An advisory committee of the Commodity Futures Trading Commission recommended scrapping the agency’s proposed rules imposing federal position limits on energy and certain other derivatives. Meanwhile, a broker-dealer was fined US $675,000 by the Financial Industry Regulatory Authority for allowing a customer to repeatedly fail to timely cover short sales involving exchange-traded funds. As a result, the following matters are covered in this week’s edition of Bridging the Week:

• CFTC Advisory Committee Says There Is No Evidence Justifying Proposed New Position Limits (includes My View);

• Broker-Dealer Fined US $675,000 by FINRA for Excessive Fails on Shares of 14 ETFs:

• Canadian Securities Regulators Seek Comments on Revised Rule Regarding Mandatory Clearing of Derivatives;

• FINRA Proposes to Require Brokers to Disclose Mark-Ups and Mark-Downs to Retail Clients on Fixed-Income Securities; and more.

Briefly:

• CFTC Advisory Committee Says There Is No Evidence Justifying Proposed New Position Limits: A report issued by the Energy and Environmental Markets Advisory Committee of the Commodity Futures Trading Commission roundly criticized the CFTC’s 2013 proposed rule mandating new federal position limits for energy futures, options and swaps. According to the report, which was adopted by an 8-1 vote of the EEMAC’s members, (1) there is “no evidence” that the proposed rule is “demonstrably necessary to prevent excessive speculation or associated fluctuations in price”; (2) coupled with already “sharp reduction” of liquidity in energy derivatives because of world developments, passage of the proposed rule would adversely impact the ability of end users to use energy derivatives for hedging; and (3) proposed limitations on what constitutes bona fide hedging are "unnecessarily restrictive and contrary to standard, prudent risk management activities in energy markets.” Tyson Slocum, Energy Program Director of Public Citizen, Inc., the one EEMAC member voting against the report, wrote a dissent that criticized its findings, saying that “[t]he Report’s claim that Position Limits are not necessary relies on selective presentations while ignoring other academic research showing that position limits are necessary.” Based on the findings of the report, CFTC Commissioner J. Christopher Giancarlo said the CFTC “should not and need not finalize its current position limit proposal.”

My View: According to a report this week in the Wall Street Journal (click here to access), CFTC Chairman Timothy Massad rejected the rationale of the EEMAC in recommending to scrap the CFTC’s latest proposed position limits rules –principally that they are not necessary or may hurt liquidity. The newspaper quoted Mr. Massad as saying, “[i]t strikes me a bit like saying you’re against speed limits because they may make you late for work.” However, this comment ignores the existing practice of designated contract markets to enforce strict position limits for energy and other commodity derivatives in the spot month, and maintain accountability levels in other months. Utilizing an accountability level regime permits DCMs to closely monitor overall market activity, but only restrict trading size when they believe it is necessary. In his dissenting view, Mr. Slocum questioned the objectivity of DCMs to establish or enforce position limits' alternatives as they are for-profit enterprises. The CFTC always retains its authority to take disciplinary action against a DCM that it believes it not fulfilling its core requirement to prevent market disruption.

• Broker-Dealer Fined US $675,000 by FINRA for Excessive Fails on Shares of 14 ETFs: Wedbush Securities Inc., agreed to pay a fine of US $675,000 to the Financial Industry Regulatory Authority and Nasdaq Stock Market LLC, to resolve charges brought by FINRA related to the firm’s allegedly impermissible short sales on behalf of a client involving almost 300 million shares of 14 exchange-traded funds from January 1, 2010, through March 16, 2012. According to FINRA, during this time, Scout Trading, LLC, a correspondent broker-dealer client of Wedbush, on multiple occasions, submitted orders to Wedbush to redeem ETF shares on the primary market and to sell ETF shares in the secondary market. However, said FINRA, these transactions resulted in a substantial number of fails by Wedbush, which were allocated to Scout. Scout typically closed out its ETF fails on the sixth day following the initial trade date (T + 6) by creating new ETF shares through placement of a creation order through Wedbush. In doing so, Scout relied on an exemption for market-makers from the ordinary requirement to close out fails by the fourth day after trade date. However, according to FINRA, Scout would promptly re-establish its short position by redeeming or selling shares of the same ETF the next trading day after it closed out the related ETF fail. FINRA claimed that Scout was not entitled to rely on the market-maker exemption to permit T+6 cover of fails and implied that Wedbush should not have permitted Scout to re-establish its short positions promptly afterwards. As a result, said FINRA, Wedbush violated its rule requiring all members to “observe the high standards of commercial honor and just and equitable principles of trade” because the firm did not follow up on Scout’s “recurring, cyclical fails.” (Click here to access a publication by the Securities and Exchange Commission, Key Points About Regulation SHO.)

