Tags: Feinberg | CFTC | TAC | subcommittees

CFTC's Technical Advisory Committee Meets in Chicago

By    |   Wednesday, 31 Oct 2012 07:43 PM

The Commodity Futures Trading Commission (CFTC), which has jurisdiction over the futures and swaps market, has a committee of industry experts that advises it on technical issues. This committee, called the Technical Advisory Committee (TAC), meets roughly quarterly, usually in Washington, to update the CFTC on the progress, or lack thereof, that it is making in addressing the myriad of complex technical issues raised by its normal trading activities and complicated by the need to implement the derivatives provisions contained in Title VII of the Dodd-Frank Act of 2010.

This is admittedly technical material, but it affects thousands of farmers, ranchers, and businesses that depend on the futures and swaps markets to hedge the risks entailed by their operations, and this, in turn, affects the abilities of these employers to hire and pay their workers. Regulation of the securities markets falls under the jurisdiction of the CFTC's commercial and cultural rival, the Securities and Exchange Commission (SEC).

Presently both commissions are bogged down by internal dissention. One could say they are shut down by storms that don’t blow over. The SEC recently issued a proposed regulation on the safeguarding of customer funds, as mandated by Title VII of Dodd-Frank. The CFTC was supposed to consider a counterpart covering futures and swaps last week, but the meeting was cancelled. SEC Chairman Mary Schapiro plans to retire at the end of the year, and she has been unable to persuade the Commission to act on her proposal to strengthen the regulation of money market mutual funds, an issue identified as one of systemic importance by the Financial Stability Oversight Council. Luis Aguilar, a fellow Democrat on the Commission who used to work for the mutual fund lobby Investment Company Institute, as well as two Republican commissioners, have kept the Commission from considering the rules.

At the CFTC, it appears that Chairman Gary Gensler wants to be reappointed and believes he can achieve this in spite of the fact that implementation of Title VII has stalled under his leadership and the CFTC has been rocked by scandals such as MF Global and Peregrine, which involved gross mishandling of customer funds.

The meeting was held in Chicago, home of the swaps and futures markets, and was not on webcast. A senior CFTC official admitted to me that the reason the CFTC did not webcast the meeting was not related to cost but rather to a stubborn policy that is calculated to demonstrate the Commission's displeasure with the lack of progress by Congress on the approval of its budget.

The purpose of this article is to set forth the major issues considered by TAC so that you can follow-up by examining the documents the Commission has posted on its website and by reviewing the transcript when it is posted by the staff.

The TAC, chaired by Republican Commissioner Scott O'Malia, is divided into subcommittees, and the meetings consist primarily of reports by the subcommittees. Meetings of the TAC tend to be marked by explanations of the progress the industry is making toward achieving consensus, assuming that the industry's deliberations will control the pace of the implementation of mandated reforms. This week’s meeting involved just the Subcommittee on Automated and High-Frequency Trading (HFT), with reports from the subcommittee's four working groups.

The following are highlights of the presentations:

Working Group #1 – Subcommittee on Automated and High-Frequency Trading

This subcommittee is working on a definition of HFT, using carefully chosen legal language and emphasizing mechanics of the transaction so as to avoid favoring any specific trading strategy. The definition consists of four criteria, and all four would have to be met to qualify as HFT. The stated reason for this approach is to prevent market participants from working around a less encompassing definition.

At the same time, the subcommittee is trying to determine how to keep the criterion of "high rates of orders" from operating to make the definition too broad. In the cliche often used by Congress, the subcommittee is trying to "strike the right balance." The subcommittee's report sets forth the roles played by automated trading systems, smart order routing and execution, market data and co-location play in trading and, by extension, in HFT.

Further studies were recommended into types of trading strategies that rely on the mechanics of HFT and into abusive practices that should receive increased surveillance and be prohibited.

Working Group #2 – Quality Measures and Gap Analysis

This group looked at measures of how well the market was performing in terms of providing liquidity and price discovery while minimizing volatility and cost. A recent study found that more than 80 percent of HFT activity was associated with market making, and this service would be most affected by policies aimed at restricting HFT.

Another recent study found that computer-based trading has improved liquidity and price discovery, without increasing volatility and while reducing cost.

The subcommittee recommended development of a voluntary quality management system standard. A timeline for the development of this standard was presented that extends through 2013.

Working Group #3 – Oversight, Surveillance and Economic Analysis

Ironically, the material for this presentation was unavailable on the website due to technical difficulties.

Working Group #4 – Market Microstructure Issues


According to this group, better understanding of HFT and the realization that the Flash Crash and Knight episodes are evidence of “what is perhaps the largest issue with modern-trading methods — the possibility that unintended trading destabilizes a market and/or adversely affects many investors or financial institutions.”

This group considered the idea of establishing an investigative body modeled after the National Transportation Safety Board to go to the scene of an untoward market event, determine the cause and recommend follow-up action. In the case of the Flash Crash, it took months to find the black box.

Conclusion

As usual, this meeting of the TAC shows that the reform process is grinding along very slowly, but it is useful to the extent that it reveals information as to what the issues are, so that investors and others who might be affected can prepare to participate in the debate on the recommendations that will eventually emerge from these meetings.

Robert Feinberg served on the staff of the House Banking Committee for the 10 years that encompassed the savings-and-loan debacle and the beginning of its migration to the banking sector. Subsequently, he has consulted on issues related to the crisis for law firms, accounting firms, securities firms and trade associations.

Feinberg holds a BS.E. from the Wharton School and a J.D. from the Law School of the University of Pennsylvania. He has drafted dissenting views on landmark banking legislation, contributed to a financial blog and written hundreds of reports for clients to document the course of the financial crisis as it has unfolded over the past three decades.

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Robert-Feinberg
The Commodity Futures Trading Commission (CFTC), which has jurisdiction over the futures and swaps market, has a committee of industry experts that advises it on technical issues. This committee, called the Technical Advisory Committee (TAC), meets roughly quarterly.
Feinberg,CFTC,TAC,subcommittees
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2012-43-31
Wednesday, 31 Oct 2012 07:43 PM
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