Commodities Firms Shy Away From Dodd-Frank Reforms

(March 14, 2011) — As the Dodd-Frank Act is still being polished by regulators, some commodities firms are saying that they should be exempt from the rules on derivatives trading.

According to the Wall Street Journal, the act’s overhauls include an array of measures that would bring more derivatives trading into regulated exchanges. However, commodities companies view the act a threat, as it may lead to increased costs.

“The theme is to go exchange-traded as opposed to going over-the-counter, making trading more orderly and more transparent,” Steve McLaughlin, executive director of Municipal Market Advisors, a Concord, Mass. research firm, told aiCIO. “It’s tougher to make margins if your business is regulated, which is why people are not gravitating to this bill,” he said.

President Obama signed the Dodd-Frank financial regulation bill last July, giving the Commodity Futures Trading Commission (CFTC) and Securities & Exchange Commission (SEC) oversight of the roughly $600 trillion OTC derivatives market while forcing most swaps to be cleared on a regulated exchange. Obama’s signature marked a legislative push that has become increasingly aggressive since the 2008 financial crisis pummeled the US economy.

The report established a code of conduct for all registered swap dealers — the Commodity Futures Trading Commission must publish an “interim final rule” for how to report data for swaps that predate the reform act. Furthermore, the report ordered the commission to establish timelines on how new swap trades will be reported. “When acting as counterparties to a pension fund, endowment fund, or state or local government, dealers are to have a reasonable basis to believe that the fund or governmental entity has an independent rep- representative advising them,” the House Financial Services Committee stated in June.