[House Report 112-482]
[From the U.S. Government Publishing Office]
112th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 112-482
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IMPROVEMENT OF CONSIDERATION BY THE COMMODITY FUTURES TRADING
COMMISSION OF THE COSTS AND BENEFITS OF ITS REGULATIONS AND ORDERS
_______
May 16, 2012.--Committed to the Committee of the Whole House on the
State of the Union and ordered to be printed
_______
Mr. Lucas, from the Committee on Agriculture,
submitted the following,
R E P O R T
[To accompany H.R. 1840]
[Including cost estimate of the Congressional Budget Office]
The Committee on Agriculture, to whom was referred the bill
(H.R. 1840) to improve consideration by the Commodity Futures
Trading Commission of the costs and benefits of its regulations
and orders, having considered the same, report favorably
thereon without amendment and recommend that the bill do pass.
Brief Explanation
The bill amends Section 15(a) of the Commodity Exchange Act
(CEA) to increase the legal standard by which the Commodity
Futures Trading Commission (CFTC) must conduct cost-benefit
analysis prior to promulgating a rule or Commission order.
Purpose and Need
In the 112th Congress, the Committee has held seven
hearings, four Full Committee and three General Farm
Commodities and Risk Management Subcommittee hearings to
examine the implementation of Title VII of the Dodd-Frank Act
and one Full Committee hearing to examine legislative proposals
related thereto. The Committee took testimony from witnesses
that represented a broad spectrum of participants in the
derivatives markets. Across the spectrum of expertise, an
overwhelming majority of witnesses expressed concerns that the
CFTC was not adequately examining the costs and benefits of its
proposed regulations, and as a result, many of the proposals
could impose costs on market participants that would far
outweigh the benefits. Witnesses testified that the Commission
would frequently make no attempt to quantify the costs and
benefits, or the estimates they would provide were
exponentially lower than cost estimates calculated by effected
entities--in some cases 63 times lower.
Section 15(a) of the CEA sets forth requirements for the
Commodity Futures Trading Commission (CFTC) to consider the
costs and benefits of Commission actions. However, in
boilerplate language in each proposed rule, the CFTC identifies
the limitations of Section 15(a) in requiring cost benefit
analysis by stating: ``By its terms, Section 15(a) does not
require the Commission to quantify the costs and benefits of an
order to determine whether the benefits of the order outweigh
the costs; rather, it requires that the Commission ``consider''
the costs and benefits of its actions''
(http://www.agriculture.house.gov/pdf/reports/
CFTC_IGreport.pdf).
Consequently, the CFTC's Inspector General, at the request
of the Chairman, conducted an investigation into the
Commission's cost benefit analysis. In its report issued in
April of 2011, the Inspector General concluded: ``. . . it is
clear that the Commission staff viewed section 15(a) compliance
to constitute a legal issue more than an economic one, and the
views of the Office of General Counsel therefore trumped those
expressed by the Office of the Chief Economist . . . We do not
believe this approach enhanced the economic analysis
performed.''
In early 2011, President Obama issued an Executive Order
``Improving Regulation and Regulatory Review'' (http://www.
white house.gov/the- press- office/2011/01/18/improving-
regulation- and-
regulatory-review-executive-order). The Executive Order laid
forth specific and extensive instructions for federal agencies
in performing cost benefit analysis associated with new
regulations. However, the CFTC as an independent federal agency
is not subject to the President's Order, and when questioned in
a hearing whether the CFTC would voluntarily comply, the
Chairman of the CFTC, Gary Gensler, stated that it was
inconsistent with the legal standard set forth in Section
15(a).
The Dodd-Frank Wall Street Reform and Consumer Protection
Act drastically expanded the CFTC's authority over the
derivatives markets. The CFTC is now the principal regulator of
the swaps markets--markets that are used by businesses of all
shapes and sizes in every sector of the economy. New rules
promulgated by the CFTC will have far more wide reaching
impacts on the economy, and it is critical that the CFTC have
clear legal directives that require it to thoroughly examine
the costs and benefits of each of its actions.
H.R. 1840 raises the legal standard for cost-benefit
analysis, incorporating the directives that were included in
the President's Executive Order. These include directives to
quantify the costs and benefits, incorporate the Chief
Economist in analyses and evaluate whether the regulations are
inconsistent with or duplicative of other federal regulations.
In addition, one of the standards in Section 15(a) requires the
Commission to consider ``the efficiency, competitive and
financial integrity of futures markets.'' Because Dodd-Frank
gave the CFTC authority over swaps, H.R. 1840 extends the
current law directive to cover the swaps markets as well.
