[House Report 113-469]
[From the U.S. Government Publishing Office]
113th Congress Report
HOUSE OF REPRESENTATIVES
2d Session 113-469
======================================================================
FUTURES CUSTOMER PROTECTION ACT
_______
June 5, 2014.--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. 4413]
[Including cost estimate of the Congressional Budget Office]
The Committee on Agriculture, to whom was referred the bill
(H.R. 4413) to reauthorize the Commodity Futures Trading
Commission, to better protect futures customers, to provide end
users with market certainty, to make basic reforms to ensure
transparency and accountability at the Commission, to help
farmers, ranchers, and end users manage risks to help keep
consumer costs low, and for other purposes, having considered
the same, report favorably thereon without amendment and
recommend that the bill do pass.
Brief Explanation
Title I--Customer Protections
The Customer Protection and End-User Relief Act, H.R. 4413,
will better protect farmers and ranchers who use the futures
markets by cementing several new regulatory customer
protections into law. Added protections include mandates to:
Require electronic confirmation of customer fund
account balances held at depository institutions. No longer
will the fraud that occurred at Peregrine Financial be allowed
to occur due to forged paper documents.
Require firms that move more than a certain
percentage of customer funds from one account to another to
follow strict reporting and permission requirements before
doing so. No longer will a firm be able to move funds from one
account to another, as happened during the MF Global
bankruptcy, without regulators knowing about it.
Require firms who become undercapitalized to
immediately notify regulators so they can assess the firm's
viability and act, if needed, to protect customer funds.
Require firms to file an annual report with
regulators from the chief compliance officer containing an
assessment of a futures commission merchant's (FCM) internal
compliance programs.
Ensures farmers, ranchers, and other futures
customers have an additional day to get their needed margin to
an FCM, which mitigates the effect of pre-funding accounts.
Provide legal clarity for futures customers that
the assets of a bankrupt commodity broker would be used to help
pay back any misappropriated or illegally transferred customer
segregated funds.
Require firms to calculate and report customer
account balances electronically to regulators on a regular
basis.
Require the CFTC to complete a study on high
frequency trading.
Title II--Commodity Futures Trading Commission Reforms
Since the enactment of the Dodd-Frank Wall Street Reform
and Consumer Protection Act (P.L. 111-203) (the Dodd-Frank Act)
in July of 2010, the U.S. Commodity Futures Trading Commission
(CFTC) has finalized over 60 new rules to enforce the new law
and has issued an unprecedented 170 ``no-action'' letters in
that same span of time to delay, revise, or exempt application
of these regulations upon various market participants. The
rulemaking process has proven confusing given the lack of a
comprehensive plan for setting a schedule for compliance. In
addition, the prolific use of no-action letters by the
Commission to revisit new Dodd-Frank Act regulations have been
used in lieu of a more thorough rulemaking process. H.R. 4413
makes basic reforms to the CFTC to help make it more effective
and ensures that all Commissioners' voices are heard in the
rulemaking process. These reforms include:
Modifying the Commodity Exchange Act's (CEA's)
cost-benefit analysis requirements for proposed rules, to
closely track President Obama's Executive Order 13563 for the
entire executive branch.
Making the Commission's division directors
answerable to the entire Commission, not just the Chairman's
office.
Creating a new Office of the Chief Economist,
answerable to the entire Commission, to provide objective
economic data and analysis.
Enhancing the CFTC staff procedures governing the
issuance of ``no-action'' or interpretive letters to improve
Commission oversight of the process and to prevent staff from
being able to issue letters at the last moment in an attempt to
regulate or deregulate markets outside of the official CFTC
rulemaking process without the possibility of Commission
review.
Requiring the Commission and the Office of the
Chief Economist to develop comprehensive internal risk control
mechanisms to safeguard and govern all market data storage, all
market data sharing agreements, and all academic research using
market data.
Creating a judicial review process similar to that
of the SEC's for rulemakings to ensure the two regulators
charged with overseeing the derivatives markets have similar
procedures in place to allow market participants to challenge
Commission rules.
Directing the Government Accountability Office
(GAO) to conduct a study on the sufficiency of CFTC resources
and examine prior expenditures of funds on market surveillance
and market data collection, standardization, and harmonization.
