House Introduces Three Bills to Amend the CEA (with Lofchie Comment)

Three legislative proposals to amend the Commodity Exchange Act ("CEA") have been introduced in the House. All three bills focus on specific parts of the CEA.

H.R. 677 - "Inter-Affiliate Swap Clarification Act" - would exempt swaps between certain affiliated entities within a corporate group and swaps between companies or subsidiaries that share some level of common ownership from the clearing and trade execution requirements of CEA Section 2(h), and applicable margin and capital requirements of CEA Section 4s(e). The bill would also clarify that, for purposes of defining "swap dealer" or "major swap participant" and certain reporting requirements, the term "swap" does not include any agreement, contract or transaction entered into by certain affiliated parties.

H.R. 3814 - "Risk Management Certainty Act" - would amend CEA Section 1a(49), which provides for an exemption from designation as a swap dealer for dealers engaged in a de minimis amount of swap dealing. The proposed bill would require that such de minimis quantity not be less than $8 billion and that any change of such level be by vote of the Commission.

H.R. 634 - "Business Risk Mitigation and Price Stabilization Act of 2013" - would amend CEA Section 4s(e) to exempt end users from the margin requirements for uncleared swaps imposed by that section of the CEA. A similar exemption would apply to affiliates that satisfy the criteria of CEA Section 2(h)(7)(D), i.e., use swaps to hedge or mitigate commercial risk.

Lofchie Comment: The first of the bills would diminish the CFTC's regulation of swaps between affiliates. While the CFTC has granted limited affiliate exemptions by rulemaking, the exemptions are subject to complicated conditions, and there are numerous situations where affiliated parties cannot benefit from the CFTC's exemptions. The second provision would effectively freeze the current de minimis level beyond which a swap dealer is not required to register with the SEC at $8 billion. Currently, the CFTC's plans include a reduction to $3 billion. The problem with reducing the registration level to $3 billion is that complying with the CFTC's swap regulations is expensive, probably too expensive for a small swap dealer to absorb. Accordingly, small swap dealers that do between $3 billion and $8 billion in notional swaps might decide that it is not worthwhile to register with the CFTC and would instead reduce or eliminate their swaps dealing activities so as to avoid the costs of registration. This would increase the concentration of business in the largest swap dealers, a result that Dodd-Frank was supposedly intended to avoid. The question is whether reducing the registration level below $8 billion results in significantly more registered swap dealers or significantly fewer overall swap dealers. It should be possible for the CFTC to conduct an analysis of the costs of regulation, and to make a better-informed prediction as to the effects of reducing the notional amount that would trigger dealer registration. The third bill would provide a benefit to end users by exempting them from clearing, and thus from the need to post high-quality collateral in respect of their cleared swaps. Given that many end users could find more productive uses for their cash than posting it to a swaps clearing corporation, and given that it would be better for the economy if end users put their cash into investments, this seems a reasonable measure. (If you would like to speculate as to the likelihood of the passage of any of these three bills, see the news item below as to why that is not possible.)

See: H.R. 677; H.R. 3814; H.R. 634.See also CFTC Letter 13-09 (providing an example of the quite complicated CFTC requirements that must be met in order for swaps between affiliates to benefit from a limited exemption from otherwise applicable requirements).