March 20, 2006

CFTC's Hatfield Speaks to SFPs, Reauthorization, Trade Tax

NEW YORK (HedgeWorld.com)--A member of the Commodity Futures Trading Commission addressed the futures and derivatives committee of the New York City Bar Association, reporting progress on some indexing and margining issues that require CFTC coordination with the Securities and Exchange Commission.

Commissioner Frederick W. Hatfield, who before the president nominated him to the position on the CFTC was chief of staff for Sen. John Breaux (D-La.), assistant minority whip before he left the Senate, spoke on several issues, in order to update the New York bar on the CFTC's pending reauthorization and appropriation bills, as well as on its discussions with the SEC over issues surrounding securities futures products (SFP). Members of the staff of the two agencies have been meeting regularly over SFPs, and the two chairmen--Messrs. Reuben Jeffery and Christopher Cox--have discussed these issues as well.

"Futures on single stocks and on indexes that qualify as narrow-based ... were authorized in 2000 by the CFMA, subject to the joint jurisdiction of the CFTC and the SEC," Mr. Hatfield recalled. "Due to the qualifying criteria set forth in the statute, however, few foreign index products have been approved for trading since that time, and futures on debt security indexes have not been permitted at all--primarily because the tests were designed with equity securities in mind."

In the near future, he said, one can expect the publication in the Federal Register of a joint proposed rulemaking that will permit debt securities futures. Progress on foreign securities indexes has been slower, though.

He also said that SFPs in the United States are at a competitive disadvantage--they aren't thriving here as they are in Europe, due to the practice of fixed-rate strategy-based margining. A move toward the alternative, risk-based portfolio margining, which allows offsets for highly correlated positions, has become a priority of the SEC and CFTC, at the urging of the President's Working Group.

As to the reauthorization of the CFTC itself, Mr. Hatfield observed that two bills addressing the issue, S. 1566 and HR 4473, are on the Senate's legislative calendar.

"It is my understanding that Sen. Mike Crapo (R-Idaho), who was previously opposed to new requirements in the natural gas market, has since removed his objection to the legislation so that the reauthorization can move forward. We have also learned that Sen. Richard Durbin (D-IL), in consultation with Chairman Jeffery, has been working to identify Democratic amendments in order that appropriate floor time can ultimately be scheduled."

CFTC Budget, and a New Fee

The issue of appropriations isn't tied to reauthorization, so Mr. Hatfield addressed it separately. He noted that the administration's budget, announced last month, proposes to fund CFTC activities through a new transaction fee: "We will be following this debate as it progresses with interest."

One week before Mr. Hatfield's address, officials of six derivatives exchanges and two prominent national futures-industry organizations had sent a joint letter to members of Congress objecting to the idea.

"If implemented," the letter warned, "such a tax would significantly reduce the vital liquidity on U.S. futures exchanges, which would put U.S. exchanges at a severe competitive disadvantage against their foreign and over-the-counter competitors, and would most likely not generate the tax revenues it is intended to raise."

The letter was signed by: Daniel J. Roth, of the National Futures Association; John M. Damgard, the Futures Industry Association; Mark G. Bagan, the Minneapolis Grain Exchange; Jeffrey Borchardt, Kansas City Board of Trade; James Newsome, New York Mercantile Exchange; Frederick W. Schoenhut, New York Board of Trade; Terrence A. Duffy, Chicago Mercantile Exchange; and Charles P. Carey, Chicago Board of Trade.

The signers argued that the claim of the Office of Management and Budget that the tax won't inhibit the competitiveness of their markets is implausible. For example, the tax at the proposed level will nearly double the trading costs of some market makers, whose profit margins are already "razor thin" and who "provide critical liquidity that makes U.S. exchange markets more efficient and cost-effective to all customers who use them to manage risk."

They also observe that Congress has defeated similar proposals before. Although they don't mention examples, a spokesman for the CFTC said March 9 that user fees have been proposed "on at least three to four occasions in the past 12 to 13 years." The signers of the March 2 (Thursday) letter to Congress closed it by asking its members to once again block a "counterproductive tax proposal" that could threaten an industry that employs tens of thousands.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.

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