Comment Text:
Catherine Gnader
16002 allenwick Lane
Houston, TX 77084-6854
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,
Catherine Gnader
281-345-4482
