A plan by the Commodity Futures Trading Commission to monitor just who is trading U.S. futures contracts and how much they are trading could mean some onerous – and costly -- data management challenges for futures commission merchants. The focus is firms trading and clearing futures contracts.
In the latest version of a proposal first floated last year, the CFTC said that it wants to require reporting entities such as designated contract markets – aka exchanges – to come up with a weekly account ownership and control report (OCR). That means futures exchanges would need to send the CFTC the information requested but in turn they would have to collect the information from their member firms – namely futures commission merchants (FCMs), who trade and clear contracts.
“At issue is the granularity of the information,” says Greg Hindy, a partner with the law firm of McCarter and English in New York. “It’s a lot more than FCMs have been providing and they will have to figure out whether they have the data and how they can aggregate it for their exchanges on a weekly basis.”
While exchanges and FCMs do report information to the CFTC on trades executed daily, the information is aggregated – the clearing members’ long and short positions, purchases and sales, exchanges of futures for cash and futures delivery notices for the previous trading day.
Clearing members do not identify the beneficial owners of positions, therefore the aggregate customer data reported for a clearing member could represent either a single trader or multiple traders.
The data also does not reveal whether a single trader controls substantial portions of the customer positions with more than one clearing member and could control a substantial portion of the market.
To accomplish this, the CFTC relies separately on its large trader reporting system which shows futures and options positions of traders at or above specific reporting levels. The large trader positions reported by the clearing members are then compared to the clearing member data reported by the exchanges so that the CFTC can check with the exchange if there are any discrepancies.
Under the CFTC’s proposal published in the Federal Register, the new weekly report would identify all accounts that are under common ownership or control at a single reporting entity; identify all accounts that are under common ownership at multiple reporting entities and identify all trading accounts whose owners are also including in the CFTC’s large trader reporting system.
Each ownership and control report, or OCR, should include the trading account number; the trading account’s ultimate beneficial owner; the name of the executing firm and its unique identifier; the name of the clearing firm and its unique identifier; the name of the exchange or other entity submitting the OCR and the transmission date, according to the CFTC.
The new data proposal is part of the CFTC’s goal to exert its muscle over the futures markets at a time when high-frequency trading has become the norm.
The rise of electronic trading has made it harder for the regulator to track down the owners so the information contained in the OCR would reduce the time and resources needed.
“Effective surveillance of millions of daily records requires automated systems capable of intelligently searching for patterns and anomalies buried deep within the data,” said the CFTC.
Without information on beneficial ownership of accounts, the CFTC must “first identify the universe of accounts traded in a relevant period, then request and avail information from outside the Commission to identify the entity associated with the account number, and fully aggregate all identified entities that relate to a common owner.
By tying large trader reports with exchange trade data so it can improve surveillance and aggregate traders’ positions to reduce the potential for speculative trading and market abuse.
Newedge, a New York based FCM, declined to comment on the CFTC’s latest proposal and the Futures Industry Association referred calls to the Chicago Mercantile Exchange, which has also opposed the CFTC’s proposal. Newedge and the FIA, the Washington, D.C., trade association for the commodity futures and options industry, have previously written letters to the CFTC opposing a similar proposal made last year and so have other FCMs. “There are a few differences between the old and new proposal so the compliance costs would still be steep,” one operations executive at a FCM in Chicago told Securities Technology Monitor.
No one is willing to estimate just how steep. In its recent proposal, the CFTC did refer to Newedge’s previous letter stating that the CFTC’s proposal would “result in an inordinate amount of work and expense for many, if not most FCMs” and may “cause some FCMs to go out of business.” Newedge also asserted that the CFTC had not “considered the burden that would be imposed on FCMs other than to a relatively nominal extent.”
In its letter to the CFTC on Aug. 19, 2009 the FIA said that “the financial and operational costs of requiring FCMs to modify their recordkeeping and reporting systems to be able to provide DCMs with the information proposed to be collected through the OCR in an acceptable format would impose a significant burden to FCMs in any environment.”
That is because many FCMs use third party vendors to provide the software required to perform back-office recordkeeping and reporting services and cannot control the costs those third-party vendors will incur in modifying their programs to collect the OCR data or the time necessary to make such modifications.
Making matters more complicated, the information collected by FCMs is not consistent, says the FIA, adding that its view representing an analysis conducted by 10 member firms. That means that even within the same FCM the address of the account holder may differ depending on the application used. It would be difficult for the FCMs to collect the information in a single location and transmit it to the DCM in a uniform manner.
The one saving grace for FCMs: the CFTC appears to have given up on requiring they come up with the account holder’s tax identification number. That number, say FCMs, would likely be stored either on paper or in systems different from those used for credit evaluation or generation of trade confirmations which would be used to comply with the new data reporting requirements.
The CFTC also acknowledged that FCMs would have difficulty meeting the requirement to file OCRs unless the futures exchanges adopted a single reporting protocol for the flow of information.
Although the CFTC invited the futures industry to submit detailed cost estimates, the regulator appears eager to move forward with the new detailed reports. “Commentators have not fully understood the commission’s intended uses for ownership and control information. The Commission notes that while its objectives do include improved position surveillance, they also include improved trade surveillance – regardless of position size – and other regulatory goals,” said the CFTC in its recent request for comment.
Representatives for the CFTC did not return calls seeking comment. Industry participants can send comments to the CFTC via email at OCR@cftc.gov.