Comment Text:
By way of introduction I am a retired history, government, and social studies teacher with over 31 years experience and a Fulbright Scholar.
I would appreciate if you provided additional explanation about the proposed changes to delegated authority.
Arguably the primary and most critical use of Part 17 data is market surveillance, including the important function of finding manipulation. Why then doesn't the delegated authority go to the Surveillance Director? Or the Director of Enforcement since Market Surveillance is under the Division of Enforcement?
It seems natural that the leadership associated with the surveillance mission should have responsibility for the content of Part 17 data. Can you address why Market Surveillance leadership does not have delegated authority with respect to Part 17 data?
After reviewing all the part 17 rules I see several opportunities to game the data submissions. The result of this gaming could allow unscrupulous traders to report data in an evasive, unclear, and untimely manner making the detection of criminal behavior considerably more difficult or even impossible. I commend the CFTC for opening this rule-making to improve the detection of crime. However as I show below, the rules have gaps in specificity that endanger the crime detection mission. Closing these gaps will improve the soundness of the markets and the public's confidence in the government.
First, the identification of special accounts can be gamed. A new special account can be created, required identification supplied, and then the ownership can be changed. The change in ownership is not required to be disclosed until a "refresh update" or "special call", and I am unsure if these events occur regularly.
It appears there is another way the identification of special counts can be gamed. You could create an account and by some legal means and immediately change the owners names. (This is similar to my last point.) Then you can trade and report the account for 6 months, and the stop using it for 6 months. At the end of the 6 month rest, the special account is no longer active. Then you create a new special account using the same name as the one you just deactivated. If you were do this twice, in which I mean create two of these special accounts and rotate between them every 6 months, you can maintain a special account where the owners' names are never required to be known. The government stresses the importance of knowing your customer and how this is exceptionally important to well-functioning markets.
Secondly, the change/deletion process can be gamed. The Part 17 rules have too much wiggle room with respect to changes/deletions. The rules do not explicitly state the period when corrections are valid, or what constitutes a violation of inaccurate reporting. I see nothing to restrict corrections being entered after contract termination or option expiration or any period after the report date. It may even be technically possible to submit a correction before any original record. Also I see your proposed process of deleting records as highly problematic. No deletions should ever be allowed. Corrections/changes only.
I believe it is considered best practice to:
a) Require that changes to data always repeat the original record, and then state the changes.
b) Provide a data element that shows that the original record has been changed.
c) Not allow deletions. Keep all submitted data and changes available so that analysts can be aware of reporters that may be gaming/misusing the change process.
d) Explicitly state that using the change process too frequently represents a violation of a reporter's duty to report timely and accurate data.
Thirdly, another opportunity for gaming comes in with optional large trader reporting. The rules allow reporting when you are under the reporting limit, but do not require that you submit identifying information through a Form 102A. Allowing the submission of unidentified/anonymous data provides the opportunity for reporters to report data that can be misleading. It seems counterintuitive that someone would voluntarily report their position to the government, but not report the identifying information. This could be an attempt to game different regulatory rules between the CFTC, registrants, self-regulatory organizations, etc. The answer is to eliminating gaming opportunities is to require all reporters to submit identifying information, and require it be kept current.
Fourthly, there are opportunities for gaming the reporting of ownership. It is fairly straightforward to create a number of different special accounts that have basically the same ownership, but not EXACTLY the same ownership. Such cases are considered to be different special accounts. In others words by making even small changes to groups of owners you can effectively create a situation where one owner appears in several distinct special accounts. This is clearly not what the rules intended. An owner could hide that he/she had a very large share of the market.
Thank you for your consideration in this matter.
Sincerely,
William Wood
