Market Matters Blog

End-User Bill of Rights

Yesterday, CFTC Commissioner Bart Chilton issued a statement outlining 10 principals he believes should guide CFTC through the implementation of Dodd-Frank financial reform legislation for end users. Looking through the list, there's a lot of focus on better customer protection.

I recently met Mr. Chilton at the National Grain and Feed Association meeting in San Francisco. Without a doubt, he's a unique bureaucrat. I've rarely seen government official stay and participate in a conference all day long or work the room at a cocktail reception the way he did. He told me that there have been two times in his long career in government that he felt issues were crucially important, but dangerously underfunded. The first was food safety immediately following the 1993 Jack-in-the-Box E. coli outbreak that killed four children and sickened more than 600. The other is financial regulation amid the rapidly evolving electronic marketplace.

I left that conversation with the strong impression that Chilton wanted to protect average people, and this End-User Bill of Rights appears to be an outgrowth of that sentiment.

"The futures and swaps markets wouldn't exist without end-users," he stated. "The primary public benefit of derivatives markets is that they provide end-users risk management opportunities that, in turn, allow them to more easily fund operations and investments and thereby generate economic growth. The ability of end-users to fund their operations is directly related to the prices paid by consumers and the overall well-being of our economy; so protecting the end-users is akin to protecting the every-day consumer."

With that in mind, he issued what he believes should be the "inalienable rights of end-users." (Please note that this isn't an official CFTC policy.)

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1. Right to reasonable Dodd-Frank implementation. "Dodd-Frank needs to be implemented and needs to be implemented quickly, but that does not mean it should be done so harshly," he stated, arguing that he wouldn't approve action against end-users who are trying to comply with rules in good faith.

2. Right to legal certainty. End users and market participants need to know what the law menas, and the commission "should strive to provide the market relief or clarity well in advance of a compliance date -- last minute relief and clarification should be avoided. Finally, during this implementation of Dodd-Frank, I will not support an action against an end-user, exchange, or anyone else on an issue deserving clarity that is the subject of an outstanding request for interpretive guidance."

3. Right to compete in the markets. "End-users should be able to hedge without getting mauled by cheetahs or crushed by Massive Passives," he stated. Chilton's referring to two groups of speculators. High frequency traders are cheetahs, while massive passives are the pension funds, ETFs and other buy-and-hold market speculators. He suggests two new rules: registration and oversight of cheetah trading programs and caps on speculation. He'd like to see those rules by May 1.

4. Right to safe accounts. Strong rules and rigorous audits should ensure that futures commission merchants don’t abuse their intermediary role while providing customers the option of a fully segregated account model and federally mandated insurance will give end-users the financial backstops they need to feel confident in the marketplace once again.

5. Right to have confidence in the commodity markets. End-users should be confident that their brokers and swap dealers are regulated and supervised. He reiterates his argument for costlier penalties "deter the malfeasance and negligence that can contribute to systemic problems."

6. Right to clear (or not to clear). "Central hedging units for non-financial end-users should be free to clear or not to clear on transactions that mitigate commercial risks for their corporate group. End-users that use inter-affiliate swaps to centralize and manage risk across a corporate group through a central hedging unit should be given the flexibility to clear or not to clear," he stated.

7. Right to margin flexibility and reasonable capital rules. Under-collateralization has not been an end-user problem, and Chilton adds that the commission should come up with a sensible compromise on capital requirements for non-financial swap dealers.

8. Right to hedge. "Speculative position limits should encourage and not unduly complicate prudent commercial risk management practices," he stated, referring to public power utilities that can't use the same tools as private utilities.

9. Right to smart regulations. "The Commission owes the end-user community a commitment that it will amend its rules when these smarter ways become apparent," he stated, citing how some reporting requirements that need updating.

10. Right to be heard. Many end-users aren't used to having their swaps activity regulated by the CFTC, and unlike their brokers and swap dealers, they don't have a group like the National Futures Association advising them on how to comply. Chilton suggests forming an End-User Advisory Committee with regular meetings to help address this group's unique compliance challenges and business concerns.

If you'd like to read Chilton's full statement, you can find it here: http://1.usa.gov/…

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DAVID KRUKOW
4/5/2013 | 8:13 AM CDT
Without knowing about all of the ins and outs of the Financial reform bill or the guide to implementing it it should make folks more than concerned because of who it is that wrote it. Someone writing laws should first know who it is that can be married. If they are confused about that then they have no business writing complicated laws. Everyone should read over on Wikipedia about Chris Dodd and the controversies he is involved in such as Fannie Mae/Freddie Mac, AIG Fed. assistance and bonuses controversy and his Irish cottage controversy. Barney Frank is also involved in the Fannie/Freddy conflict of interest scandal. They are not foxes they are wolves and they are guarding the chicken house.