Posts tagged ‘regulation’

Chairman Gensler’s comments last week to the Energy Bar Association make clear that the CFTC has not forgotten about regulation of the OTC commodities space as the memories of the credit/banking crisis of 2008 have faded. Chairman Gensler wants to make any exemptions to posting collateral to be small and focuses on the benefits of making the OTC market transparent to all participants (tighter spreads, lower transaction costs etc). Commissioners Dunn and Sommers have seemed more lenient on exemptions in past comments focusing on the potential flight of capital from US shores.

There could be unintended consequences of stringent rules for posting collateral. Balancing all-encompassing regulation (ie exchange and OTC) with the concern of driving volumes overseas is a REAL risk. Corporations in particular may be especially hard hit by the costs of posting margin. For example, a large agricultural firm might not have the cash handy to post as margin against their hedges until the crop comes in. One that I know of traded actively in ICE agricultural futures (listed) until there was big volatility back in Feb of ’08. They didn’t have cash to cover margin, lost millions, and now vow they will only trade OTC. A large regional bank also indicated their clients pushed back hard on posting margin, which they looked at as their counterparties demanded more collateral during the credit crisis.

The flipside of this argument is what Gensler is proposing: if you make everything transparent and cleared, you bring down the total costs because of narrower spreads etc… One thing is clear: the decisions made by the CFTC on these points will have profound effects on commodities hedging and trading.