CFTC Urged to Scrap Ban on ‘Hybrids’
The Treasury Department has asked the Commodity Futures Trading Commission to withdraw a proposal aimed at preventing firms from offering financial instruments similar to futures or options normally traded on futures exchanges.
The Treasury Department, in an April 5 letter to CFTC, said the proposal concerning off-exchange instruments has created “legal uncertainties that may cause serious problems in the swap markets and other large institutional markets.”
CFTC proposed the rules last year to address futures exchanges’ concerns over a proliferating number of so-called hybrids, or financial instruments with returns pegged in many cases to the prices of commodities such as oil or gold. CFTC is reviewing comments from the public and other agencies.
CFTC by law must ensure that all futures and options are traded on regulated exchanges.
The Treasury Department argued that some hybrid deals put together by banks can help commodity users and producers hedge against price changes.
Two Subpoenaed
“It (the CFTC proposal) has already generated uncertainty among market participants with respect to a wide variety of transactions, including interest rate swaps, swaps based on the price of tangible commodities such as oil, certain bank products and certain types of warrants,” the Treasury Department said in a letter signed by Undersecretary for Finance George Gould.
Last year, the commodities commission subpoenaed Chase Manhattan Bank and Wells Fargo and Co. concerning off-exchange instruments it considered illegal.
A federal judge subsequently ordered Wells Fargo to stop offering gold market certificates, which CFTC said were really cash-settled options on gold.
Futures are agreements to buy or sell a commodity for future delivery at a set price. An option gives the buyer the right to buy or sell a commodity at a specific price within a specified period of time.
The Treasury Department said the CFTC proposal “could have potentially deleterious effects on financial markets generally as the uncertainty increases.”
The CFTC proposal, the department said, has generated anxiety with respect to existing contractual arrangements since market participants may be “justifiably concerned” about the outcome of possible private litigation concerning such transactions.
The Treasury Department is known to be particularly concerned about the implications that the CFTC proposal could have for the burgeoning foreign exchange and interest rate swap markets.