Section-by-Section
Section 1 amends the Commodity Exchange Act to require the
CFTC, through the office of the Chief Economist, to assess the
cost and benefits of a regulation or order before it's
promulgated. In performing the assessment the Chief Economist
shall consider protection of the market participants and the
public; the efficiency, competitiveness and financial integrity
of futures and swap markets; the impact on the futures and
swap's market liquidity; price discovery; risk management
practices; available alternatives to direct regulation; the
degree and nature of the risks posed by various activities
within the scope of the Commission's jurisdiction; whether the
regulation or rule is tailored to impose the least burden on
society; whether it is inconsistent or duplicative of other
federal regulations; whether the approach taken maximizes net
benefits and other public interest considerations.
Committee Consideration
I. HEARINGS
In the 112th Congress, the Committee has held seven
hearings, four Full Committee and three General Farm
Commodities and Risk Management Subcommittee hearings to
examine the implementation of Title VII of the Dodd-Frank Act
and one Full Committee hearing to examine legislative proposals
related thereto, including H.R. 1840. The Committee took
testimony from witnesses that represented a broad spectrum of
participants in the derivatives markets.
Public hearing to review implementation of title VII
of the Dodd-Frank Wall Street Reform and Consumer
Protection Act: February 10, 2011
Public hearing to review implementation of title VII
of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, Part II: February 15, 2011
Defining the Market: Entity and Product
Classifications Under Title VII of the Dodd-Frank Wall
Street Reform and Consumer Protection Act: March 31,
2011
Implementing Dodd-Frank: A Review of the CFTC's
Rulemaking Process: Apr 13, 2011
Harmonizing Global Derivatives Reform: Impact on U.S.
Competitiveness and Market Stability: May 25, 2011
Derivatives Reform: The View from Main Street: July
21, 2011
To review legislative proposals amending Title VII of
the Dodd-Frank Wall Street Reform and Consumer
Protection Act: October 12, 2011
Public hearing to review the Commodity Futures
Trading Commission 2012 Agenda: February 29, 2012
In each hearing, witnesses discussed concerns regarding
inadequate or altogether absent cost-benefit analysis or
proposed rules by the CFTC.
For example, on October 12, 2011, Ms. Brenda Boultwood of
Constellation Energy, representing the Coalition for
Derivatives End-Users, testified:
``We firmly believe that rigorous cost-benefit
analysis creates better rules. By first analyzing how a
regulation will affect individuals, companies, other
stakeholders, and the integrity of the overall market,
a regulatory agency can avoid making the mistake of
putting a rule in place that has adverse and unintended
effects. The CFTC is subject to a cost-benefit analysis
requirement, but it does not require the regulator to
consider such key factors as available alternatives to
regulation, whether the regulation is tailored to
impose the least burden possible while achieving its
goals, and whether the regulation maximizes net
benefits. These and other factors would be required to
be considered under the Conaway-Quigley bill.''
On April 13, 2011 Mr. James Overdahl, of the National
Economic Research Associates testified:
``The CFTC does not have a formal requirement for
including economic analysis in the rulemaking process,
aside from the requirements of the Regulatory
Flexibility Act and the cost benefit requirements of
the Paperwork Reduction Act (PRA). However, the
analysis required in the PRA applies only to a rule's
paperwork burden, and does not include an analysis of
broader economic effects of a rule.''
On April 13, 2011 Mr. Terrence Duffy, of the CME Group
testified:
``The explicit cost-benefit analysis included in the
more than thirty rulemakings to date and the
Commission's testimony in a number of congressional
hearings indicate that those responsible for drafting
the rule proposals are operating under the mistaken
interpretation that Section 15(a) of the CEA excuses
the Commission from performing any analysis of the
direct, financial costs and benefits of the proposed
regulation. Instead, the Commission contends that
Congress permitted it to justify its rule making based
entirely on speculation about unquantifiable benefits
to some segment of the market. The drafters of the
proposed rules have consistently ignored the
Commission's obligation to fully analyze the costs
imposed on third parties and on the agency by its
regulations.''
II. FULL COMMITTEE
The Committee on Agriculture met, pursuant to notice, with
a quorum present, on January 25, 2012, to consider H.R. 1840,
to improve consideration by the Commodity Futures Trading
Commission of the costs and benefits of its regulations and
order, and other pending business. Chairman Lucas offered an
opening statement, as did Ranking Member Peterson, Mr. Conaway
and Mr. Boswell.
By unanimous consent, the Subcommittee on General Farm
Commodities and Risk Management was discharged from further
consideration and the bill, H.R. 1840 was placed before the
Committee for consideration and without objection a first
reading of the bill was waived and it was opened for amendment
at any point.
