House Passes CFTC Reauthorization Act
Commentary by Steven Lofchie
The House of Representatives approved the Commodity End-User Relief Act (H.R. 238). Approved by a 239 to 182 vote, the Act would reauthorize the CFTC with an appropriation of $250,000,000 for fiscal years 2017 through 2021. The purpose of the Act is "to better protect futures customers, to provide end users with market certainty, to make basic reforms to ensure transparency and accountability at the Commission, to help farmers, ranchers, and end users manage risks [and] to help keep consumer costs low."
The Act would modify existing CFTC regulations by:
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requiring (rather than merely permitting) the CFTC to recognize bona fide hedging transactions, and by providing additional specificity regarding what constitutes such a transaction, as part of the exemption from position limit requirements (Section 311);
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providing guidance on the application of the commercial user exemption to swaps with affiliates (Section 301);
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limiting the extent to which utilities that use swaps to hedge may be treated as "special entities" (Sections 303-306);
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exempting end users from a number of Dodd-Frank Act requirements, particularly by removing forward contracts that relate to physical commodity deliveries and/or that have volumetric optionality from the definition of the term "swap" (Section 309);
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delaying the trade reporting of swaps in illiquid markets (Section 307);
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requiring the CFTC to perform a cost-benefit analysis of its rule proposals (Section 202);
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directing the CFTC to issue a rule that defines when firms engaged in cross-border activities may be exempted from U.S. rules (Section 313);
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granting futures commission merchants ("FCMs") a full business day after a trade execution to meet residual interest requirements (Section 104);
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permanently establishing the de minimis swap dealer threshold at $8 billion, which can be changed only through formal CFTC rulemaking (Section 310);
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modifying several procedural requirements through measures such as requiring (i) a public comment and notice period for CFTC statements and guidance, and (ii) the establishment by the CFTC of internal staff procedures concerning the issuance of exemptive, no-action or interpretive letters to the public (Section 205); and
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requiring that property of the bankruptcy estate of a commodity broker be included in "customer property" to the extent that such property is insufficient to satisfy the net equity claims of the broker's public customers (thus reversing the decision of In re Griffin Trading Co., 245 B.R. 291 (Bkt. Ct. N.D. Ill. 2000)) (Section 105).
Commentary
The Commodity End-User Relief Act fixes a number of serious problems including the difficulty of utilities' search for swap counterparties; the need to trade-report illiquid positions; and the drop in the de minimis amount. One provision that could be interpreted as increasing risk is the treatment of residual interest, but the relevant provision will lower the costs of operating as an FCM materially (which is a very good thing considering the number of FCMs that have gone out of business since Dodd-Frank). Additionally, the proposal benefits the credit positions of customers materially, since Section 105 allows any customer of an FCM who is not fully reimbursed to go after all of the proprietary assets of the FCM.
Many of the provisions of the Act are reactions to the procedural laxity permitted under Democratic leadership, particularly the CFTC's adoption of cross-border "guidance," a procedural bypass which should have been recognized as a material violation of the Administrative Procedures Act, the District Court's opinion to the contrary, notwithstanding. (See D.C. District Court Issues Opinion on SIFMA v. CFTC Cross-Border Guidance Case (with Lofchie and Zwirb Comments).)
It is unfortunate that this bill was adopted in the House along strict party lines. The bill is far from a repeal of Dodd-Frank. It is a thoughtful fix for a number of problems that were considered to be serious by a wide consensus. Opponents should go through the comparatively slender document and indicate which sections they oppose and why. Perhaps compromises can be reached concerning certain provisions. Perhaps, for example, the trade reporting delay on illiquid positions should be shortened. Perhaps the CFTC should be given more time to adopt a cross-border rule. Otherwise, the Democrats' party-line vote seems merely reactionary. Must the trade reporting of illiquid swaps, or the mere appointment of the next CFTC Chief Economist, be a cause for a Republican/Democrat divide?
By the way, a very similar version of this bill was proposed last year. (See House Approves Bill to Reauthorize CFTC and Amend the Commodity Exchange Act (with Lofchie and Zwirb Comments); and House Agriculture Committee Passes Bill to Reauthorize CFTC and Amend CEA (with Patel and Lofchie Comments).)
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