The forum kicked off with a few words from David Blass, associate general counsel at the Securities and Exchange Commission and Ananda Radhakrishnan, director of clearing at the Commodity Futures Trading Commission (CFTC).  Blass said that the timeline for reconciling rules is uncertain, that more staff resources and funding from Congress was required and called rulemaking “an immense undertaking in a short amount of time.” Both had a positive outlook on the coordination that would be required between the two agencies to implement the rules, with Blass admitting it was a “challenge” to coordinate but said “it’s going well.”

Other participants weren’t quite so optimistic. Kenneth Rosenzweig, partner at Katten, Muchin, Rosenman, said he was concerned about “the ability of regulators to act in a coordinated fashion,” citing past hiccups on issues that required agency cooperation, like single stock futures and portfolio margining.

Major complications of the new rules include new categories for swaps and swap dealers and rules regarding swap execution facilities, which many panelists point out have not yet been defined, making rule writing that much more complex. New capital requirements and margin issues will affect business for futures commission merchants(FCMs). Dennis Klejna, assistant general counsel at  MF Global, said that the FCM business will change based on how attractive it will be to clear certain contracts, and in theory, FCM business should be enhanced, but that’s not certain because capital requirements and margin issues are still undetermined.

Rita Molesworth, partner at Willkie, Farr & Gallagher, noted that new regulations would make things more expensive for traders. Alessandro Cocco, associate general counsel for J.P. Morgan, agreed, saying, “There’s a point when you can drive costs up so much that you take participants out of the market. Finding a balance is important.”

Klejna said the hardest parts of the law to implement would be capital and margin requirements and position limit requirements. The CFTC’s previous efforts to establish position limits in energy have now been pushed back due to a mandate in the law requiring position limits in all products, which Klejna called “complex to achieve and provocative within the industry.”

Also still on the table are the CFTC’s new rules for forex, including the proposal to reduce leverage to 10:1. The agency is scheduled to issue final rules on Oct. 19. Daniel Driscoll, COO at National Futures Association, said he wasn’t sure how the “controversial” parts of the proposal (likely meaning the 10:1 leverage rule) would be resolved.

One panelist called Dodd-Frank the most significant change in the futures industry since the Commodity Futures Modernization Act of 2000, and the complex decisions regarding the new rules make it hard to disagree. One thing’s for sure: on the regulatory front, it’s going to be a very interesting year.

The list of 30 is divided into eight groups:  Comprehensive Regulation of Swap Dealers & Major Swap Participants; Clearing; Trading; Data; Particular Products; Enforcement; Position Limits; and Other Title. You can submit comments on the rule-writing areas on the CFTC’s website here.

In other CFTC news, the agency announced it will begin publishing a new large trader report, called Traders in Financial Futures (TFF). The TFF report uses the same data that appears in the COT reports, but separates large traders into the following four categories: Dealer/Intermediary; Asset Manager/Institutional; Leveraged Funds; and Other Reportables.

We spoke to several experts who all said that this is the beginning of a larger process. Former CFTC Chairman Philip McBride Johnson said of the law: “I don’t think there is any question that just about every time they could not get unanimity on a particular term they said ‘OK we are going to fob it off.’ Yes there is going to be a lot of rulemaking.” He added, “There are two levels of this. First there is the normal rulemaking that follows all legislation but in this case in spades. There are also certain provisions where the CFTC and SEC  are instructed to come up with parallel stuff — and we know how successful they have been [in working together].”

The passage of the law came with the obligatory kudos from the CFTC and exchanges. In a statement, CFTC Chairman Gary Gensler said, “The Wall Street reform bill will – for the first time – bring comprehensive regulation to the over-the-counter derivatives marketplace.” In a statement, CME Groupsaid, “The Dodd-Frank Act reinforces the core tenets of CME Group’s markets: price transparency, liquid markets with low transactions costs, market integrity, customer protection, and safety and soundness in central counterparty clearing services.” CME Group also added, however, that it would work to ensure new rules stemming from the law “do not place the U.S. financial services sector at a competitive disadvantage in our rapidly globalizing financial markets.”

