The Futures Industry Association today filed a comment letter with the Commodity Futures Trading Commission urging the agency to preserve its hedge exemptions for dealers in over-the-counter derivatives. The FIA commended the CFTC for its efforts to protect the integrity of the price discovery process, but said a repeal of these exemptions would not achieve the agency’s goal of promoting greater transparency and accountability.
“FIA would not support repealing the dealer hedge exemption or replacing it with a limited risk management exemption,” the FIA said in its comment letter. “In our view, repealing the hedge exemption would harm those who rely on U.S. futures markets by calling into question the sound economic analysis that has served as the foundation for the Commission’s bona fide hedging definition for decades. In addition, the recommended risk management exemption would impose on dealers regulatory conditions they could not meet and that might actually compromise the CFTC’s market surveillance goals.”
Rather than repealing the exemptions, the FIA urged the agency to adopt a different approach based on determining which OTC derivatives affect price discovery in the futures markets. As a starting point for this approach, the FIA suggested that the CFTC could use the OTC derivatives data collected through its special call process to reach those determinations. This approach would be more consistent with the regulatory reform plan being developed by the Obama administration as well as recent testimony by CFTC Chairman Gary Gensler, the letter noted.
The FIA letter also explained that OTC derivatives dealers use futures markets to reduce the price risks they face in running their operations. The letter cited the findings of a CFTC staff report issued last fall that dealers assume price risks from their counterparties and then offset their net price risk on the futures market.
The letter was submitted in response to a concept release issued by the CFTC on March 24 that asks for feedback on whether the CFTC should eliminate the bona fide hedge exemptions for OTC dealers and replace them with a conditional limited risk management exemption. The hedge exemptions allow dealers to take positions larger than the limits set on speculative positions provided that they can show that their positions are hedging related transactions in the OTC markets.
The text of the letter is available at: http://www.futuresindustry.org/downloads/Comment_Letter_CFTC_Concept_Release_on_Bona_Fide_Hedge_Exemption.pdf