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From Securities Regulation Daily, April 9, 2014

House Ag Committee approves CFTC reauthorization legislation

By Lene Powell, J.D.

The House Agriculture Committee reported favorably a bill that would reauthorize the CFTC, strengthen customer protections, restrict the agency’s rulemaking activity in some ways, and ease requirements for swaps end users. H.R. 4413, the Customer Protection and End-User Relief Act, was introduced by Committee Chairman Frank Lucas (R-Okla.), Ranking Member Collin Peterson (D-Minn.), and Reps. K. Michael Conaway (R-Tex.) and David Scott (D-Ga.). The measure was approved by voice vote.

H.R. 4413 provisions. In the wake of the failure of futures commission merchants (FCMs) MF Global and Peregrine Financial Group, it has been recognized that commodity customer protection rules need to be strengthened. Under the customer protection provisions in Title I, the bill would require an FCM to immediately report to the CFTC and National Futures Association (NFA) when it becomes undercapitalized and mandate that FCMs require banks holding customer segregated and secured funds to report balances to the NFA.

In addition to reauthorizing the CFTC through 2018, Title II of the bill would put restrictions on the agency’s rulemaking process. Staff would give seven days’ notice to the Commission before issuing guidance, policy statements, or exemptive, interpretive, or no-action letters. Any commissioner could then request a meeting of the Commission to consider the proposed action, which would stay the action. Staff guidance would comply with notice and comment provisions of the Administrative Procedure Act. Original jurisdiction over the review of final CFTC rules would be committed to the U.S. Court of Appeals for the District of Columbia Circuit or the circuit where the party resides, which would parallel judicial review of SEC rules. In addition, the cost-benefit analysis provisions of the Commodity Exchange Act would be harmonized with executive order 13563, and cost-benefit analyses would be performed by the Chief Economist and published within the proposed rule.

Title III of the bill would provide relief for swaps end users, excluding them from the definition of financial entity and clarifying that initial and variation margin requirements do not apply to swaps in which one counterparty is an end user. Public reporting for illiquid swaps would be delayed and recordkeeping requirements would be reduced for non-registered members of contract markets. Inter-affiliate swaps would not have to be cleared if a credit support measure is used.

Bipartisan support. In the hearing, Chairman Lucas said the bipartisan bill addresses some of the concerns the committee has heard over the past couple of years, especially from agricultural producers and end users. Ranking Member Peterson agreed that the legislation addressed some concerns that have arisen, and said he’s proud that the Agriculture Committee is demonstrating to the rest of Congress that it’s possible to get things done on a bipartisan basis. Although the rulemaking process has been confusing and longer than he would like, he does not see any reason to dismantle the Dodd-Frank Act.

Amendments. Several members offered and then withdrew amendments. Rep. Bob Goodlatte (R-Va.) said he was looking at concerns about the supply of aluminum, as the London Metal Exchange (LME) allows warehouses to hold the metal for a long period of time and charge purchasers rent during that time, causing the price of aluminum to go up despite sufficient supply. There have been reports of delivery being held up longer than 600 days and there are concerns that the CFTC has been slow to act on this. His amendment would require the CFTC to report annually on its actions in response to the issue. However, he withdrew the amendment after reaching an agreement with Chairman Lucas that this would be looked at.

Rep. Conaway offered an amendment that would put a sunset date on every rule the CFTC issues, requiring the Commission to act to preserve a rule. He was not prepared to vote on the amendment, but “wanted to start the conversation.” Rep. Steve King (R-Iowa) said he supported the amendment and that it was consistent with a bill he has introduced several times, the Sunset Act. Rep. John Garamendi (D-Cal.) cautioned that this could have unintended consequences and that the pending uncertainty could cause chaos.

CFTC resources. Rep. Scott said it was a “well-crafted bipartisan bill,” adding that it was important to make sure that the CFTC has the funding and resources it needs, because implementation of the Dodd-Frank Act has put a strain on the agency’s resources. The bill helps protect customers, and gives end users relief. “It’s a good, good bill and I urge my colleagues to support this bill as we have it today,” he said.

FIA statement. In a statement, the derivatives industry association FIA commended the committee on the bill. “While the process of enacting these statutory changes is far from complete, such thoughtful coordination among the various political interests is critical to ensuring that the final product yields a balanced outcome.”

MainStory: TopStory CFTCNews CommodityFutures Derivatives Swaps

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