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CFTC's Chilton calls for derivatives 'bill of rights', including HFT registration and conduct rules

First Published 3rd April 2013

Bart Chilton set out his view of what rights swaps and futures end users should have as many of them begin to come under CFTC scrutiny for the first time.

Washington DC - Commissioner Bart Chilton of the Commodity Futures Trading Commission (CFTC) has suggested a "bill of rights" for end users in the derivatives markets, including a call for high frequency trading firm registration and conduct rules.

"At the dawn of the United States of America, the founding fathers set out 10 principles, the "Bill of Rights" that would bind the new national democratic government," Chilton said in a statement. "Similarly, today I am setting out 10 principles to guide the Commission as we move into a new, more transparent Dodd-Frank regulatory regime."

Chilton noted the approaching April 10 date for compliance for Dodd-Frank swap reporting rules for end-users, saying that many of them would now find themselves under CFTC regulation for the first time.

"I believe these principles best protect our consumers and end-users who help move our economy forward-and let's keep in mind that these end-users were not the cause of the financial crisis that lead to financial reform. In fact, end-users were among the many victims of the crisis and much of Dodd-Frank was drafted with their interests in mind," Chilton said.

Below are the "rights" Chilton set out:

1. Right to reasonable Dodd-Frank implementation. "Dodd-Frank needs to be implemented and needs to be implemented quickly, but that does not mean it should be done so harshly," he said,

2. Right to legal certainty. "End-users and other market participants should have little doubt as to the status of their activities and the Commission and staff should respond thoughtfully and diligently to requests for legal certainty." He said he would not support an action against an end-user, exchange, or anyone else on an issue deserving clarity that is the subject of an outstanding request for interpretive guidance.

3. Right to compete in the markets. "To protect end-users' right to compete in the markets, the Commission should start with two common sense rulemakings: First, we need high-frequency trader registration and conduct rules to prevent cheetahs from going feral. We should also provide the public market quality metrics designed to help end-users and other non-cheetahs from distinguishing between false cheetah liquidity and true liquidity." (Chilton often refers to high frequency traders as "cheetahs" due to their speed.) "Second, we need caps on speculation so that the commodity markets return to their principal role as risk management markets for end-users. The commodity markets worked best when end-users were the predominant players. The Commission should move quickly on a new proposal on speculation limits by May 1."

4. Right to safe accounts. "We need strong rules and rigourous auditing to ensure that futures commission merchants (FCMs) don't abuse their role as intermediaries while not imposing undue burdens on FCMs that provide end-users access to critical risk management markets (including a sensible compromise on residual interest)."

5. Right to have confidence in the commodity markets. End-users should be confident that their intermediaries, FCMs and SDs in particular, are appropriately regulated and supervised, Chilton said, noting that he has called for raising civil monetary penalty maximums to $10 million for entities and $1 million for individuals. "The current $140,000 maximum civil monetary penalty is simply an inadequate deterrence for an agency tasked with, among other things, deterring manipulation and preventing systemic risk."

6. Right to clear (or not to clear). Central hedging units for non-financial end-users should be free to clear or not to clear on transactions that mitigate commercial risks for their corporate group, Chilton said.

7. Right to margin flexibility and reasonable capital rules. Under-collateralisation has not been an end-user problem, he said. "The Commission also needs to come up with a sensible compromise on capital requirements for non-financial SDs."

8. Right to hedge. "Speculative position limits should encourage and not unduly complicate prudent commercial risk management practices. Public power end-users using swaps to hedge commercial risk should have the same access to risk management markets as privately-owned utilities."

9. Right to smart regulation. "The Commission owes the end-user community a commitment that it will amend its rules when these smarter ways become apparent," Chilton said.

10. Right to be heard. "Many end-users … are not used to having their swaps activity subject to CFTC regulation. During and after Dodd-Frank implementation we need a venue for end-users to air their concerns."