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From Securities Regulation Daily, May 14, 2015

House Ag Committee approves CFTC reauthorization over Ranking Member’s protests

By Anne Sherry, J.D.

The House Committee on Agriculture approved H.R. 2289, the Commodity End-User Relief Act, during this morning’s markup session. The Act would reauthorize the CFTC, reform certain of its operations, and install relief for end-users. Although support was nominally bipartisan, Ranking Member Collin Peterson (D-Minn) vocally opposed the bill and most amendments, protesting that it goes far beyond the simple reauthorization that is needed and could actually inhibit the CFTC’s functioning.

H.R. 2289. The CFTC’s last reauthorization, through the 2008 Farm Bill, expired in September 2013. The Commodity End-User Relief Act would reauthorize the Commission as well as require changes to its operations and install customer protections. Title I, a reaction to the frauds by Peregrine Financial and MF Global, would impose new requirements on regulators and firms. Title II would reform certain CFTC processes, notably by modifying the requirements of its cost-benefit analysis for rulemaking. Title III would provide relief to end users to ensure that market participants are not burdened by recent regulatory and clearing requirements. “Our end users did not cause the financial meltdown,” David Scott (D-Ga) emphasized in his opening remarks.

Specifically, new protections in the Act would require regulators to electronically confirm customer fund account balances held at depository institutions, closing a gap that allowed Peregrine Financial to forge documents to further its fraud. In order to prevent another MF Global situation, firms would have to follow reporting and permission requirements before moving a certain percentage of customer funds from one account to another. Firms would also have to notify regulators if they are undercapitalized, and chief compliance offers of a futures commission merchant would be required to submit an annual report to regulators assessing the FCM’s internal compliance programs. Customers would have a full business day to send margin payments to an FCM and would enjoy legal clarity that the assets of a bankrupt commodity broker would be used to repay misappropriated or illegally transferred customer segregated funds.

Title II would rework the CFTC’s operations, including the creation of a new Office of the Chief Economist. The marked-up bill would amend the Commodity Exchange Act to require the CFTC to publish the results of its rulemaking cost-benefit analyses and would direct courts to affirm and enforce the resulting rules unless the Commission abused its discretion or authority. Finally, Title III would relieve companies using centralized treasury units to manage affiliate risk of clearing requirements; ensure that commercial end-users are not considered financial entities; protect the identity of nonfinancial end-users hedging in thinly-traded markets; and reduce the recordkeeping burden on certain market participants. It would also amend the CEA to remove indemnification requirements for foreign regulators and codify government-owned utilities’ access to nonfinancial commodity swaps.

Ranking Member’s opposition. Ranking Member Peterson introduced an amendment to strip away what he called “unnecessary and extraneous” items in the bill and bring it closer to a clean reauthorization of the CFTC. In his view, the committee’s issues with the former leadership of the Commission are being “relitigated” in the bill. Chairman K. Michael Conaway (R-Tex) pointed out that the cost-benefit analysis provided for in the bill is essentially the same as that contained in H.R. 4413 in the last Congress, which Ranking Member Peterson cosponsored. David Scott (D-Ga) added that the cost-benefit provisions do not mandate that the benefits outweigh the costs; they simply direct the Commission to consider the efficiency, competitiveness, and financial integrity of the futures and swaps markets.

Ranking Member Peterson clarified that the cost-benefit analysis is not what led him to change his mind, but rather other additions to the bill that “will muck things up at the Commission” and the ten amendments from both sides of the aisle. He also doubted that CFTC Chairman Timothy Massad would be happy about the changes to the CFTC’s operations. Indeed, Massad wrote to Chairman Conaway to oppose the bill, the Wall Street Journal reports.

Ranking Member Peterson also disagrees with the provisions of the bill directing the Commission to issue a rule addressing the registration and regulation of non-U.S. persons engaging in swaps activities. Praising Chairman Massad’s negotiations with foreign regulators to achieve a cross-border regulatory regime, Ranking Member Peterson said that the cross-border provisions in the bill could “cut the Chairman off at the knees” by promising substituted compliance to foreign companies in the midst of these ongoing negotiations.

A stick for the E.U. David Scott (D-Ga) emphasized the need to respond to the European Commission’s position on U.S. margin requirements. The European Commission recently granted equivalent status to several Asian jurisdictions, including Singapore, which has the same margin regime as the United States, he said. Representative Scott, who is the Ranking Member of the Subcommittee on Commodity Exchanges, Energy, and Credit, supported an amendment to the bill that would allow the CFTC to withhold exemptions to jurisdictions that do not recognize U.S. equivalency. The cost of clearing futures on U.S. markets will increase significantly on June 15, he said, and the adopted amendment introduced by Mike Bost (R-Ill) “will send a message to our European friends to treat U.S. companies with the same respect that we treat [them].” Sean Patrick Maloney (D-NY) also spoke out in support, calling the E.U.’s failure to afford equivalency “outrageous.”

Aluminum. Bob Goodlatte (R-Va) introduced an amendment that would prevent unreasonable delay in the delivery of aluminum to warehouses. The CFTC would be required to report on this issue to Congress within 90 days of enactment. End users have to wait months, if not years, for delivery of aluminum when other commodities are delivered in a matter of days, added Dan Newhouse (R-Wash). Jackie Walorski (R-Ind) voted against this amendment, cautioning that when studies and reviews are on the table, more diligence is necessary to ensure complete fairness, transparency, and openness. The committee adopted the amendment.

Other amendments. An amendment submitted by Frank D. Lucas (R-Okla) that would require the CFTC to put procedures in place to safeguard sensitive data passed easily. Suzan DelBene (D-Wash) also secured an amendment that would require courts to uphold the CFTC’s cost-benefit assessment in the absence of abuse. If Congress is going to require the CFTC to undertake a formal analysis, it should not allow the rules to get caught up in litigation at the eleventh hour, she said. The committee also passed an amendment to address dual SEC/CFTC registration by SEC-registered investment companies that also need to register as commodity pool operators with the CFTC. Nonprofit organizations would likewise be exempt from registration as commodity pool operators under the marked-up bill.

The bill, as amended, would clarify that the CFTC’s exemptions of small bank and savings associations will include the holding companies of those associations; ease capital requirements and monitoring responsibilities of swap execution facilities; and clarify that Federal Home Loan Bank advancements to financial institutions are financial products and not derivatives. Ranking Member Peterson initially opposed this amendment, but agreed to support it after its sponsor, Rep. Lucas, offered to work with the Ranking Member to refine the language.

Better Markets response. Better Markets opposes the legislation. In a statement, President and CEO Dennis Kelleher likened it to Alice in Wonderland in that it amounts to “indefensibly outsourcing the protection of U.S. taxpayers to foreign regulators who have repeatedly failed to protect their own taxpayers.” Instead of rolling back financial reforms by deregulating Wall Street, Congress should “fully fund the CFTC cops on the Wall Street derivatives beat,” Kelleher argued.

MainStory: TopStory CommodityFutures Derivatives Swaps ClearanceSettlement ExchangesMarketRegulation

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