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Oversight of Trading & Post-Trading. Ukraine Commodity Market Development Conference

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Presentation to Ukraine Commodity Market Development Conference The author of the presentation: Christa Lachenmayr, Division of Market Oversight, CFTC (US)

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Christa Lachenmayr, Division of Market Oversight Kevin Piccoli, Office of International Affairs Tracey Wingate, Office of International Affairs December 2017 Oversight of Trading & Post-Trading U.S. COMMODITY FUTURES TRADING COMMISSION OFFICE OF INTERNATIONAL AFFAIRS
Definitions ? Artificial price ¨C a price that does not reflect the legitimate market or economic forces of supply and demand ? Manipulation ¨C any market behavior that causes or results in an artificial price whether intentionally or recklessly. Not defined in law but is loosely regarded as the exercise of market power to affect price to an ¡°uneconomic¡± level. ? Corner ¨C control or domination of both the long side of the futures market and the available supply of the cash commodity, providing little choice to those who need the commodity, influencing cash or futures prices. ? Squeeze ¨C dominant long futures position, exceeding in size the amount of the cash commodity available to shorts, which forces the short position holders to cover their positions at higher prices. 2
MarketSurveillanceObjectives ? Objectives ? Ex ante ? seek out adverse situations as they are developing, before the market can be disrupted ? identify specific threats of manipulation ? initiate appropriate preventive actions ? During ¨C detect manipulative behavior and contain it ? Ex post ¨C Refer to Enforcement ? Analysis ? Understand market for underlying commodity ? Assess related contracts ? Identify owners, monitor trader activity ? Enforce position limits and exemptions ? Track all large positions that could pose a threat of market manipulation 3
MarketSurveillanceApproach 4 ? CP2: Board of trade shall establish, monitor, and enforce compliance with the rules of the contract market¡­[and] shall have the capacity to detect, investigate and apply appropriate sanctions to any person that violates any rule of the contract market.¡± ? Exchange enforces exchange rules ¨C monitors market participants, examines futures and cash markets daily ? CFTC enforces CFTC regulations ¨C monitors large traders¡¯ activities, examines key price relationships ? FCM ¨C monitors execution for compliance with exchange and CFTC rules and position limits ? Customer or Trader ¨C reports suspicious activity to exchange and/or CFTC
MarketSurveillanceActivities 5 ? Monitors markets to detect and deter manipulation ? market data (confidential or protected) ? large trader reporting ¨C end-of-day positions, concentration of positions (market power), limits and exemptions, trader identification information ? transaction reporting ¨C volume, liquidity, account identification ? deliveries and deliverable supply ? clearing-member data ? order book data (upon request) ? other market information (public) on price movements and changes in price relationships, volume, open interest ? Weekly surveillance meetings/briefings ? Interactions with market participants on surveillance issues ? phone calls/emails to traders and exchanges ? warning letters ? emergency actions ? referrals to Division of Enforcement
MarketSurveillanceActivities 6 ? Understand underlying market ? Understand trading behavior ? Monitor trader activity ? Analyze market composition ? Examine large positions that could pose a threat of market manipulation ? Identify owners ? Enforce speculative position limits
Physical Delivery 7 ? Susceptibility to manipulation occurs when the deliverable supply is small relative to the size of large positions as the contract approaches expiration ? The more difficult and costly it is to augment deliverable supplies within the time constraints of the expiring futures contract's delivery terms, the more susceptible to manipulation the contract becomes. ? Questions to ascertain susceptibility to manipulation ? Are the positions held by the largest long trader(s) greater in size than deliverable supplies not already owned by such trader(s)? ? Are the long traders likely to demand delivery? Is delivery their least costly means of acquiring the commodity? ? To what extent are the largest short traders capable of making delivery? ? To what extent are shorts willing to make futures delivery? Is futures delivery their best market? ? Does the futures price, as the contract approaches expiration, reflect the cash market value of the deliverable commodity? ? Is the price spread between the expiring future and the next delivery month reflective of underlying supply and demand conditions in the cash market?
CashSettlement ? Integrity of the price series/index ? Monitor size of futures positions vis-¨¤-vis equivalent in the cash market ? Is the futures price consistent with supply and demand factors? ? How is the settlement cash price series behaving compared to similar cash prices? ? Are the largest futures traders engaged in cash trades that affect the settlement cash price? That is, do the futures traders have an incentive to engage in losing cash trades in order to benefit a large futures position? 8
EmergencyActions 9 ? CFTC or Exchange ? there are statutory provisions under which CFTC can invoke and exchanges must have rules in place about the authority to use an emergency action ? types ? margin increase ? required liquidation of positions ? extending the delivery period ? temporarily closing a market ? Exchanges can make hedge exemptions contingent upon acceptance of these types of actions in non-emergency situations ? Exchanges and the Commission view market participation as a privilege not a right ¨C subject to good governance procedures

