For Release: September 11, 2008
CFTC Releases Staff Report on Swap Dealers and Index Traders
Unprecedented Volume and Data Set Collected and Analyzed
Commission Recommends Enhanced Transparency, Increased Reporting and Modernization of Risk Management and Agency Procedures
Washington, DC – Today, the Commodity Futures Trading Commission (CFTC or Commission) released a staff report with Commission recommendations on activities of swap dealers and commodity index traders. The report’s findings and recommendations are based on information obtained from an unprecedented June 2008 special call that Commission staff issued to quantify key components of the over-the-counter (OTC) swap and commodity index markets.
The special call included 43 request letters to 32 entities and their sub-entities seeking information on total swap and index activity in the futures and OTC markets, and asked responders to categorize the activities of their customers. Responders provided monthly data for the period of December 31, 2007 through June 30, 2008 and have a continuing obligation to provide monthly data to the Commission. The results from the special call represent a snapshot of the best data currently available concerning the trading activity of swap dealers and commodity index traders.
“This staff report was an enormous undertaking that provides a window into the complex activities of swap dealers and commodity index traders,” said CFTC Acting Chairman Walter Lukken. “Based on the staff report, the Commission is recommending preliminary actions to increase transparency and improve controls in the marketplace. The recommendations represent steps in modernizing the agency’s approach to oversight, while ensuring that the markets remain competitive, open, and on U.S. soil.”
In analyzing the data, Commission staff focused on three quarterly dates for presenting data on four individual commodity markets. The report also included aggregate market data. The report made several findings, including:
- The aggregate amount of commodity index trading occurring both OTC and on-exchange is estimated to be $200 billion as of June 30, 2008 – of which $161 billion was tied to commodities traded on U.S. markets regulated by the CFTC.
- While there was an increase in the net notional value of commodity index business in crude oil futures, it appears to be due to an appreciation of the value of existing investments caused by the rise in crude oil prices and not the result of more money flowing into commodity index trading.
- As crude oil prices were increasing during the period December 31, 2007 to June 30, 2008, the activity of commodity index traders in crude oil during this period reflected a net decline of futures equivalent contracts.
- While the report is the best available data on the markets, it is not possible to measure the entire market due to the non-standardized nature of the contracts, and the general complexity and nature of the OTC swap market.
Based upon the staff’s analysis, the Commission report includes the following recommendations:
1. Remove swap dealers from the commercial category in the Commitments of Traders Reports and create a new swap dealer classification for reporting purposes.
2. Develop and publish a new periodic supplemental report based on OTC swap dealer activity.
3. Create a new CFTC Office of Data Collection, whose sole mission is to collect, verify, audit, and publish all the agency’s commitments of traders information.
4. Establish more detailed reporting standards for certain large traders on regulated futures exchanges to ensure a more precise picture of their trading activity.
5. Consider elimination of bona fide hedge exemptions for swap dealers and the creation of a new, limited risk management exemption.
6. Request increased funding to successfully implement the above recommendations, along with additional funding sufficient to meet current mission requirements and any other additional responsibilities given to the agency.
7. Continue to encourage the clearing of OTC transactions.
8. Conduct a review of swap dealers’ futures trading activity to ensure that it is sufficiently independent of any affiliated commodity research.
R. David Gary
Last Updated: September 11, 2008