Commodity Exchange Act Cea: Issues Related to the Regulation of Electronic Trading Systems
Thomas J. McCool, Cecile O. Trop
DIANE Publishing, Aug 1, 2000 - Business & Economics - 51 pages
The application of technology to derivatives trading has resulted in the development and use of electronic systems that are changing the way derivatives are traded. What is the appropriate regulation of electronic trading systems for exchange-traded futures (ETF) and OTC derivatives? This report answers these questions: how is technology being used in the ETF market, and what concerns does this use raise under the CEA?; how is technology being used in the OTC derivatives market, and what concerns does this use raise under the CEA?; and what alternatives have been suggested for addressing the concerns by the use of technology in the derivatives markets?
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addition AORS automated bids and offers broker-dealers CFI‘C ofﬁcials CFTC clearing clearinghouse commodities with ﬁnite counterparties customer orders customer’s deﬁned derivatives not involving difﬁcult efﬁciency electronic systems electronic trade-matching systems electronic trading systems Eurex exchange-traded futures market exclusion ﬁnancial integrity ﬁnite supplies ﬁrms ﬂexible ﬂoor Forward contracts fully electronic further regulatory objectives futures and OTC futures contract futures exchange ofﬁcial futures market participants Group recommendations Interactive Brokers involving nonﬁnancial commodities market integrity market liquidity matching systems MTEF NFA ofﬁcials notional amount NYMEX ofﬁcials told open-outcry options order routing OTC derivatives market OTC derivatives transactions Over-the-Counter Derivatives price discovery function proposed provide other beneﬁts raise reduce systemic risk Refco regulatory concerns regulatory relief regulatory structure retail customers securities serve a signiﬁcant signiﬁcant price discovery speciﬁc swap agreement swaps exemption systems for exchange-traded systems for OTC trading volume traditionally Treasury Amendment voice broker
Page 3 - physical or electronic facility in which all market makers and other participants that are members simultaneously have the ability to execute transactions and bind both parties by accepting offers which are made by one member and open to all members of the facility.
Page 5 - Option contracts (American style) give the purchaser the right, but not the obligation, to buy (call option) or sell (put option) a specified quantity of a commodity or financial asset at a specified price (the exercise or strike price) on or before a specified future date.
Page 7 - A cash transaction common in many industries, including commodity merchandising, in which a commercial buyer and seller agree upon delivery of a specified quality and quantity of goods at a specified future date. A price may be agreed upon in advance, or there may be agreement that the price will be determined at the time of delivery. Forward Market: Refers to informal (non-exchange) trading of commodities to be delivered at a future date. Contracts for forward delivery are “personalized...
Page 20 - Bucketing is defined as directly or indirectly taking the opposite side of a customer's order into the broker's own account or into an account in which the broker has an interest, without competitive execution of the order on an exchange.
Page 12 - We requested comments on a draft of this report from the heads, or their designees, of the Federal Reserve, OCC, Treasury, and SEC.
Page 8 - Under its exemptive authority, CFTC can change the conditions of an exemption or eliminate the exemption. In providing CFTC exemptive authority, Congress responded to industry concerns that because of their similarities to exchange-traded futures, swaps and other OTC derivatives faced the possibility of falling within the judicially crafted definition of a futures contract. This possibility posed a legal risk for many OTC derivatives because of the CEA requirement that futures be traded on an exchange...
Page 10 - OTC derivatives in excluded commodities are not generally subject to manipulation because they are "settled in cash, based on a rate or price determined by a separate highly liquid market with a very large or virtually unlimited deliverable supply...
Page 6 - Clearinghouses manage credit risk,"" in part, by substituting themselves as the buyer to every seller and the seller to every buyer.