Commissioner Scott O'Malia of the Commodity Futures Trading Commission (CFTC) said the regulator's efforts to gain insight into the swaps market via data reporting have been ineffective, but added that work is underway to improve the situation.
"As important as data is, the Commission does not have a clear picture into the commodity swaps markets or financial markets, for that matter," O'Malia said in remarks at a Bank of Canada workshop.
"Let me be clear. The data is extraordinarily difficult to use and the Commission is not utilising this data effectively, or as it was intended. Without usable data, the Commission cannot conduct surveillance, set appropriate position limits, or analyse systemic risk in these markets."
O'Malia said swaps data is not merged with futures data and cannot be analysed together. "Despite the fact that market participants trade across markets and across jurisdictions with little effort; the Commission continues to struggle to develop its own oversight capacity, unless the Commission makes this a top priority," he said.
But he said he was pleased the CFTC was taking steps to improve the quality and consistency of its data.
"The Commission's Technology Advisory Committee, which I chair, started to perform work on data harmonisation back in 2011. Based on this effort, the Commission is currently working with the swap data repositories to harmonise the data within the credit asset class and will then move on to the interest rate asset class. Commodities, unfortunately, are well down the road."
O'Malia also noted a number of issues that are coming up for commodity market participants.
One issue is the "de minimis" level for certain types of transactions, which determines whether swap market participants are considered dealers and whether they get relief from some of the compliance rules under Dodd-Frank-based rules.
"In a few years, the $8 billion de minimis level will fall to $3 billion if the Commission does not vote to change the threshold," he said.
O'Malia said CFTC staff could not say how many additional entities would need to register if the $3 billion level were applied today. "If the Commission cannot determine if an entity falls within the swap dealer definition, how can it expect end-users to navigate this complex rule?"
O'Malia proposed "a modest fix" that would allow end-users to exclude all cleared trades from the calculation towards the de minimis threshold. "This fix would encourage end-users to clear their trades and would reduce regulatory compliance costs for those end-users who choose to do so."
Once an entity is subject to the swap dealer definition, the cost of complying with the swap dealer regulations is high, he said. This has pushed activity towards futures contracts that behave similarly, but not exactly like, swap trades.
"The downside of futurization for participants in the commodity markets is reduced hedging flexibility because futures contracts, unlike swaps, cannot be individually tailored to meet specific risk needs," he said. "Given the volatility of prices in the commodity markets, and the different needs, risks, time horizons, and incentives for end-users in these markets, customized hedging is especially important."
O'Malia noted several upcoming rulemakings that will impact hedging in commodity markets:
- The CFTC is considering a proposed futures block rule that will limit the availability of block trades, especially for energy futures;
- The OTC margin and capital rules for uncleared swaps will increase the cost of hedging;
- Commission staff are working on mandatory clearing determinations for additional interest rate swap contracts and non-deliverable forward contracts; and
- A position limits re-proposal has the potential to negatively impact end-users legitimate hedging activities.