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Wednesday, March 26, 2014

Impact of Dodd-Frank on Commodity Futures and Swaps

In a rush to complete Dodd-Frank Act rulemakings the CFTC “preferred speed over precision,” CFTC Commissioner Scott D O’Malia said. He noted that this has caused “unnecessary complexity, vagueness, and costs” in the market, including the commodity markets.

These consequences have led hedgers to seek out alternatives, such as swap futures. The switch from swaps to swap futures, or the “futurization of swaps”, in the commodities markets has caused reduced hedging flexibility because futures contracts cannot be individually tailored to meet specific risk needs. O’Malia remarked:
Because of the Commission’s rules, these [commodity market] participants will have to accept imperfect hedges, endure the higher cost of swaps, or forego hedging all together….If end-users are forced to use swap futures because the cost of using swaps is too high, these participants will have a less perfect hedge, which could result in additional risk or reduced capital investment.
The CFTC has completed 68 final rulemakings mandated by the Dodd-Frank Act and 8 exemptive orders. In addition, CFTC staff has issued approximately 172 no-action relief letters and 34 guidance and advisories.

Read the speech.

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