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January 25, 2013

House Ag Committee Approves Bills Clarifying Derivatives Legislation

By Lene Powell, J.D.

At a markup session of the House Committee on Agriculture presided over by Chairman Frank Lucas (R-OK) and Ranking Member Collin Peterson (D-MN), the full committee reported favorably a number of bills that would clarify various facets of derivatives legislation adopted by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Chairman Lucas noted that the Ag Committee has held seven hearings over the past year on the implementation of the Dodd-Frank Act. He said that Dodd-Frank had made using derivatives too expensive. Farmers and energy companies might not be able to hedge, manufacturers might have to alter business models, and community banks might have to stop using interest rate swaps. The House had a chance to fix that by making some "tweaks," he said.

Ranking Member Peterson said legislation was premature until the CFTC final rules were complete. So far, it's safe to say that CFTC has done a pretty good job, said the congressman.

The bills all had broad bipartisan support.

H.R. 1840: CFTC cost-benefit analysis. A bill that would require the CFTC to engage in more thorough cost-benefit analysis during the rulemaking process was reported favorably to the House through substitute amendment.

H.R. 1840 would amend the Commodity Exchange Act section concerning cost-benefit analysis by the CFTC to require both qualitative and quantitative cost-benefit analysis. The amendment would specifically require the Office of the Chief Economist to conduct the analysis, and would permit the CFTC propose or adopt a regulation only if the agency makes a reasoned determination that the benefits justify the costs. In addition, the amendment lists additional mandatory considerations for the CFTC to evaluate in making a reasoned determination of the costs and the benefits, including the impact on market liquidity in the futures and swaps markets, as well as alternatives to direct regulation.

Rep. Michael Conaway (R-TX), the bill's sponsor, clarified that the change was prospective only, and would not affect any rulemaking currently in progress.

H.R. 3336: Small Business Credit Availability Act. A bill that would exclude a number of financial entities from the definition of "swap dealer" and "major swap participant" was reported favorably to the House via substitute amendment.

The bill would amend the Commodity Exchange Act to exclude from regulation as a swap dealer an insured depository institution, or a U.S. uninsured branch or agency of a foreign bank that has a prudential regulator. In addition, the amended bill permits designation of a person as a swap dealer for a single type, class, or category of swap or activity, and yet allows the person not to be considered a swap dealer for other types, classes, or categories of swaps or activities.

The bill would also exclude from the definition of "swap dealer" a person that enters into swaps for such person's own account if the swaps meet one of a number of conditions, including hedging commercial risk or complying with governmental regulations. Further, it excludes various small financial institutions, including small banks and credit unions, from the definition of "financial entity" if the certain aggregate exposure with respect to its swaps does not exceed $1 billion. This would exempt the entities from the clearing requirement. Finally, the measure excludes certain captive finance entities from the definition of "major swap participant" and from the swap clearing requirement.

The bill's sponsor, Rep. Vicky Hartzler (R-MO), said it was important to make sure farmers can use banks in their communities instead of having to go to big banks. Former representative and committee member Bobby Schilling raised concerns relating to captive finance companies, noting that many manufacturers have these and they do not want to be major swap participants or subject to the clearing requirement. He stated that the CFTC has indicated they will not issue further clarification, and asked if the committee could work on this.

H.R. 3527 and 2682: Exclude end users. Two bills that would exclude end users from swap regulation were reported favorably to the House through substitute amendment.

H.R. 3527 would amend the Commodity Exchange Act to revise the current exception to the definition of "swap dealer" to state that, in determining whether a person is a "swap dealer," no consideration shall be given to any transaction entered into for the person's own account for the purpose of hedging or mitigating commercial risk.

The measure further directs the CFTC to adopt standards distinguishing the activities of a swap dealer as specified in current law, and entering into swaps for a person's own account in order to achieve its own trading objectives as determined by the CFTC. In addition, the bill also provides for a de minimis exception, directing the CFTC to exempt an entity that enters into swap dealing transactions if the aggregate gross notional amount of the outstanding swap dealing transactions entered into does not exceed $3 billion in one year, or a greater amount as market conditions warrant.

H.R. 2682 would exempt certain uncleared swaps from initial and variation margin requirements. Chairman Lucas stated that the bill reaffirms congressional intent, as expressed in a letter by former senators Chris Dodd and Blanche Lincoln describing their intention that end-user entities not be swept up in regulation. He said the CFTC has proposed to uphold congressional intent and not require margin, but banking regulators have ignored congressional intent and have proposed to impose margin requirements.

Ranking member Peterson agreed, saying that the problem was caused not by the CFTC but by the prudential regulators. He said that hopefully the prudential regulators will listen, but he is not optimistic.

Other bills approved. Two other bills reported favorably were H.R. 2779, which would exempt inter-affiliate swaps from regulation (although it would still require reporting to a swap data repository), and H.R. 2586, which would prevent the CFTC or SEC from imposing certain requirements on Swap Execution Facilities (SEFs).

Requirements that would not be allowed to be imposed on SEFs under H.R. 2586 include the following: (1) having a minimum number of participants receive a bid or offer or respond to any trading system or platform functionality, (2) displaying or delaying bids or offers for any period of time, (3) limiting the means of interstate commerce used by market participants to enter into and execute swap transactions on the trading system or platform, or (4) requiring bids or offers on one trading system or platform operated by the swap execution facility to interact with bids or offers on another trading system or platform operated by that facility.

CommodityFutures Derivatives DoddFrankAct

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