Today the Commodity Futures Trading Commission (CFTC) published a concept release aimed at bringing greater transparency and accountability to the derivatives marketplace.
The concept release arose from Recommendation Five of the September 2008 “Staff Report on Commodity Swap Dealers and Index Traders with Commission Recommendations” (September 2008 Report). The recommendation directed Commission staff to review whether to eliminate bona fide hedge exemptions for swap dealers and create new limited risk management exemptions. The new exemptions would be conditioned upon, among other things, “(1) an obligation to report to the CFTC and applicable self-regulatory organizations when certain noncommercial swap clients reach a certain position level and/or (2) a certification that none of a swap dealer’s noncommercial swap clients exceed specified position limits in related exchange-regulated commodities.”
In commenting on the release, CFTC acting chairman Michael V. Dunn, said:
“A review of existing hedge exemptions and possible alternatives to granting these exemptions has been one of my top priorities since taking over as Acting Chairman in January. As the CFTC seeks to bring greater transparency and accountability to the swaps markets, input from those using and following these markets will undoubtedly help to inform our decisions.”
As noted in the September 2008 Report, by eliminating the existing bona fide hedge exemption and replacing it with a limited risk management exemption that would look through the swap dealer to its counterparty traders, Recommendation Five has the potential to bring greater transparency and accountability to the marketplace and to guard against possible manipulation.
The concept release reviews the underlying statutory and regulatory background, as well as the regulatory history and relevant marketplace developments which led to Recommendation Five. It then poses a number of questions designed to help inform the Commission’s decision as to: (1) whether to proceed with the recommendation to eliminate the bona fide hedge exemption for swap dealers and replace it with a conditional limited risk management exemption; and (2) if so, what form the new limited risk management exemptive rules should take and how they might be implemented most effectively.
Public comment on the Concept Release must be received by May 26, 2009. Copies of the Concept Release also may be obtained by contacting the Commission’s Office of the Secretariat, Three Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581, 2020418-5100, or by accessing the Commission’s website, www.cftc.gov.