There being no amendments, the Peterson motion to report
the bill favorably to the House with the recommendation that it
do pass was adopted by a voice vote.
The Committee then moved on to the other pending business,
where at the conclusion of the meeting, Chairman Lucas advised
Members that pursuant to the rules of the House of
Representatives that Members have 2 calendar days to file such
views with the Committee.
Without objection, staff was given permission to make any
necessary clerical, technical or conforming changes to reflect
the intent of the Committee.
Chairman Lucas thanked all the Members and adjourned the
meeting.
Reporting the Bill--Rollcall Votes
In compliance with clause 3(b) of rule XIII of the House of
Representatives, H.R. 1840 was reported by voice vote with a
majority quorum present. There was no request for a recorded
vote.
Committee Oversight Findings
Pursuant to clause 3(c)(1) of rule XIII of the Rules of the
House of Representatives, the Committee on Agriculture's
oversight findings and recommendations are reflected in the
body of this report.
Budget Act Compliance (Sections 308, 402, and 423)
The provisions of clause 3(c)(2) of rule XIII of the Rules
of the House of Representatives and section 308(a)(1) of the
Congressional Budget Act of 1974 (relating to estimates of new
budget authority, new spending authority, new credit authority,
or increased or decreased revenues or tax expenditures) are not
considered applicable. The estimate and comparison required to
be prepared by the Director of the Congressional Budget Office
under clause 3(c)(3) of rule XIII of the Rules of the House of
Representatives and sections 402 and 423 of the Congressional
Budget Act of 1974 submitted to the Committee prior to the
filing of this report are as follows:
U.S. Congress,
Congressional Budget Office,
Washington, DC, April 9, 2012.
Hon. Frank D. Lucas,
Chairman, Committee on Agriculture,
House of Representatives, Washington, DC.
Dear Mr. Chairman: The Congressional Budget Office has
prepared the enclosed cost estimate for H.R. 1840, a bill to
improve consideration by the Commodity Futures Trading
Commission of the costs and benefits of its regulations and
orders.
If you wish further details on this estimate, we will be
pleased to provide them. The CBO staff contact is Susan Willie.
Sincerely,
Douglas W. Elmendorf,
Director.
Enclosure.
H.R. 1840--A bill to improve consideration by the Commodity Futures
Trading Commission of the costs and benefits of its regulations
and orders
Summary: H.R. 1840 would direct the Commodity Futures
Trading Commission (CFTC) to assess both costs and benefits of
a proposed regulation, adopting such regulation only if the
agency determines that the estimated benefits justify the
estimated costs. The bill also would broaden the items to
consider in developing costs and benefits including, among
other things, alternatives to direct regulation.
Based on information from the CFTC, CBO estimates that
implementing H.R. 1840 would cost $27 million over the 2013-
2017 period, assuming appropriation of the necessary amounts.
Enacting H.R. 1840 would not affect direct spending or
revenues; therefore, pay-as-you-go procedures do not apply.
H.R. 1840 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA)
and would not affect the budgets of state, local, or tribal
governments.
Estimated cost to the Federal Government: The estimated
budgetary impact of H.R. 1840 is shown in the following table.
The costs of this legislation fall within budget function 370
(commerce and housing credit).
----------------------------------------------------------------------------------------------------------------
By fiscal year, in millions of dollars--
-------------------------------------------------------
2013 2014 2015 2016 2017 2013-2017
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CHANGES IN SPENDING SUBJECT TO APPROPRIATION
Estimated Authorization Level........................... 3 6 6 6 7 28
Estimated Outlays....................................... 3 6 6 6 6 27
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Basis of estimate: For this estimate, CBO assumes that the
bill will be enacted before the end of 2012, the necessary
amounts will be appropriated each year, and spending will
follow historical trends for the affected activities.
H.R. 1840 would expand the analysis that the CFTC must
perform in developing new regulations or issuing orders. Under
current law, the agency undertakes an analysis of the estimated
costs and benefits that would result from a proposed
regulation; H.R. 1840 would require the agency to consider
additional factors in this analysis and restrict the agency to
adopting regulations only when the analysis determines that the
benefits justify the costs.
Based on information from the CFTC, CBO estimates that the
agency would need an additional 25 positions to handle the
increased workload under the bill. CBO estimates that
implementing H.R. 1840 would cost $27 million over the 2013-
2017 period, assuming appropriation of the necessary amounts.
Pay-As-You-Go Considerations: None.
Intergovernmental and private-sector impact: H.R. 1840
contains no intergovernmental or private-sector mandates as
defined in UMRA and would not affect the budgets of state,
local, or tribal governments.