Title III--End-User Relief
Title III of the Customer Protection and End-User Relief
Act was developed in response to the CFTC's implementation of
the Dodd-Frank Act. Many of the CFTC's new rules have
negatively impacted end-users, such as our farmers, ranchers,
manufacturers, and utilities, by making it more difficult and
costly to manage risks associated with their businesses.
Despite America's end-users representing 94 percent of the job
creators in the United States, they comprise only 10 percent of
the swaps markets. Even though Congress intended to exempt end-
users from some of the most costly new regulations associated
with using derivatives during consideration of the Dodd-Frank
Act, the CFTC has narrowly interpreted the law. As a result,
the ability of producers to affordably protect against risks
associated with farming and ranching has been threatened. Title
III addresses the following concerns:
True commercial end-users should not be treated as
financial entities. The bill amends the CEA to allow many end-
users who are legitimate ``commercial market participants'' to
avoid being inadvertently classified as financial entities.
Certain non-financial end-users should not be
disadvantaged in the marketplace if they use contracts that
trade infrequently. This issue has cost certain end-users
millions of dollars in fuel hedging costs because their
identifiable positions in thinly-traded markets are immediately
reported to the marketplace.
The bill provides relief to grain elevators,
farmers, agriculture counterparties, and commercial market
participants from burdensome and unnecessarily costly
recordkeeping rules that currently require the recording of all
forms of communication that may possibly lead to a trade.
Instead, the bill specifies that keeping searchable written
records of the final material economic terms of an agreement
will be sufficient.
The bill provides relief for end-users who use
contracts that result in actual physical delivery of a
commodity that has a stand-alone or embedded 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 bill corrects an illogical and unworkable
capital requirement imposed on non-bank swap dealers that would
result in those entities holding much more capital than their
bank counterparts, likely making the business too expensive,
resulting in fewer participants in the marketplace. The CFTC
now must consult with the other regulators in formulating
workable capital requirement formulas and recognize formulas
already approved by other regulators.
The bill amends the CEA to simply require a vote
by the CFTC before the swap dealer de minimis level
automatically changes from the current level of $8 billion
established by the CFTC in regulations.
The bill makes a conforming change to CFTC
regulations to bring its rules in line with the Jumpstart Our
Business Startups Act (JOBS Act) (P.L. 112-106). An oversight
in the JOBS Act omitted funds that were also registered as
Commodity Pools, and the bill allows those funds to also
solicit certain potential new investors.
The bill allows for end-users to continue to hedge
against anticipated business risks by providing a more workable
definition of bona fide hedging related to position limits.
The bill also includes CEA portions of the
following measures that passed the House Agriculture Committee
and/or the U.S. House of Representatives with overwhelming
bipartisan support:
H.R. 634, the Business Risk Mitigation and Price
Stabilization Act that passed the House on June 6,
2013, by a vote of 441-12.
An amended bipartisan version of H.R. 677, the
Inter-affiliate Swap Clarification Act, which
originally was passed by House Agriculture Committee on
March 20, 2013 by voice vote and by the Financial
Services Committee on May 7, 2013, by a vote of 50-10.
H.R. 742, the Swap Date Repository and
Clearinghouse Indemnification Act that passed the House
on June 12, 2013, by a vote of 420-2.
H.R. 1038, the Public Power Risk Management Act
that passed the House on June 12, 2013 by a vote of
423-0.
H.R. 1256, the Swap Jurisdiction Certainty Act that
passed the House on June 12, 2013, by a vote of 301-
124.
Purpose and Need
Title I--Customer Protections
When futures commission merchant (FCM) MF Global, Inc.,
failed in November of 2011 and Peregrine Financial Group, Inc.
(PFGBest), followed suit in July of 2012, thousands of farmers,
ranchers, and futures customers collectively lost more than a
billion dollars in customer funds that were thought to be
segregated by law apart from the funds of the FCMs. The
bankruptcy of these two firms, caused by gross mismanagement or
outright fraud, resulted in tremendous hardship for a large
segment of the U.S. agricultural community and created serious
public doubts about the safety of using the futures markets to
manage risk. After both failures, the Committee held half a
dozen hearings and heard from numerous witnesses over the
course of the 112th and 113th Congresses to examine why these
failures occurred and how public confidence could be restored
in the futures markets.
