After listening to the CFTC hearing yesterday, I thought it might be useful to offer up a quick overview of the positions taken during the testimony yesterday in the hearing to examine trading on regulated exchanges and exempt commercial markets.
First, Jeffrey C. Sprecher, chairman and CEO of the Intercontinental Exchange (ICE), who arguably has the most to lose if exempt commercial markets (ECM) become subject to the same level of regulatory scrutiny as designated contract markets (DCM), seems willing to accept that outcome as an eventuality for commodities like natural gas, which have specific analogs in the regulated futures markets. He argues for a highly targeted approach.
The second observation is that James E. Newsome, president and CEO of the New York Mercantile Exchange, which is unarguably the ICE’ biggest competitor, is advocating a relatively restrained position on an issue that could be weight on the ICE’s shoulders. Newsom says that there is a need for a statutory change to provide effective regulatory oversight, and that a legislative response “would be targeted.” In press statement, Nymex says ECMs should “require routine mandated large trader reporting and position accountability/limit requirements for certain ECM contracts that are linked to and functionally equivalent with regulated futures exchange contracts;” but that ECMs should police their own markets and that these changes; and, “These statutory changes are necessary and would not negatively impact the price discovery and hedging functions provided by derivatives markets.”
Richard L. Sandor, chairman and CEO of the Chicago Climate Exchange, is clearly opposed changes in the regulatory regime based on the belief that it would crush innovation by raising the cost of entry to new small businesses, such as those trading polar bear futures. Really. I should jump in here and add that I have nothing but respect for the man, and even more given his ability to envision new products, new markets, mitigate environmental destruction and to bring a bit of levity to a seven hour conference call on regulatory issues. Somebody buy that guy a beer.
What was interesting was the depth, breadth and detail of CME Group CEO Craig Donohue’s prepared remarks. Donohue argued strongly in favor of regulating the ECMs. “Historically, there have been distinctions between OTC trading platforms and regulated exchange markets. I believe that these distinctions have now blurred to the extent that disparity of regulatory treatment is no longer justified,” he says. And why shouldn’t he? As the biggest, baddest derivatives exchange in North America, and one that endlessly and overtly describes its plans to continue moving aggressively into the OTC market, mandating this regulation plays to its strengths and raises the barrier to entry for new competitors and puts a couple rocks in Sprecher’s pockets as he tries to wade this stream.
Also, the CFTC has thoughtfully posted links to all of the CFTC’s testimony, including General Counsel Terry S. Arbit, Chief Economist Jeffery H. Harris, Director of Division of Market Oversight Rick Shilts, Acting Chairman Walter L. Lukken, Commissioner Michael V. Dunn, Commissioner Bart Chilton and Commissioner Jill . Sommers.
Tags: CFTC, CME Group, Nymex, regulation, The Chicago Climate Exchange, The ICE