Estimate prepared by: Federal Costs: Susan Willie; Impact
on State, Local, and Tribal Governments: Elizabeth Cove
Delisle; Impact on the Private Sector: Paige Piper/Bach.
Estimate approved by: Peter H. Fontaine, Assistant Director
for Budget Analysis.
Performance Goals and Objectives
With respect to the requirement of clause 3(c)(4) of rule
XIII of the Rules of the House of Representatives, the
performance goals and objectives of this legislation are to
improve consideration by the Commodity Futures Trading
Commission of the costs and benefits of its regulations and
others.
Constitutional Authority Statement
The Committee finds the Constitutional authority for this
legislation in Article I, section 8, clause 18, that grants
Congress the power to make all laws necessary and proper for
carrying out the powers vested by Congress in the Constitution
of the United States or in any department or officer thereof.
Committee Cost Estimate
Pursuant to clause 3(d)(2) of rule XIII of the Rules of the
House of Representatives, the Committee report incorporates the
cost estimate prepared by the Director of the Congressional
Budget Office pursuant to sections 402 and 423 of the
Congressional Budget Act of 1974.
Advisory Committee Statement
No advisory committee within the meaning of section 5(b) of
the Federal Advisory Committee Act was created by this
legislation.
Applicability to the Legislative Branch
The Committee finds that the legislation does not relate to
the terms and conditions of employment or access to public
services or accommodations within the meaning of section
102(b)(3) of the Congressional Accountability Act (Public Law
104-1).
Federal Mandates Statement
The Committee adopted as its own the estimate of Federal
mandates prepared by the Director of the Congressional Budget
Office pursuant to section 423 of the Unfunded Mandates Reform
Act (Public Law 104-4).
Earmark Statement Required by Clause 9 of Rule XXI of the Rules of
House of Representatives
H.R. 1840 does not contain any congressional earmarks,
limited tax benefits, or limited tariff benefits as defined in
clause 9(e), 9(f), or 9(g) of rule XXI of the Rules of the
House Representatives.
Changes in Existing Law Made by the Bill, as Reported
In compliance with clause 3(e) of rule XIII of the Rules of
the House of Representatives, changes in existing law made by
the bill, as reported, are shown as follows (existing law
proposed to be omitted is enclosed in black brackets, new
matter is printed in italic, existing law in which no change is
proposed is shown in roman):
COMMODITY EXCHANGE ACT
* * * * * * *
SEC. 15. CONSIDERATION OF COSTS AND BENEFITS AND ANTITRUST LAWS.
(a) Costs and Benefits.--
[(1) In general.--Before promulgating a regulation
under this Act or issuing an order (except as provided
in paragraph (3)), the Commission shall consider the
costs and benefits of the action of the Commission.
[(2) Considerations.--The costs and benefits of the
proposed Commission action shall be evaluated in light
of--
[(A) considerations of protection of market
participants and the public;
[(B) considerations of the efficiency,
competitiveness, and financial integrity of
futures markets;
[(C) considerations of price discovery;
[(D) considerations of sound risk management
practices; and
[(E) other public interest considerations.]
(1) In general.--Before promulgating a regulation
under this Act or issuing an order (except as provided
in paragraph (3)), the Commission, through the Office
of the Chief Economist, shall assess the costs and
benefits, both qualitative and quantitative, of the
intended regulation and propose or adopt a regulation
only on a reasoned determination that the benefits of
the intended regulation justify the costs of the
intended regulation (recognizing that some benefits and
costs are difficult to quantify). It must measure, and
seek to improve, the actual results of regulatory
requirements.
(2) Considerations.--In making a reasoned
determination of the costs and the benefits, the
Commission shall evaluate--
(A) considerations of protection of market
participants and the public;
(B) considerations of the efficiency,
competitiveness, and financial integrity of
futures and swaps markets;
(C) considerations of the impact on market
liquidity in the futures and swaps markets;
(D) considerations of price discovery;
(E) considerations of sound risk management
practices;
(F) available alternatives to direct
regulation;
(G) the degree and nature of the risks posed
by various activities within the scope of its
jurisdiction;
(H) whether, consistent with obtaining
regulatory objectives, the regulation is
tailored to impose the least burden on society,
including market participants, individuals,
businesses of differing sizes, and other
entities (including small communities and
governmental entities), taking into account, to
the extent practicable, the cumulative costs of
regulations;
(I) whether the regulation is inconsistent,
incompatible, or duplicative of other Federal
regulations;
(J) whether, in choosing among alternative
regulatory approaches, those approaches
maximize net benefits (including potential
economic, environmental, and other benefits,
distributive impacts, and equity); and
(K) other public interest considerations.
* * * * * * *