As a result of the Committee's work, Title I of H.R. 4413
is designed to better protect futures customers and restore
confidence in the marketplace while also providing regulators
with enhanced tools to supervise FCMs. Importantly, sections
102, 103, and 104 of H.R. 4413 would codify regulatory changes
already implemented by both the National Futures Association
(NFA) and the U.S. Commodity Futures Trading Commission (CFTC),
therefore the Committee does not intend for any of these
sections to require new rulemakings by the NFA or CFTC in order
to implement the requirements of the legislation. Section 105,
however, contains statutory changes that are in conflict with
existing CFTC regulations, so the Committee would expect
expedited action from the CFTC to conform its regulations to
the legislation when enacted into law to provide for certainty
in the marketplace.
Sec. 102--Enhanced customer protections for customers
After MF Global filed for bankruptcy, it was revealed that
in the final days before the firm's failure, customer
segregated funds (cash deposits, securities, or other property
of customers held by the firm to margin or guarantee futures
trading) were used to fund the company's liquidity needs
related to aggressive and ultimately ill-advised investments in
European sovereign debt securities. Section 102 would provide
the NFA and CFTC with the statutory authority to help supervise
and prevent future mismanagement involving the illegal transfer
of customer segregated funds.
Accordingly, Section 102 would broadly codify regulatory
changes proposed by the NFA, and approved by the CFTC in July
2012, (NFA Financial Requirements Section 16) requiring FCMs to
strengthen their controls over the treatment and monitoring of
funds held for customers trading in the U.S. (``segregated'')
and foreign (``Part 30 secured'') futures and options markets.
Notable changes contained in the new NFA rules that would meet
the statutory requirements of Section 102 include: (1) FCMs
must now hold sufficient funds in Part 30 secured accounts to
meet their total obligations to customer trading; (2) FCMs must
maintain written policies and procedures governing the
maintenance of excess (i.e., proprietary or residual) funds in
customer segregated and Part 30 secured trading accounts; (3)
any withdrawals of more than 25% of the excess segregated or
Part 30 secured funds that are not for the benefit of customers
must be pre-approved in writing by the FCM's senior management;
and (4) FCMs must file notice with the NFA of any withdrawal of
25% or more of the excess segregated or Part 30 secured amount
funds that are not for the benefit of customers.
On July 25, 2012, at a hearing entitled ``Oversight of the
Swaps and Futures Markets: Recent Events and Impending
Regulatory Reforms,'' the following testimony was provided by
witnesses with respect to NFA provisions incorporated in
Section 102:
All of these rule changes promote greater
transparency for both customers and regulators and
should help prevent a recurrence of the type of
problems we saw at MF Global. These rule changes,
however, are only the beginning. The MF Global and
Peregrine customer losses are a painful reminder that
we must continuously improve our surveillance, audit
and fraud detection techniques to keep pace with
changing technology and an ever-more-complicated
financial marketplace.--Mr. Daniel Roth, President, NFA
In direct response to the MFG collapse, the ``Corzine
Rule'' will be implemented on September 1st. The
``Corzine Rule'' requires the CEO or CFO of the FCM to
pre-approve in writing any disbursement of customer
segregated funds not made for the benefit of customers
and that exceeds 25% of the firm's excess segregated
funds. The CME (or other SROs) must be immediately
notified of the pre-approval.--Mr. Terrance A. Duffy,
Executive Chairman & President, CME Group Inc.
We also recommended and supported rules adopted by
the Chicago Mercantile Exchange and National Futures
Association that subject all FCMs to enhanced
recordkeeping and reporting obligations, including . .
. requiring the chief financial officer or other
appropriate senior officer to authorize in writing and
promptly notify the FCM's DSRO whenever an FCM seeks to
withdraw more than 25 percent of its excess funds from
the customer segregated account in any day. These
changes have now been approved by the Commission.--Hon.
Walt Lukken, President & Chief Executive Officer,
Futures Industry Association (FIA)
On March 14, 2013, at a hearing entitled ``Examining
Legislative Improvements to Title VII of the Dodd-Frank Act,''
the Hon. Gary Gensler, Chairman, U.S. Commodity Futures Trading
Commission, provided the following testimony with respect to
provisions that were ultimately included in Section 102:
The Commission also worked closely with market
participants on new customer protection rules adopted
by the self-regulatory organization (SRO), the National
Futures Association (NFA). These include requiring FCMs
to hold sufficient funds for U.S. foreign futures and
options customers trading on foreign contract markets
(in Part 30 secured accounts). Starting last year, they
must meet their total obligations to customers trading
on foreign markets under the net liquidating equity
method. In addition, withdrawals of 25 percent or more
of excess segregated funds would necessitate pre-
approval in writing by senior management and must be
reported to the designated SRO and the CFTC.
