As step toward establishing trading limits, the U.S. Commodity Futures Trading Commissions (CFTC) approved a rule that requires traders to report over- the-counter swaps based on raw materials including oil and corn.
According to the plan approved by the CFTC, derivatives considered “economically equivalent” to commodity futures must be reported in a manner similar to current large- trader reports.
The system will stay in place until centralized databases known as swap-data depositories are in place, which can take two years to establish.
According to various news sources, the CFTC Chairman Gary Gensler expressed his support and said that he would like to see the move to a centralized database take place as quickly as possible. However, the transitional system may not take effect until after position limits are established, which could be early next year.
This rule followed the Dodd-Frank financial reform law that gave the CFTC a year to establish rules governing the $615 trillion over-the-counter derivatives market.
Position Limits
As the result, all swaps will have to be reported to central repositories. The commission has until July to establish rules for those databases. At that time, the rule recently enacted may be discontinued. The legislation also directs the commission to cap the number of contracts a single trader can hold.
The CFTC has until January to set the limits on energy commodities and metals, and until April to cap agricultural trades. The interim rule will allow regulators to institute and enforce limits before the repositories are in place.
Criticism
Some commissioners expressed concern that an interim system would create cost burdens to companies while failing to set up a proper foundation for comprehensive reporting later. The CFTC estimates the interim system may cost market participants $40 million a year.
Other commissioners support the proposal without backing position limits by the current deadline. In addition, they expressed that it would be a mistake to put such restrictions in place without full swaps data being available.
The new rule will take effect after a comment period the CFTC has not yet set. The agency is also seeking to establish a definition of agricultural commodities to determine which products may or may not be exempt from position limits.