• Canadian Securities Regulators Seek Comments on Revised Rule Regarding Mandatory Clearing of Derivatives: The Canadian Securities Administrators published for comment a revised proposal related to the mandatory clearing of derivatives. Their initial proposal was published in February 2015. (Click here for details on CSA’s earlier proposal.) Among other things, CSA now proposes that mandatory clearing obligations only apply to participants that subscribe to the services of a regulated clearing agency for a mandatory clearable derivative (as well as their affiliated entities) in addition to local entities with in excess of CAD 500 billion of month-end gross notional amount of outstanding over-the-counter derivatives. CSA also proposes limiting mandatory clearable derivatives to certain specifically enumerated interest rate derivatives. CSA seeks comment on its revised proposal, as well as some specifically enumerated matters, including whether there might be any “significant consequences” that might arise from subjecting Canadian dollar-denominated [interest rate swaps] to mandatory clearing “absent a corresponding … mandate in one or more foreign jurisdictions.” Comments will be accepted through May 24, 2016.

• FINRA Proposes to Require Brokers to Disclose Mark-Ups and Mark-Downs to Retail Clients on Fixed-Income Securities: The Board of Governors of the Financial Industry Regulatory Authority approved a proposal requiring member firms to disclose to retail customers on their confirmation statements the amount of mark-ups or mark-downs for most transactions in corporate and agency debt securities. The proposal would require a firm that sells or buys a relevant fixed-income security for a retail customer that on the same day buys or sells the same security as principal from another party to disclose to the customer on its confirmation statement the amount of the firm’s mark-up or mark-down from the prevailing market price for the security. The confirmation must also include a reference (and hyperlink if the confirmation is electronic) to trade-price data for the same security from FINRA’s Trade Reporting and Compliance Engine, more commonly known as TRACE.

And more briefly:

• London-Based CTA Banned by NFA for Failing to File Mandatory Quarterly Reports: TGI Capital Management Limited, a commodity trading advisory located in London, England, and registered with the Commodity Futures Trading Commission, was permanently barred from membership with the National Futures Association because the firm repeatedly failed to timely file Form PR and failed to respond to NFA’s attempts to notify the firm of its failure. (CTAs are required to file a Form PR with NFA within 45 days of quarters ending March, June and September, and a Form PR annual report within 45 days of calendar year-end; click here for details.) This action was taken by an NFA business conduct committee after TGI failed to respond to a complaint filed by NFA against the firm. Form PR provides information about a CTA's trading programs, monthly rates of return, and assets under management, among other information.

• LCH.Clearnet Seeks CFTC Approval to Portfolio Margin Futures, Foreign Futures and Cleared Swaps in Cleared Swaps Accounts: The Commodity Futures Trading Commission is seeking public comment on a proposal by LCH.Clearnet Ltd. to authorize it and its futures commission merchant clearing members to combine in a single cleared-swaps customer account customer’s cleared-swaps, futures and foreign futures positions, and all related funds, and to subject such positions to portfolio margin. Comment is due by March 11, 2016.

• CFTC to Hold Public Roundtable on Residual Interest Deadline: The Commodity Futures Trading Commission will hold a public roundtable on March 3, 2016, to assess whether the current obligation that futures commission merchants hold by 6 p.m. Eastern Time on the next business day after trade date a sufficient amount of their own funds (known as an FCM’s residual interest) in customer segregated accounts to cover the undermargined amounts of other customers. The CFTC is seeking to determine whether the 6 p.m. time is appropriate or should be changed to another earlier time. This requirement applies to customer accounts for futures and foreign futures. There is a different regime for customer accounts involving swaps.