On May 21, 2013, testifying before the Committee at a
hearing entitled ``The Future of the CFTC: Market
Perspectives,'' Mr. Daniel Roth, President, NFA, provided the
following testimony with respect to the provisions included in
Section 102:
All FCMs maintain excess segregated funds. These are
funds deposited by the FCM into customer segregated
accounts to act as a buffer in the event of customer
defaults. Because these funds belong to the FCM, the
FCM is free to withdraw the excess funds, but after MF
Global, NFA and the CME adopted rules to ensure notice
to regulators and accountability within the firm. Now
all FCMs must provide regulators with immediate
notification if they draw down their excess segregated
funds by 25% in any given day. Such withdrawals must be
approved by the CEO, CFO or a financial principal of
the firm and the principal must certify that the firm
remains in compliance with segregation requirements.
This rule became effective on September 1, 2012.
Sec. 103--Electronic confirmation of customer funds
On Monday, July 9, 2012, the founder and Chairman of
Peregrine Financial Group, Inc., Russell R. Wasendorf Sr.,
unsuccessfully attempted suicide outside of the firm's Cedar
Falls, Iowa, headquarters. He left a note admitting to
producing elaborate forgeries of bank documents submitted to
regulators. In court filings the next day, the CFTC alleged
that PFGBest and Wasendorf ``committed fraud by
misappropriating customer funds, violated customer fund
segregation laws, and made false statements in financial
statements filed with the [CFTC]'' and that Wasendorf may have
falsified certain bank records. According to press reports, Mr.
Wasendorf's suicide attempt which led to the discovery of the
fraud occurred only days after the NFA first required PFGBest
to electronically confirm customer balances directly through a
third-party electronic auditing system with PFGBest's banks.
Prior to this requirement, self regulatory organizations such
as the NFA and CME had relied on paper statements from an FCM's
bank.
Section 103 would provide broad statutory authority to
codify regulatory changes first proposed in 2012 by a special
committee composed of futures industry SROs (including the CME
Group, NFA, InterContinental Exchange, the Kansas City Board of
Trade, and the Minneapolis Grain Exchange) to require: (1)
confirmation of the balances of customer segregated bank
accounts for all FCMs using a web-based electronic confirmation
process; (2) all FCMs to provide their designated-SRO with
direct online access to confirm segregated and secured funds
balances at the banks which hold the FCM's customer segregated
and secured funds; and (3) any bank that fails to provide
electronic online access will not be considered an acceptable
depository for holding customer segregated and secured funds.
Notably, in light of the PFGBest fraud, Section 103 would
also provide the statutory authority for regulations that
require FCMs to file segregation and Part 30 secured amount
computations on a daily basis with the NFA. Additionally, FCMs
must file with the NFA detailed information regarding the banks
holding customer funds and the investments made with customer
funds as of the 15th and last business day of each month.
On July 25, 2012, at a hearing entitled ``Oversight of the
Swaps and Futures Markets: Recent Events and Impending
Regulatory Reforms,'' the following testimony was provided by
witnesses with respect to provisions the Committee decided to
include in Section 103:
NFA intends to expand this approach, once it is
implemented, to receive daily reports from all
depositories for customer segregated accounts,
including clearing FCMs. We will develop a program to
compare these balances with those reported by the firms
in their daily segregation reports. While there may be
reconciling items due to pending additions and
withdrawals, the system will generate an immediate
alert for any material discrepancies. We have also
agreed with the CME to perform an immediate
confirmation of all customer segregated bank accounts
for all of our FCM Members using the e-confirmation
process I referred to earlier. The completion of this
work within the next week or so should help ensure that
another Peregrine is not lurking in the industry.--Mr.
