Here is your report from this morning’s meeting – apologies upfront for length, but we wanted you to benefit from a full overview.

Next three meetings will be: November 10th, November 19th and December 1st.


All of the Commissioners expressed concern about lack of adequate funding. Several commissioners also indicated the significance of new manipulation and disruptive trade practice rules and enhanced enforcement authority. Sounds like there is definitely more to come in near future regarding silver markets and public’s concern over widespread manipulation in the markets. 



1) Part 40: How the CFTC approves the rules and new products of registrants


Division of Market Oversight gave this presentation. The proposed rules make changes to Part 40, which relates to CFTC review of proposed changes to registrant rules and products approvals. At a high level, the biggest change is timing: under the proposal, there is a 10 day initial review period for rule certifications (but not product certifications) during which the CFTC has a chance to determine if the proposal is novel or complex. If determined to be complex, then CFTC can extend the review period another 90 days and seek public comment. There is a presumption of approval at the end of the 90 day period, unless CFTC rule or public comments warrant otherwise.


This is different from current Rule 40 procedures, which provide for a 1 day self-certification period for both rule certifications and product certifications. The 1 day review period will continue to apply to product certifications, since Dodd-Frank only allows CFTC to prevent listing of certain enumerated event contracts (war, terrorism, assassination and gaming).


There will be a 60 day public comment period on this proposal.


Proposed rule was approved as presented via unanimous vote of Commissioners


2) Removal of Reliance on Credit Rating Agencies



Division of Office of General Counsel gave this presentation. Title IX of Dodd-Frank required CFTC (among other agencies) to remove reliance on credit rating agencies. Section 939A 1) Review regulations for references to credit rating agencies, 2) Remove references to credit ratings and 3) report back to Congress. As it relates to CFTC rules, there were 5 rules identified as referencing credit ratings. Generally, those references are replaced with a creditworthiness standard.

There will be a 30 day public comment period on this proposal.


Proposed rule was approved as presented via unanimous vote of Commissioners.



3) Investment of Customer Funds Under Reg. 1.25 and 30.7

Division of Clearing and Intermediary Oversight gave this presentation. CFTC Rule 1.25 lists the types of investments in which customer funds can be invested (i.e., what an FCM or DCO can do with cash collateral that it receives from a from a customer).

The proposal makes recommended changes to permitted investments (by types) and imposes asset based concentration limits (i.e., FCM can invest no more than a stated percentage of its aggregate customer funds into this type of permitted investment), as follows:

Type of Investment

Recommended Changes

Asset Based Concentration Limits Other Comments
Treasuries No changes recommended No limitation N/A
Munis No changes recommended other than the concentration limit 10% N/A
Agencies Only agencies with explicit government support 50% This is in addition to the 25% issuer concentration. Presently, only one agency is eligible investment – GNMA – so there is a 25% limit on GNMAs.
CDs Only non-brokered CDs are eligible for investment 25% N/A
CP/Corporate Bonds Eligible corporates must qualify for support under the government term programs 25% N/A
Foreign Sovereign Debt Prohibited as an eligible investment N/A Too much volatility to allow this to continue as an eligible investment
Money Market Mutual Funds   10%

Also, there will be a 2% issuer concentration limitation applied at the fund family level.

Chairman Gensler asked for specific questions to be raised in respect of this investment class – namely, is 10% too low of an ABCL?


Proposed rule will also limit in-house transactions (including repurchase agreements with an affiliate) and recommend a 5% counterparty limit on repurchase agreement. Also, there will be changes recommended to Rule 30,7 to conform the types of permitted investments for foreign FCM funds to the permitted investment types in Rule 1.25.

Proposed rule was approved as presented with one exception: amendment per Chairman Genstler to include specific questions on money market funds (is 10% correct?). Proposal was approved via majority vote of Commissioners (with one dissent).


4) Process of Reviewing Swaps for Mandatory Clearing

Division of Clearing and Intermediary Oversight gave this presentation, which included discussion of the eligibility of an existing DCO or new DCO to clear a swap, the process for submitting swaps for clearing and the ability of the CFTC to mandate clearing, as well as the stay from the clearing requirement. The goal of the CFTC is to have this rule in place by April 15, 2011, so that the 90 day review can be completed by the July 2011 effective date for Dodd-Frank Title VII.

Commissioner Sommers asked a very practical question about how to review a large number of similar interest rate swaps submitted for approval by a clearinghouse. Presenters response suggested that this will be handled on a “learn as we go” basis.

Proposal was approved via unanimous vote of Commissioners.


5) Anti-Manipulation Rules

Division of Enforcement gave this presentation – focus on two aspects of Section 753                        1) Fraud Based Manipulation: Use of manipulative or deceptive device or contrivance in connection with a CFTC regulated transaction (this includes electronic or algorithmic based trading programs) and represents the introduction of a “recklessness” standard. From the CFTC perspective, this is all based upon effect of activity on the market (rather than the SEC’s disclosure based regime); and

2) Price Based Manipulation: Affirmation of CFTC’s prohibition on price manipulation in respect of swaps, futures or commodities, as well as manipulation that arises by false reporting of positions.

Subject to approval and comment periods, rules will be effective 60 days after rules are published or 360 days after Dodd-Frank (whichever is later).

Proposal was approved via unanimous vote of Commissioners.


6) Proposals regarding Disruptive Trading Practices

Division of Enforcement gave this presentation, although almost all of the divisions contributed. This was to consider an Advance Notice of Proposed Rulemaking regarding Section 747 of Dodd-Frank. Under this section, there are a number of disruptive trading practices, including:

                i) Violating bids or offers

                ii) Spoofing (bidding or offering with the intent to cancel the bid or offer before execution);

                iii) Practices that demonstrate intentional or reckless disregard for the orderly execution of transactions during the closing period.

There is also open-ended rulemaking authority given to CFTC to adopt rules to prohibit practices that disrupt fair and equitable trading.

There will be a public roundtable on December 2nd to discuss the ANOPR.