CHICAGO -- Three resolutions aimed at ensuring U.S. futures exchanges are on an even footing with foreign competitors have been adopted by a committee advising the Commodity Futures Trading Commission.
The Subcommittee on Regulatory Parity of the Global Markets Advisory Committee presented its three resolutions on electronic trading to a full meeting of GMAC July 21. GMAC will make a recommendation to the full commission.
The resolutions are likely to be approved, but with modifications.
The parity issue arose when foreign futures exchanges made requests to place electronic trading terminals in the United States and requested "no action" letters from the CFTC, allowing them to abide by the same rules they had in their home countries.
Leo Melamed, chairman emeritus and senior policy adviser to the Chicago Mercantile Exchange, chaired the subcommittee. "I tried to embrace as many viewpoints as I could to find a common ground. We're not asking for favoritism," he said, referring to the U.S. futures exchanges. "We're just asking for equal treatment."
Draft resolutions were prepared in mid-June. The subcommittee then met in Chicago on July 8, when the final resolutions were approved by the subcommittee members.
A memo prepared by Mr. Melamed after the July 8 meeting -- a copy of which was obtained by Pensions & Investments -- gives a detailed picture of the discussions and how the resolutions were adopted.
The first resolution deals with the requirement under the Commodity Exchange Act that new contracts, new rules and rule amendments be submitted to the CFTC for prior review and approval.
U.S. futures exchanges believe that this requirement puts them at a competitive disadvantage relative to foreign exchanges, because it prevents the U.S. exchanges from acting quickly in response to competitive pressures.
A two-part resolution was approved by the subcommittee. The first allows U.S. exchanges to adopt new contracts without advance notice to, or approval by, the CFTC. The second part allows U.S. exchanges to adopt new rules or rule changes so long as they are submitted to the CFTC 10 days in advance of their effective dates.
The CFTC could disapprove such rule changes by finding they are likely to cause fraud, render trading readily susceptible to manipulation or threaten the financial integrity of the market. The CFTC would still have the power to alter or supplement any rule change implemented under the exemption.
FIA only dissenter
The subcommittee approved the resolution, with only John Damguard of the Futures Industry Association, voting in place of Ronald Hersch, FIA chairman, voting against it, according to the memo. He said that the FIA Executive Committee had a substantive problem with the second part of the resolution, dealing with new rules and rule changes, and believed the issue should be dealt with by Congress as part of the CFTC reauthorization.
Concerning dealing with new contracts, Mr. Damguard said the FIA wasn't opposed to the substance of the resolution, but felt that relief under Section 4(c) of the act was not the appropriate means of accomplishing this objective.
The second resolution involves trade practices that are, or could be, engaged in by foreign exchanges. U.S. exchanges have taken the position that if foreign exchanges are permitted to offer their contracts to U.S. investors from terminals located in the United States with certain trade practices, then U.S. futures exchanges should be allowed to use the same trade practices for their contracts.
However, some members of the subcommittee didn't agree that U.S. exchanges should be allowed to engage in every practice used by foreign exchanges, according to the memo.
The proposed resolution said that U.S. exchanges should be allowed to implement trading rules and procedures, without prior approval by the CFTC, that are comparable to those of a competing foreign exchange with authorization to locate trading terminals in the United States.
The final resolution said that U.S. exchanges should be allowed to adopt and implement new trading rules and procedures immediately after certifying to the CFTC that the foreign exchange employs comparable rules and procedures, provided that the CFTC can require the exchange to rescind such rules and procedures if the CFTC makes a finding within 90 days that the proposed rules and procedures are not comparable to those of a foreign exchange. Resolution two was approved by a 7 to 4 vote.
Just saying nay
The naysayers claim the CFTC's power to alter or supplement a U.S. exchange's rule changes should not be limited to cases where it finds that the proposed rule changes are not comparable to the referenced rules of a foreign exchange.
The third resolution was in two parts. The first asked the CFTC to act immediately and favorably to grant the relief requested in the first resolution. It was approved unanimously.
The second part asked the commission to act immediately and favorably to grant the relief requested in resolution two. It was approved by a vote of 7 to 3.
The CFTC will not approve the resolutions as passed, this source said.
He hopes a compromise will be reached and thinks the rules used in the United Kingdom for its futures exchanges "would be a decent compromise."