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UPDATE 1-CFTC seen delaying broker conflict-of-interest rule
June 1, 2012 / 10:21 PM / 5 years ago

UPDATE 1-CFTC seen delaying broker conflict-of-interest rule

* CFTC to delay rule for futures brokers - two sources

* Industry: rule will hurt business, be legally risky

* CFTC seen delaying rule for 60 days

By Christine Stebbins and Alexandra Alper

CHICAGO/WASHINGTON, June 1 (Reuters) - The U.S. futures regulator is poised to postpone the compliance date of a hotly debated new rule that the industry says will disrupt brokerage research and damage customer communications, two people familiar with the matter said.

The rule, finalized by the Commodity Futures Trading Commission in February, seeks to establish a firewall between the research, trading and clearing sides of big futures brokers.

It was originally slated to go into effect on Monday. However, the commission will issue a “no action” letter, stating that it will not immediately enforce the rule, the two people said. One of the people said the delay would be for 60 days.

That is welcome news to the derivatives industry, which says the rule will create a nightmare of legal liabilities, stifle communication and disrupt markets if brokerages are forced to comply.

While the rule is “well intentioned, we are concerned its implementation will inhibit the flow of quality information that is fundamental to price discovery”, said Christine Cochran, president of the Commodity Markets Council, an industry group representing commodities brokers, known formally as futures commission merchants (FCMs).

“The quality research and analysis -- including trade recommendations -- issued by FCMs are sought after by clients and used, especially by smaller clients, to determine an appropriate response if presented with a dramatic change in the fundamentals,” Cochran said.

A CFTC spokesman did not immediately respond to a request for comment.

Mandated by the 2010 Dodd Frank financial reform law, the rule clamps down on the information a commodity research analyst can disseminate to clients and restricts how researchers interact with traders and clearing personnel inside their own firms.

One worry that analysts cite is that they could be held liable if they omit any “material facts or qualifications” in research reports that would cause communication to be misleading to a reasonable person.

“How is it possible to draft a report that includes all ‘material facts’?” asked Richard Feltes, vice president of commodity research for broker RJ O‘Brien.

The CFTC rule, part of a broader set of business conduct regulations for swap dealers and futures brokers, was approved by a 3-2 commission vote earlier this year, with both Republicans voting against it.

The delay comes in response to two petitions filed recently by law firms on behalf of the Futures Industry Association ( FIA) an d certain major brokers, one of the two sources said.

FIA was not immediately available for comment.

Bart Chilton, a Democratic CFTC commissioner, told Reuters on Friday that he approves of a delay in implementation as long as it comes with a firm date to end the extension.

“I think we should be amenable to reasonable requests,” he said in an interview. “That doesn’t mean that we should have a never-ending escape valve.”

Feltes, one of the leading analysts working in the world agricultural derivatives markets, said a delay would be welcome.

“The No. 1 requested item from users of the futures markets is trade recommendations,” Feltes said.

To the extent that the rule inhibits the flow of analysis and trade ideas to small investors, it will give an informational trading edge to larger entities, he said.

“I‘m puzzled why the CFTC would be penalizing medium- and small-size investors with this rule,” Feltes said.

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