House Agriculture Committee Passes Bill to Reauthorize CFTC and Amend CEA
Commentary by Nihal Patel and Steven Lofchie
The U.S. House Committee on Agriculture passed the "Commodity End-User Relief Act of 2015" (the "bill") by voice vote. The vote was reported to the full House along with a recommendation for passage of the bill.
Sponsored by Representatives Michael Conaway (R-TX), Austin Scott (R-GA) and David Scott (D-GA), the bill would reauthorize the CFTC for an additional five years. In addition, the bill would enact various "narrowly targeted changes" to the CEA, including the following:
- Title I of the bill ("Customer Protections") would codify certain protections for futures customers that were adopted in the wake of the bankruptcies of MF Global and Peregrine Financial by:
- requiring that the National Futures Association confirm account balances electronically for customer funds held at depository institutions;
- requiring futures commission merchants that become undercapitalized to notify the CFTC immediately; and
- providing legal notifications and certifications to futures customers stating that the assets of a bankrupt commodity broker will be used to pay back misappropriated or illegally transferred customer-segregated funds.
- Title II of the bill ("CFTC Reforms") would enact administrative procedure changes to the CEA, including:
- reforming the CFTC's cost-benefit analysis ("CBA") statutory mandate by:
- requiring the CFTC to conduct CBAs in connection with "guidance" that is similar in effect to a formal rule;
- requiring CBAs to be conducted by economists (rather than lawyers) and creating a new "Office of the Chief Economist" to oversee CBAs; and
- requiring the CFTC to consider additional factors in conducting CBAs;
- providing that judicial challenges to CFTC rulemakings may be heard in the first instance in a U.S. Appellate Court; and
- requiring the CFTC to develop procedures for submitting no-action and interpretative letters to the Commissioners for review.
- reforming the CFTC's cost-benefit analysis ("CBA") statutory mandate by:
- Title III of the bill ("End-User Relief") would, among other things:
- limit the CFTC's international application of Dodd-Frank swap regulations by:
- requiring the CFTC to issue a formal rulemaking (instead of guidance) within a year concerning such international application;
- prohibiting the CFTC from considering the location of personnel that "arrange, negotiate or execute" swaps in such rulemaking;
- granting the CFTC authority to suspend substituted compliance for foreign jurisdictions that do not grant comparable exemptions for U.S. persons that comply with U.S. swaps regulations; and
- defining "U.S. Person";
- provide that forwards with embedded optionality are not "swaps";
- limit the definition of "financial entity" to carve out certain affiliates of end users, and add a new exception from the "financial entity" definition for "commercial market participants";
- limit the recordkeeping requirements that are applicable to entities not required to be registered with the CFTC;
- amend CFTC regulations applicable to CPOs to conform them to certain JOBS Act provisions;
- amend the terms by which "bona fide hedging" transactions are carved out from the position limit requirements in Section 4a(c);
- require a vote by the Commission prior to altering the de minimis threshold for swap dealer registration; and
- enable entities that are subject to the margin and capital requirements to use financial models in calculating margin and capital that have been approved by other U.S. financial regulators (e.g., the Fed and the SEC).
- limit the CFTC's international application of Dodd-Frank swap regulations by:
See: House Agriculture Committee Press Release; Commodity End User Relief Act (H.R. 2289); Summary of the Bill.
Commentary
In many ways, the bill is a direct response to actions that the CFTC has taken in implementing Title VII of Dodd-Frank, as well as other recent events (see below).
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Recent Event |
What the Bill Does |
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Numerous commenters and dissenting CFTC commissioners have criticized the CFTC's cost-benefit analysis or lack thereof. The analyses were a part of the legal case challenging the CFTC's cross-border guidance. |
Enhances the cost-benefit analysis requirements, including by applying it to "guidance" issued by the CFTC. |
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The CFTC's cross-border guidance came under judicial review in federal district court. |
Provides for judicial review to begin in the D.C. Circuit Court of Appeals. (The provision is similar to one that appears in SEA § 25(b).) |
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In implementing Dodd-Frank, CFTC staff issued hundreds of no-action and interpretive letters that were criticized in some instances by dissenting commissioners. |
Creates new procedures for review by the Commissioners prior to the issuance of staff interpretations. |
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CFTC issued cross-border "guidance" rather than formal rulemaking. |
Requires formal rulemaking and adds a definition of "U.S. person" that is very similar to the one adopted by the SEC in its security-based swap rulemaking. See SEA Rule 3a71-3. |
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Numerous end users found it difficult to determine whether they were "financial entities" and thus to use the end-user exception from clearing. |
Adds an express carve-out for "commercial market participants." |
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Application of recordkeeping requirements combined with SEF membership requirements resulted in numerous unregistered entities becoming subject to CFTC recordkeeping requirements. |
Adds provisions to allow members of DCMs and SEFs that are not otherwise registered with the CFTC to satisfy recordkeeping requirements solely by keeping (essentially) the confirmations of their transactions. |
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CFTC swap dealer registration rule now contains an automatic decrease in the de minimis threshold (scheduled to go from $8 billion to $3 billion within five years). See CEA Rule 3a71-2. |
Requires CFTC to vote prior to altering the threshold and adds an exception for utility special entity transactions. |
Participants that are following the rulemaking for margin requirements for uncleared swaps should note that the changes made by the bill could have an impact by (i) changing who may be able to use an exception from the rules as a result of not being a "financial entity" (see CEA § 4s(e)(4), recently added to the CEA by the Terrorism Risk Insurance Program Reauthorization Act of 2015) and (ii) allowing CFTC-regulated swap dealers and major swap participants to use models "comparable" to those that are approved by the prudential regulators or the SEC to calculate minimum capital and margin requirements.
In light of the SEC's recent proposal to apply aspects of its security-based swap requirements to transactions of foreign dealers with foreign persons that are "arranged, negotiated or executed" in the United States, it seems especially interesting that the bill would bar consideration of this factor by the CFTC. Once again, the provision is likely a direct response to a CFTC action. See CFTC Staff Advisory No. 13-69 (Applicability of Transaction-Level Requirements to Activity in the United States) and the subsequent withdrawal of the advisory and request for comment, 79 Fed. Reg. 1347 (Jan. 8, 2014).
Commentary
Passing a version of this bill would raise the question as to what the CFTC should do regarding an actual rule on cross-border jurisdiction. One possible solution would be for Congress to mandate the CFTC's adherence to the SEC's cross-border jurisdictional rules until the CFTC could study the issue and adopt its own rules (which could end up being identical to those of the SEC). This would solve at least three problems. First, it would conform the CFTC and SEC's jurisdictions temporarily. Second, it would allow the CFTC to maintain jurisdiction over cross-border transactions, to the extent to which they're covered by the SEC rules, rather than depriving them of its jurisdiction entirely. Third, it would give authority to the CFTC to deviate from the SEC's rules should there be reason to do so, but only following a formal rulemaking process.
The proposal concerning volumetric options seems consistent with Commissioner Bowen's fine discussion of the issue recently. (See previous Cabinet news item here.)