And if the analysts are correct, it could be a while before we know exactly how the new law will impact trading in the U.S. and worldwide.

The bill is only the first step in a longer rule-making process, as it gives the CFTC authority to sort out the specifics of the new rules. “If the CFTC sets requirements that are stringent, that could actually limit the amount of new participants to the marketplace,” says Kevin McPartland, senior analyst at Tabb Group. Some experts say it could take about a year for the full impact of the bill to be realized.

But there are big changes and challenges ahead for the OTC market, as new reforms passed by the Senate will require most OTC derivatives contracts be traded on exchange and cleared.  Issues surrounding central clearing and exchange trading, according to the report, will include determining ownership of clearinghouses, trading requirements and exceptions and capital and margin requirements. When discussing upcoming efforts to harmonize the Commodity Futures Trading Commission and Securities and Exchange Commission and give them the authority to regulate OTC derivatives, the report states: “If done correctly, it could help simplify the regulation of these markets. If it is not done correctly, market participants fear that regulatory confusion will create a difficult-to-navigate environment muddied by redundant bureaucracy.”

The issue of trading on movie receipts has also been a controversial one, with Hollywood protesting futures trading in movie receipts and the CFTC approving Media Derivatives, Inc. (MDEX), the company angling for box office futures contracts, as a designated contract market on Friday. MDEX will operate under the name TrendExchange. The actual motion picture receipt contracts are still under consideration by the CFTC.

Since the market meltdown of 2008, Washington’s attack on “speculation,” blaming traders for price volatility in the energy (and now to some extent, metals) markets has been all the rage. Although onions and movies have stayed out of the trading mix, one has to wonder if the proposed ban could be part of a trend that would ban or restrict other commodities from trading.

The size and scope of the recommendations ensured that most of the initial responses by industry insiders were positive affirmations of the general principles. After all there will be plenty of time to tear it apart and given its enormous scope and the realities of the sausage making process of legislation, the likelihood of the recommendations becoming law anytime soon is pretty slim.  

The 89 page document cites five key objectives to the proposed reforms: (1) Promote robust supervision and regulation of financial firms, (2) Establish comprehensive supervision of financial markets, (3) Protect consumers and investors from financial abuse,(4) Provide the government with the tools it needs to manage financial crises  and (5) Raise international regulatory standards and improve international cooperation.

One exception to the mostly general responses to the document came from Chicago Board Options Exchange Chairman and CEO Bill Brodsky, who was invited to the White House for the announcement and played a part in creating the document, and who provided more specific comments on the recommendations. “We are particularly pleased that the plan recognizes the need for greater coordination and harmonization of the SEC and CFTC, including streamlining the approval of new products and rule filings. We are gratified to have been included in the process,” Brodsky said in a statement.

The item Brodsky refers to may be of concern to the Futures industry as it seeks a compromise between the Commodity Futures Trading Commission’s core principles and the Securities and Exchange Commission’s rules based approach to regulation (see page 49 of document). If you recall, the main argument against numerous proposals to merge the two agencies cited by futures industry insiders has been that they would lose the benefits of principle based regulation and fall under the proscriptive rules of the SEC.

When former Treasury Secretary Hank Paulson released his Blue Print for a Modernized Financial Regulatory Structure in March 2008, it recommended an eventual merger between the CFTC and SEC but it also noted that the SEC would need to adopt a core principles type approach similar to the CFTC. The document stated, “Treasury recommends that the SEC use its exemptive authority to adopt core principles applicable to securities clearing agencies and exchanges. Embracing such an approach for these sophisticated market participants will not only be more conducive to the modern marketplace, but it will also facilitate a smoother merger of the CFTC and the SEC.”

The current Treasury document seems to ask the CFTC to meet the SEC half way, stating, “Efforts at harmonization should seek to build a common foundation for market regulation through agreement by the two agencies on principles of regulation that are significantly more precise than the CEA’s current “core principles.”

We are in a new regulatory environment. Ironically it is one more supportive of the SEC’s model, despite its numerous failures, and less supportive of the CFTC’s model, despite its relative successes.