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From Securities Regulation Daily, June 24, 2014

House passes CFTC reauthorization and derivatives end-user relief legislation by bi-partisan vote

By Jim Hamilton, J.D., LL.M.

The House passed H.R. 4413, the Customer Protection and End User Relief Act, authored by Agriculture Committee Chair Frank Lucas (R-Okla.), by a bi-partisan vote of 265 to 144, with 46 Democrats voting for the bill. The House passed a floor amendment, sponsored by Rep. Scott Garrett (R-N.J.), which exempts SEC-registered investment companies from duplicative registration requirements with the CFTC.

Floor amendment. The SEC would continue to have full regulatory oversight and enforcement authority over registered investment companies. The amendment would not remove the jurisdiction and regulatory authority that the CFTC has over all futures, options and swaps transactions that the registered investment companies invest in on behalf of their customers who are pensioners, retirees, and savers. The Garrett Amendment passed by a bi-partisan vote of 252 to 158, with 33 Democrats voting for the amendment.

Rep. Garrett assured that the amendment would not, in any way, change the extent to which all commodity transactions are subject to the transaction level requirements of regulation, such as reporting, clearing, trading, and even margin. The amendment simply eliminates the duplicative regulatory and registration costs faced by these funds (Cong. Record, June 23, 2014, p. 5636).

Commodity Exchange Act. In addition to reauthorizing the CFTC, H.R. 4413 would also amend the Commodity Exchange Act (CEA) to allow many end-users who are legitimate commercial-market participants to avoid being unfairly treated as financial entities. The measure provides relief for end-users who use contracts that result in actual physical delivery of a commodity that has an imbedded option to change the amount of a commodity delivered. This impacts utilities that use natural gas to produce electricity, in addition to millions of consumers who use natural gas to heat their homes.

The legislation would also reform CFTC processes to make it more efficient and effective and to ensure that all commissioners have a voice in the rulemaking process. The legislation makes the CFTC more responsive and accountable to each Commissioner, and ensures that each Commissioner, not just the Chair, is given a greater voice on Commission and staff activities. It also creates and defines the Office of Chief Economist to provide every Commissioner with objective economic data and analysis.

Cost-benefit analysis. H.R. 4413 would require a cost-benefit analysis for each proposed CFTC rule, which closely tracks President Obama’s Executive Order No. 13563 for the entire executive branch. The executive order set out general requirements directed to executive agencies concerning public participation, integration and innovation, and flexible approaches. It also reaffirmed that executive agencies should conduct a cost-benefit analysis of regulations.

Rep. C. Michael Conaway (R-Tex.), Chair of the Commodities Subcommittee of the House Ag Committee, noted that one of the most important changes the bill makes is to require a meaningful quantification of the costs and benefits of a rule when it is first proposed. This analysis, done by the CFTC Chief Economist, will strengthen the rulemaking process and will result in better regulations and safer markets. This small mandate on the economists at the CFTC will ensure that regulatory burdens are justified in the real world, said Rep. Conaway, not just in the pages of the Federal Register. Rules that reflect the impact of a proper cost-benefit analysis will be better accepted by those being regulated and may result in less acrimony during the rulemaking process (Cong. Record, June 23, 2014, p. 5620).

A bi-partisan amendment ensures that the Commission’s assessment of costs and benefits regarding rules and orders will be affirmed by a court unless that assessment is found to be an abuse of discretion. It was sponsored by Rep. Suzan DelBene (D-Wash.), rep. Chris Gibson (R-N.Y.) and Rep. Juan Vargas (D-Cal.). As explained by Rep. DelBene, the amendment simply states that a court shall affirm the CFTC's assessment of the costs and benefits of a rule. This would have the practical impact of limiting the ability of individuals and firms to challenge the CFTC in court in an attempt to stop a rule from being implemented based on the cost-benefit analysis. The amendment also provides for an exception in the case of an abuse of discretion by the Commission. If no such abuse occurs, a court must uphold the CFTC's assessment (Cong. Record, June 23, 2014, p. 5631).

H.R. 4413 would also direct the CFTC to examine the effect of high-frequency trading upon markets under its jurisdiction. An amendment offered by Rep. Peter DeFazio (D-Or.) added one requirement to the study on high frequency trading, which is whether such trading increases market volatility, including short term market swings such as the flash crash.

An amendment offered by Rep. Stephen Fincher (R-Tenn.) directed the Comptroller General to conduct a study of the efficiencies in leasing and rental costs at the Commodity Futures Trading Commission.

Statement of Administration Policy. The White House issued a Statement of Policy (SOP) strongly opposing the passage of H.R. 4413 because it undermines the efficient functioning of the CFTC by imposing a number of organizational and procedural changes and offers no solution to address the persistent inadequacy of the agency's funding. The CFTC is one of only two Federal financial regulators funded through annual discretionary appropriations, noted the SOP, and the funding the Congress has provided for it over the past four years has failed to keep pace with the increasing complexity of the financial markets.

MainStory: TopStory CommodityFutures

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