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Oversight of Trading & Post-Trading. Ukraine Commodity Market Development Conference

  • 1. Christa Lachenmayr, Division of Market Oversight Kevin Piccoli, Office of International Affairs Tracey Wingate, Office of International Affairs December 2017 Oversight of Trading & Post-Trading U.S. COMMODITY FUTURES TRADING COMMISSION OFFICE OF INTERNATIONAL AFFAIRS
  • 2. Definitions ? Artificial price ¨C a price that does not reflect the legitimate market or economic forces of supply and demand ? Manipulation ¨C any market behavior that causes or results in an artificial price whether intentionally or recklessly. Not defined in law but is loosely regarded as the exercise of market power to affect price to an ¡°uneconomic¡± level. ? Corner ¨C control or domination of both the long side of the futures market and the available supply of the cash commodity, providing little choice to those who need the commodity, influencing cash or futures prices. ? Squeeze ¨C dominant long futures position, exceeding in size the amount of the cash commodity available to shorts, which forces the short position holders to cover their positions at higher prices. 2
  • 3. MarketSurveillanceObjectives ? Objectives ? Ex ante ? seek out adverse situations as they are developing, before the market can be disrupted ? identify specific threats of manipulation ? initiate appropriate preventive actions ? During ¨C detect manipulative behavior and contain it ? Ex post ¨C Refer to Enforcement ? Analysis ? Understand market for underlying commodity ? Assess related contracts ? Identify owners, monitor trader activity ? Enforce position limits and exemptions ? Track all large positions that could pose a threat of market manipulation 3
  • 4. MarketSurveillanceApproach 4 ? CP2: Board of trade shall establish, monitor, and enforce compliance with the rules of the contract market¡­[and] shall have the capacity to detect, investigate and apply appropriate sanctions to any person that violates any rule of the contract market.¡± ? Exchange enforces exchange rules ¨C monitors market participants, examines futures and cash markets daily ? CFTC enforces CFTC regulations ¨C monitors large traders¡¯ activities, examines key price relationships ? FCM ¨C monitors execution for compliance with exchange and CFTC rules and position limits ? Customer or Trader ¨C reports suspicious activity to exchange and/or CFTC
  • 5. MarketSurveillanceActivities 5 ? Monitors markets to detect and deter manipulation ? market data (confidential or protected) ? large trader reporting ¨C end-of-day positions, concentration of positions (market power), limits and exemptions, trader identification information ? transaction reporting ¨C volume, liquidity, account identification ? deliveries and deliverable supply ? clearing-member data ? order book data (upon request) ? other market information (public) on price movements and changes in price relationships, volume, open interest ? Weekly surveillance meetings/briefings ? Interactions with market participants on surveillance issues ? phone calls/emails to traders and exchanges ? warning letters ? emergency actions ? referrals to Division of Enforcement
  • 6. MarketSurveillanceActivities 6 ? Understand underlying market ? Understand trading behavior ? Monitor trader activity ? Analyze market composition ? Examine large positions that could pose a threat of market manipulation ? Identify owners ? Enforce speculative position limits
  • 7. Physical Delivery 7 ? Susceptibility to manipulation occurs when the deliverable supply is small relative to the size of large positions as the contract approaches expiration ? The more difficult and costly it is to augment deliverable supplies within the time constraints of the expiring futures contract's delivery terms, the more susceptible to manipulation the contract becomes. ? Questions to ascertain susceptibility to manipulation ? Are the positions held by the largest long trader(s) greater in size than deliverable supplies not already owned by such trader(s)? ? Are the long traders likely to demand delivery? Is delivery their least costly means of acquiring the commodity? ? To what extent are the largest short traders capable of making delivery? ? To what extent are shorts willing to make futures delivery? Is futures delivery their best market? ? Does the futures price, as the contract approaches expiration, reflect the cash market value of the deliverable commodity? ? Is the price spread between the expiring future and the next delivery month reflective of underlying supply and demand conditions in the cash market?
  • 8. CashSettlement ? Integrity of the price series/index ? Monitor size of futures positions vis-¨¤-vis equivalent in the cash market ? Is the futures price consistent with supply and demand factors? ? How is the settlement cash price series behaving compared to similar cash prices? ? Are the largest futures traders engaged in cash trades that affect the settlement cash price? That is, do the futures traders have an incentive to engage in losing cash trades in order to benefit a large futures position? 8
  • 9. EmergencyActions 9 ? CFTC or Exchange ? there are statutory provisions under which CFTC can invoke and exchanges must have rules in place about the authority to use an emergency action ? types ? margin increase ? required liquidation of positions ? extending the delivery period ? temporarily closing a market ? Exchanges can make hedge exemptions contingent upon acceptance of these types of actions in non-emergency situations ? Exchanges and the Commission view market participation as a privilege not a right ¨C subject to good governance procedures