Daniel Roth, President, NFA
First, FIA strongly supports providing regulators
with the independent ability to electronically review
and confirm customer segregated balances across every
FCM at any time. Second, FIA supports the creation of
an automated confirmation process for segregated funds
that will provide regulators with timely information
that customer funds are secure. Technology solutions
can help prevent this type of event from occurring
again.--Hon. Walt Lukken, President and Chief Executive
Officer, FIA
On October 2, 2013, testifying before the Committee at a
hearing entitled ``The Future of the CFTC: Perspectives on
Customer Protections,'' Mr. Daniel Roth, President, NFA,
provided the following testimony:
For years, NFA and other SROs confirmed FCM reports
regarding the customer segregated funds held by the FCM
through traditional paper confirmations mailed to the
banks holding those funds. These confirmations were
done as part of the annual examination process. In
early 2012 NFA began confirming bank balances
electronically through an e-confirm process. That
change led to the discovery of the fraud at PFG, but e-
confirms were still done as part of the annual
examination. We had to find a better way and we did. We
partnered with the CME and developed a process by which
NFA and the CME confirm all balances in all customer
segregated bank accounts on a daily basis. FCMs file
daily reports with NFA and the CME, reflecting the
amount of customer funds the FCM is holding. Through a
third-party vendor, NFA and CME get daily reports from
banks for the over 2,000 customer segregated bank
accounts maintained by FCMs. We then perform an
automated comparison of the reports from the FCMs and
the reports from the banks to identify any suspicious
discrepancies. In short, Mr. Chairman, the process by
which we monitor FCMs for segregated fund compliance is
now far ahead of where it was just one year ago. We
have recently expanded this system to also obtain daily
confirmations from clearing firms and will expand it
again by the end of the year to include clearinghouses
as well.
Section 104--Notice and certifications providing additional customer
protections
On October 22, 2012, the CFTC proposed additional rules to
enhance several aspects of supervision in order to better
protect customers of FCMs. Just over a year later, these new
rules were finalized and adopted by the CFTC. In order to
codify the CFTC's authority to increase customer protections,
Section 104 would require that FCMs notify both the CFTC and
the appropriate self-regulatory organization when they become
under-capitalized or under-segregated. By legally requiring
that an FCM notify authorities as soon as the firm is faced
with an undercapitalization scenario, regulators will have the
power to step in and take preventative or corrective action to
protect customer segregated funds. This would help prevent the
same type of harm to customers that occurred when MF Global
illegally transferred hundreds of millions of dollars of
customer segregated funds to cover its trading shortfalls.
Similarly, Section 104 requires FCMs to file a report at
the end of each fiscal year that details an assessment of an
FCM's internal compliance programs so the Commission can
evaluate whether the controls are adequate or need to be
improved or modified.
On October 2, 2013, testifying before the Committee at a
hearing entitled ``The Future of the CFTC: Perspectives on
Customer Protections,'' Mr. Dan Roth, President, NFA, provided
the following testimony with respect to the CFTC's provisions
included in Section 104:
The Commission also proposed its own changes to
customer protection rules in a 107-page Federal
Register release last year. Certain parts of the
Commission's proposals have provoked strong opposition
both from the industry and from end-users of the
markets, particularly in the agricultural sector. As
described below, NFA shares many of the concerns raised
by others, but we fully support many of the
Commission's proposals. For example, the Commission's
proposed rules would:
Require SROs to expand their testing of FCM
internal controls and develop more sophisticated
measures of the risks posed by each FCM;
Require that FCM certified annual financial
reports and reports from the chief compliance officer
be filed within 60 days of the firm's fiscal year end;
Require that an FCM that is undercapitalized
provide immediate notice to the Commission and its DSRO
. . .
Section 105--Futures Commission merchant compliance
On October 22, 2012, the CFTC proposed additional rules to
enhance several aspects of customer protections at FCMs. Among
the proposals was a requirement to shorten the time period an
FCM has to collect additional funds for a margin call from a
customer to one business day. Another proposal would require an
FCM to hold enough of its own capital (known as ``residual
interest'') to cover the changing positions of all customers at
all times of the day. As a result, many FCMs would have to use
their own capital to satisfy these margin calls, and customers
could also be required to hold more funds at an FCM.
Unfortunately for many farmers and ranchers who use futures
to hedge their operating risks, a part of the CFTC ``customer
protection'' rule finalized in October of 2013 could result in
significant harm to these core constituencies of the Committee.
The new rule will require farmers and ranchers to pre-fund
their margin accounts due to onerous new requirements that
force FCMs to hold large amounts of cash in order to pay
clearinghouses at the start of trading the next business day.
The increased costs of pre-funding margin accounts will likely
drive many small and medium-sized agricultural producers out of
the marketplace. When the small players are forced out of the
markets, the small and medium-sized FCMs will be forced to
consolidate, giving customers fewer choices.
