Comment Text:
Vermont Licensed Plumbers Association
Bradley R Talbot
Vermont Licensed Plumbers Association
PO Box 222
Randolph Center, VT 05061-0222
December 29, 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 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.
For energy companies like mine that serve thousands of consumers and play
a vital role in the health and growth of the American economy,
deregulation and the absence of transparency, oversight and accountability
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), skews the price discovery
function of these markets, unhinges them from concrete economic
fundamentals such as supply and demand, creates a difficult environment
for hedgers seeking to manage price risk and subjects their consumers 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 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.
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.
Furthermore, for any entity that is not a legitimate end-user as described
above, the exception should be limited so that it is in direct proportion
with their physical holdings, i.e. an investment bank or hedge fund cannot
claim to be an end-user and thereby obtain an exemption from speculative
position limits or other requirements or restrictions merely because it
holds a few hundred thousand barrels of inventory.
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 the immediate imposition and enforcement of the strongest
possible energy speculative position limits, as required (not made
OPTIONAL) under the Dodd Frank Act. The law does not require the
Commission to prove that speculation is excessive before imposing such
limits, it again REQUIRES the Commission to impose limits in order to
PREVENT the burdens of excessive speculation.
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.
Commodity-dependent businesses and consumers are already burdened by
excessively volatile and unjustifiably high commodity market prices. The
Commission must publish a rule for comment and enforce said rule as soon
as possible.
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.
Sincerely,
Bradley R Talbot
(802) 728-5400
