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. Title VII reforms the derivatives
    markets, including energy futures, options, swaps and related products,
    seeks to bring renewed transparency, oversight and accountability, to
    these 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
    risk that is 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 bona fide commercial end-users.

    II. Governance & Possible Limits on Ownership & Control - Swap Dealers

    The CFTC must establish both a meaningful limit on individual ownership
    and a limit on collective ownership if the proposed rule is to have the
    intended effect of limiting conflict of interest, assuring transparency
    and open competition, and preventing clearinghouses and exchanges from
    catering to the interests of a few large participants in the financial
    community. This requires both a cap on ownership for individual entities
    as well as a sector-wide aggregate cap on banks.

    III. End-User Exception

    The end-user exception should remain narrowly tailored to those businesses
    that produce, refine, process, market or consume an underlying commodity
    and counter-parties buying or selling a position to an end-user. Purely
    financial risk, including broad terms such as balance sheet risk, should
    not be considered legitimate commercial risk.

    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, prohibitions on manipulation and trading on false
    information, and new authority 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 under the Dodd Frank Act beginning within 180 days from enactment
    for exempt commodities (including energy commodities) not simply the
    promulgation of formulae for establishing limits that can be then imposed
    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 as an asset
    class 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 our concerns regarding the definition of commercial risk and
    the end-user exemption. Too broad of a definition would allow a continued
    watering down of the hedging exemption and provide additional incentives
    for financial speculators to enter the market in the guise of legitimate
    hedgers, thereby, evading position limits and other requirements.

    VI. Conclusion

    Again, as regulators, we American businesses and consumers are relying on
    you 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
    depend on these markets to insulate energy consuming businesses and
    individuals, as well as the broader economy, from fraud, manipulation, and
    disruptive/abusive trading, 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.

    Sincerely,


    Richard Tonsing
    916-436-1403


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