On May 21, 2013, testifying before the Committee at a
hearing entitled ``The Future of the CFTC: Market
Perspectives,'' the following testimony was provided by
witnesses with respect to problems with the CFTC's proposed
rule:
However, this rulemaking also seeks to fundamentally
change the way in which the futures marketplace
operates. As we explained in our comment letter, if a
proposed ``protective'' measure is so expensive or its
impact on market structure is so severe that customers
cannot effectively use futures markets to mitigate risk
or discover prices, the reason to implement that
measure needs to be re-examined. Among the proposed
rules to reevaluate is the rule that would require at
all times an FCM's residual interest (its own funds) in
segregated accounts to exceed the margin deficiencies
of its customers. It does not appear that any system
currently exists or could be construed in the near
future will permit FCMs to accurately calculate
customer margin deficiencies, continuously in real-
time. Without access to this data, FCMs will be
required to maintain substantial residual interest in
segregated accounts or require customers to
significantly over-collateralize their accounts. We
believe this will be a significant and unnecessary
drain on liquidity that will make trading significantly
more expensive for customers to hedge. We believe this
rule and others could have a very significant impact on
certain sectors in the marketplace, particularly
smaller FCMs that serve the agricultural community.--
Mr. Terrance A. Duffy, Executive Chairman and
President, CME Group Inc.
In the end, this new interpretation will result in
FCMs requiring customers to put up more money at all
times, likely resulting in customers being asked to
pre-fund their margin. In addition to requiring
customer pre-funding, some have suggested that this
rule will likely require an FCM to double a customers'
overall margin requirements: in essence requiring
customers to fund their potential margin deficiencies.
As such, the customer would be required to keep margin
funds far in excess of exchange minimum margin
requirements. Our mid-sized commercial customers rely
upon their lending institutions, such as CoBank, a
member of the Farm Credit System, to fund their
commercial activities including their hedging
activities. A potentially doubling of their funding
needs to support their hedging activities would
significantly impact the profitability of such
customers. In addition to the negative customer impact,
the rule will also put significant financial pressure
on FCMs. If the sum of an FCM's customer margin
deficits is greater than the residual interest an FCM
typically maintains in their customer accounts, then
the FCM would have to increase the amount of residual
interest it maintains in customer segregated accounts.
On ``limit up'' or ``limit down'' days in the
agricultural exchange traded markets, our firm may be
required to deposit up to $400 million to satisfy
exchange demands for margin. In order to ensure that
our residual interest would be in excess of the sum of
all of our customers margin deficiencies in such a
situation, we would need to require our customer pre-
fund their potential margin deficiencies or in effect
require us to pre-fund their potential margin
requirements by maintaining our capital in customer
segregated accounts. Requiring massive additional
injections of our own capital to support the new
residual interest requirements will, at some point,
become unsustainable for us and others, again leading
to the real and substantial risk of increased
concentration in an already shrinking market.--Mr.
William J. Dunaway, CFO, INTL FCSTONE, Inc.
On July 24, 2013, at a hearing entitled ``The Future of the
CFTC: End-User Perspectives,'' the following witnesses also
provided testimony with respect to problems with the CFTC's
proposed rule:
Regulations that would accelerate a further
consolidation in the FCM industry would have the
adverse effect of leaving commodity hedgers with fewer
options, while concentrating risk among fewer FCM
entities . . . [a]nother provision would require that
an FCM's residual interest in the customer-segregated
account must at all times be sufficient to exceed the
sum of the margin deficits that the FCM's customers
have in their accounts. This requirement is counter to
the historical interpretation, which requires an FCM to
maintain residual interest to cover customer-segregated
accounts with negative net liquidating balances (debit
equity). This gives an FCM time to collect customer
funds prior to the time a payment must be made to the
clearing house. In addition to increased costs for
hedgers, this proposed rule would be more burdensome to
firms like farmer cooperative-owned FCMs, which largely
deal only with hedgers. Although the risk profile of
the customer base is very low, customers are
predominantly on one side of the market and therefore
more susceptible to big swings in the market. To
require all deficits to be covered immediately would be
overly burdensome on these FCMs given the low-risk
profile of their customers as hedgers.--Mr. Scott
Cordes, President, CHS Hedging, Inc., on behalf of the
National Council of Farmer Cooperatives (NCFC)
Specifically, CMC strongly believes that the proposed
requirement that FCMs maintain a residual amount
sufficient to cover on a constant basis the aggregate
of customer margin deficits could create considerable
liquidity issues and increase costs for FCMs,
producers, and end-users. Such a decrease in liquidity
could be substantial and limit the number and type of
transactions FCMs clear, the number of customers they
service, and the amount of financing they provide. The
proposal would require FCMs to fund accounts holding
their customers' collateral with proprietary assets in
excess of the aggregated margin deficiencies of all its
clients on a continuous basis. The proposal also
appears to require executing FCMs to collect collateral
for give-ups so that customer positions are fully
margined in the event a clearing FCM rejects a trade.
