WASHINGTON (CN) – Designated contract markets will need large reserves to account for the risk they take, according to Commodity Futures Trading Commission reforms.
The reforms apply to all exchanges regulated by the CFTC, ranging from the well known, such as the Chicago Board of Trade, to obscure markets for climate futures and environmental products.
The CFTC approved the reforms in 23 Core Principles at its 27th open meeting to discuss rules mandated by the Dodd-Frank Wall Street Reform and Consumer Protection Act, in May.
Dodd-Frank requires all federal financial regulators to increase the transparency of market activity and reduce risk to counterparties.
Most of the principles already existed in statutes or regulations, but were updated in light of Dodd-Frank.
For instance, former Core Principle 1 used to say the markets had “reasonable discretion in establishing the manner in which they comply with the core principles.” Post-Dodd-Frank, that discretion applies “unless otherwise determined by the commission by rule or regulation.”
Among the changes is the application of the core principles to swaps, which must now be traded on a type of designated contract market known as a Swap Exchange Facility.
Another new principle is a requirement that all markets adopt trade risk control mechanisms, including pauses and halts to trading to control volatility and limit market manipulation.
For the first time, designated contract markets will have to maintain reserves equal to their annual operating costs to assure market participants that an exchange has the resources available to carry out its core functions in the event of an economic down turn.
The Core Principles are effective Aug. 20.