Banking Reform: Coming to a Metals Market near You


"Financial reform bill. . .could drastically alter the way commodity trading schemes are regulated"

Though banking regulations probably aren't the first thought for most metals buyers, Senate Banking Committee Chairman Christopher Dodd's financial reform bill, currently under consideration, could drastically alter the way OTC swap markets and other commodity trading schemes are regulated. A summary of the bill's provisions impacting metals markets follows:
  • A swap dealer and swap market participant will face similar regulatory oversight specifically, "It preserves the corporate-user exemption for firms using swaps primarily for hedging, reducing or otherwise mitigating commercial risk." However, "really large corporate users" would be subject to oversight
  • All swaps are banned "unless they conform to the bill's provisions" (which means they must be cleared, registered and reported)
  • The bill would allow corporate end users to engage in un-margined swap deals. A company would need to apply for an exemption and only industrial firms would qualify for the exemption
  • The bill would grant the CFTC with rights to "impose position limits on regulated futures markets so that it applies to 'swaps that perform or affect a significant price discovery function with respect to regulated markets.'"
  • The bill would also "clarify position limits" that can be applied to traders or group of traders
  • The one part of the bill that we find most intriguing involves the proverbial 'Chinese wall'"swap dealers major market participants and futures commission merchants must implement systems to manage conflicts of interest in the publication of price and market analysis."
  • Finally the bill would create these same reporting requirements overseas. The idea is to prevent the industry from moving elsewhere to avoid legislation
This Wall Street Journal summary provides a comprehensive "Readers Digest" version of the entire bill, which contains additional points not necessarily related to swaps, derivatives, etc. It also summarizes the four key changes to the derivatives portion of the legislation as: "closes regulatory gaps, provides for central clearing and exchange trading, safeguards for un-cleared trades and creates market transparency."

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