Government administers the trading post: The underlying philosophy of the law of markets ….

Commentary

Government’s role is to administer the trading post by managing the masses with a law-and-order scheme; broadcasting the value of its money through a regulated banking system; and expanding into and protecting new markets with its military and diplomatic corps.  Government, specifically western government, operationalizes the tenets of western philosophy: that man is at war with himself and nature and to alleviate the uncertainty of extermination, man must divide up the world and seek the most yield from the resulting parts.

Humans have no other reason to engage each other but to extract value from one another.  To garner the most yield from this engagement, the exchange, the trade, needs to be unencumbered by conflict.  Where it is impossible to obtain the means for survival by staying in one’s lane and exchange is necessary, humans then put in place customs, practices, rules designed to reduce conflict. 

Government promulgates the statutes, codes, and policies that manage the day-to-day mitigation of conflict.  It stays “in the money” by optimally maintaining the physical and social infrastructure that facilitates and expands its tax base.  It’s ability to effectively manage infrastructure and expand its tax base makes its money more attractive to traders.

Unfortunately, government has taken on a life of its own, going beyond its mandate to manage infrastructure and ensure law and order to regulating society on an increasingly micro level.  More of its policy and legislative initiatives appear intended to replace private market judgment with its own government judgment.  This imposition of government judgment on market judgment was not part of the original deal between traders, market makers, and government.  The imposition has seeped into the act of establishing price, an act that is best left to markets. 

Government now wants more than its cut in the form of taxes.  It now wants to weaponize price discovery and price setting for the purpose of expanding its cut by garnering more votes from the electorate.

The merchant trader, to protect her lane, should inform herself daily on the political process and support efforts that push back on government efforts to intervene in her ability to set price and other terms and conditions within and via the markets.

Alton Drew

27.03.2022

For consultation on how this political or legal event impacts your foreign exchange trade, request an appointment at altondrew@altondrew.com.

Call to action: To support this page, please visit our advertisers. You may also visit the sidebar and make a donation via PayPal.

Disclaimer: The above is provided for informational purposes and should not be construed as financial or legal advice or as creating an agreement to provide financial or legal advice.

CFTC Orders London-Based Swap Dealer to Pay $3.25 Million for Swap-Data Reporting, Conflicts of Interest, Mid-Market Mark, and Supervision Failures

March 15, 2022

Washington, D.C. — The Commodity Futures Trading Commission today simultaneously filed and settled charges against ED&F Man Capital Markets, Ltd. (ED&F Man), a London-based provisionally registered swap dealer, for failing to comply with certain swap dealer requirements to report accurate swaps data to a swaps data repository (SDR), failing to disclose a conflict of interest to swaps counterparties, failing to disclose mid-market marks to counterparties, and for related supervision failures.

The order imposes a $3,250,000 civil monetary penalty on ED&F Man and orders it to cease and desist from further violations of the Commodity Exchange Act and CFTC regulations, as charged.

“The CFTC will not hesitate to bring cases against swap dealers that violate substantive customer protection regulations and fail to have adequate supervisory controls in place,” said CFTC Acting Director of Enforcement Vincent McGonagle. “Swap dealer registrants must ensure they make complete and accurate disclosures to counterparties and accurately report swap valuation data to SDRs, and they must also diligently perform their supervisory duties.”

Case Background

Specifically, the order finds that between February 2014 and July 2021, ED&F Man failed to report certain swaps data to an SDR accurately for hundreds of thousands of swaps. The order also finds that, from February 2014 through January 2018, ED&F Man failed to disclose to its U.S. swaps counterparties that proprietary traders, trading on behalf of an affiliate, had access to counterparties’ trade information. Further, from February 2014 to April 2021, ED&F Man failed to disclose mid-market marks to some of its counterparties as required for numerous metals and FX swaps. The order also finds that ED&F Man failed to maintain an adequate supervisory system and to perform its supervisory obligations diligently with respect to swaps data reporting, conflict of interest disclosures, and providing mid-market marks. 

The CFTC thanks and acknowledges the assistance of the National Futures Association with this matter.

The Division of Enforcement staff members responsible for this case are Kevin Samuel, Glenn Chernigoff, Erica Bodin, Kathleen Banar, and Rick Glaser. Pamela Geraghty from the Market Participants Division assisted with this matter.

Source: Commodity Futures Trading Commission

How the regulator’s mindset may impact cryptocurrency …

An article today in Bloomberg discussing how a Biden administration would address the regulation of cryptocurrency has me putting myself in the place of the regulator. What is the U.S. Securities and Exchange Commission’s world view of digital assets? How will the Commodity Futures Trading Commission’s view toward regulation of exchanges evolve? Will the Board of Governors of the Federal Reserve System view the payment system aspect of cryptocurrency as a threat to the current national and global payment system regime or as a welcome supplement that brings more efficiency and transparency?

Clarity on what may happen on the regulatory side of cryptocurrency requires that the trader first take a top-down view of how governments view the world and especially how they view markets. You will never hear a regulator utter the term “free markets.” That phrase is best suited for the rhetoric of politicians who inherit worn out campaign slogans and reboot them for the latest run for office. I doubt they themselves, a significant number of whom are not trained in economics, truly understand what a market is or can likely identify threats to it. Compound markets for digital assets with the mechanics of payment systems and the politician’s eyes glaze over and she falls back to what she knows best: sloganeering tainted with tropes that appeal to individualism, consumerism, collectivism, or whatever narrative they believe their constituency will buy into.

The professional regulator, on the other hand, uses law and regulatory code as a front or an excuse. Statutes and codes give the professional regulator cover for their underlying philosophy and narrative. Unlike the elected official who only spends minutes on issues of markets and their regulation, the professional regulator is the expert spending years developing her own philosophy and transitive narrative and reconciling that philosophy and narrative with at times archaic statutes that the elected official has dumped on her to interpret. With archaic statutes and codes as cover for the regulator, it is the trader’s task not only to generate returns from holding a digital asset but to best understand what that regulator’s philosophy is.

There are two types of regulator. One I term as the myopic regulator. This regulator focuses on the black letter of the law and the code. Their focus is primarily on whether the market participants are following the rules on the books. He does not take into consideration any wider view of the philosophy behind markets and regulation. If the rules are skewed more to trader protection, his interest will be in outcomes that favor trader protection. If the rules skew more toward brokerage or platform protection, the regulator’s interest will be in outcomes favoring platform protection.

On the other side is what I term the universal regulator. They have managed to synthesize the role of government, traders, and platforms. They have an interest in maintaining the viability of the market system. Government’s role, in their view, is to provide for an efficient and productive trading post where there is sufficient transparency between traders and where the exchange platform ensures speed, efficiency, and clarity of trade because without these characteristics, the American markets as a whole become less viable, less reliable. Government will expand or contract in order to meet its universal role.

The trader should be mindful of this regulatory environment, particularly the tug-of-war between more or less regulation of exchanges. Eventually the trader pays the price in terms of transparency, price fairness, and the level of fees, especially where trade is her primary means of livelihood and income. After all, trade boils down to an information game and staying informed on government actions as well as on how government itself can disrupt information flow is important to the trader’s success.