G20 FINANCIAL REFORM
coordination on a global scale has resulted in a disjointed implementation process. These systemic mismatches will impose a range of atomised requirements on commodity market participants active in multiple markets, who will be facing a number of new and unprecedented challenges. These include the high compliance costs imposed by dual (or multi) jurisdictional regulation, the lack of clarity regarding the requirement to register and the availability of substituted compliance, and the CFTC’s asserted jurisdiction over third country counterparties.
to conduct business and the costs of continuing (or changing) those business relationships. There has not been any suggestion that trading
in commodities was to blame for the financial crisis, but the introduction of a plethora of new rules runs the serious risk of creating reduced liquidity, increasing concentration of trading activity within fewer market participants, and, ironically, creating systemic risk where none existed before. This will be the opposite effect to what was intended and has the potential to cause long term damage to the commodity markets.
There is an argument that both EU and
(particularly) US legislators should strongly consider “resetting” the process now ...
The presence of numerous commodities markets The problems created by the disjointed
implementation process are further complicated by the CFTC’s decision to implement many of its requirements before all of the substantive requirements and extraterritorial aspects of Dodd-Frank are resolved. For example, the decision by the CFTC to move forward with its registration requirements even before it finalises the extraterritorial guidance, margin or capital requirements, has created substantial confusion among multinational institutions regarding how to structure their US derivatives business, which entities are required to (or should) register, and the costs of doing business going forward. The CFTC reliance on “substituted compliance” as an alternative form of compliance is equally problematic, given that substituted compliance is effectively unavailable at this point in time due to the lack of finality of non-US regulation such as EMIR – meaning that multinational institutions will have no practicable choice other than to become fully compliant with CFTC regulations until EMIR is finalised. These problems in turn are being felt by counterparties as well, who remain uncertain regarding exactly which institutions will be able
players spread across the globe brings liquidity and efficiency to the commodities markets. Regulators must not underestimate the imminent harm caused by inconsistent or poorly coordinated regulations. The markets will respond to the regulatory uncertainty. The reforms are already leading to market changes such as the “futurisation” of contracts under which an increasingly large volume of swaps will be converted into futures and driven onto a limited number of exchanges. It seems unlikely that such a reallocation of risk in fewer trading venues, albeit well capitalised and highly regulated ones, would have been the goal of those framing the news rules, particularly with regard to the commodity markets. There is an argument that both EU and
(particularly) US legislators should strongly consider “resetting” the process now to avoid the need to revise and reverse elements of the provisions later and on a piecemeal basis, potentially in the face of a future crisis. In any event, it is imperative that legislators and regulators should, as far as possible, maintain a sharp focus on aligning their policies with other international reform measures. A critical first step in this process is for the CFTC to take to heart the recent admonition by an EU representative – “Washington We Have A Problem.” •
Doron Ezickson is a partner and Adam
Topping & Ramona Simms are associates in the Energy & Commodities Group with Cadwalader, Wickersham & Taft LLP, a leading international law firm with wide-ranging and extensive experience in all forms of complex derivatives,
transactional, litigation and regulatory matters involving the energy and commodities industry.
www.cadwalader.com December 2012 17
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