August 21, 2000

The Commodity Futures Trading Commission's Proposed Rules Relating to a New Regulatory Framework for Multilateral Transaction Execution Facilities, Intermediaries and Clearing Organizations

Key materials
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Rulemaking:

Request for Comments on Proposed Rules Relating to a New Regulatory Framework for Multilateral Transaction Execution Facilities, Intermediaries and Clearing Organizations; Exemption for Bilateral Transactions

Stated Purpose:

To effect "far reaching and fundamental changes to modernize regulation of commodity futures and options markets."

Summary of RSP Comment:

The Commodity Futures Trading Commission (CFTC) has issued four proposals designed to promote innovation, maintain US competitiveness, provide greater legal certainty to over-the-counter markets, reduce systematic risk, and protect customers. These are desirable goals. The rapid technological and financial innovations which have occurred since 1974, when the modern Commodities Exchange Act (CEA) was enacted and the CFTC was created, will require a structure that can easily adapt itself to, and accommodate, new market entrants, new products and new business structures. However, the means proposed to achieve these objectives may have the opposite effect of creating more legal uncertainty and regulatory gridlock.

The proposed approach may increase legal uncertainty by broadening the category of products over which the CFTC could in the future exercise control, even though such products may not be futures contracts, and should not be regulated as such. Since the CFTC's exemptive authority is limited to futures contracts, this proposal to exempt "derivatives transactions" or "contracts, agreements and transactions" between eligible participants from all requirements except the antimanipulation and antifraud requirements of the CEA in fact suggests an expansion of jurisdiction and regulatory authority. Given the Commission's past attempts to assert regulatory jurisdiction over swaps, this Proposal could increase legal uncertainty.

Though the proposals would replace existing regulatory standards with "Core Principles" for different types of entities and transactions, these Core Principles are fundamentally the same as the current regulatory standards. It is unclear what regulatory requirement on U.S. futures exchanges would be eliminated. Regulatory relief for intermediaries is even less specific. Furthermore, procedures for implementing these Proposals that are transparent, fair, and efficient should be specified.