If the proposed residual interest provision were to be
finalized, FCMs may be forced to take steps such as
over-margining clients, requiring clients to pre-fund
their margin accounts, imposing punitive interest rate
charges on margin deficit balances, and introducing
intra-day margin calls. Such steps would dramatically
increase the cost of using futures markets and may
force many end-users to decrease or discontinue hedging
and risk management practices, which is the reason
these markets were created.--Mr. Lance Kotschwar,
Senior Compliance Attorney, The Gavilon Group, LLC, on
behalf of the Commodity Markets Council
On October 2, 2013, testifying before the Committee at a
hearing entitled ``The Future of the CFTC: Perspectives on
Customer Protections,'' the following additional testimony was
provided by witnesses with respect to their concerns about the
CFTC's proposed rule:
We believe that the CFTC's proposal respecting the
required residual interest that must be maintained by
FCMs in the customer segregated account will adversely
impact customers and fundamentally change the way in
which futures markets operate. If a proposed
``protective'' measure is so expensive or its impact on
market structure is so severe that customers cannot
effectively use futures markets to mitigate risk or
discover prices, there is no justification for
implementing that measure. The proposal on ``residual
interest'' fails this test . . . [t]he residual
interest rule is not necessary to protect customer
funds. Its costs and negative consequences outweigh any
added protection. This over-collateralization is
unwarranted from a risk management standpoint. No
regulatory risk model assumes that all customers with
margin requirements will fail promptly to meet them.
The proposed rule will unnecessarily drain liquidity
and increase the cost of hedging financial and
commercial risk especially for farmers and ranchers
using our markets. Smaller and mid-sized firms that
serve them will suffer the greatest impact of these
increased costs, and may be driven out of business,
leaving farmers and ranchers with fewer FCMs to
facilitate their risk management goals. This will
actually increase systemic risk by concentrating risk
among fewer firms. Ironically, the proposal would force
customers to place more collateral with their FCM--when
they may be trying to actively avoid fellow-customer
risk or FCM misconduct. We understand the Commission is
considering phasing in the rule, possibly to mitigate
the consequences I just described. A phase-in does not
cure the problem. Instead, CME supports the FIA
alternative--that would permit an FCM to calculate its
required residual interest as of 6:00 p.m. on the first
business day after the trade date.--Mr. Terrance A.
Duffy, Executive Chairman & President, CME Group Inc.
Other provisions of the Commission's proposals,
however, raise serious concerns, particularly with
regard to the so-called ``residual interest'' issue . .
. [t]he Commission has now proposed that all FCMs must
maintain at all times a residual interest sufficient to
exceed the sum of all margin deficits that the
customers in each account class have. Essentially, FCMs
would have to assume that every customer will default
on every margin call and maintain capital in the
segregated account to cover that possibility. Several
points need to be made on this proposal. First, it has
absolutely nothing to do with the problems encountered
at either MF Global or PFG. Neither of those cases had
anything to do with customers failing to meet margin
calls. Second, this is the first time in the
Commission's 39-year history that it has ever taken the
position that the Act requires FCMs to assume that all
customers will default on all margin calls. Third, the
underlying assumption that in this day and age no
customers meet margin calls by writing checks is wrong.
Agricultural hedgers frequently meet their margin calls
with checks. Fourth, the impact of this proposal could
be devastating for both agricultural end-users and the
relative handful of FCMs that service those customers.
Customers will have to post much more margin funds with
their FCMs or the FCMs will have to maintain much more
capital in their business. Either way, there will be
fewer customers using futures markets to hedge and
fewer FCMs handling their accounts. This proposal does
not just fix something that is not broken, it threatens
to do real harm to a longstanding system that has
worked well for both customers and the markets.--Mr.
Daniel Roth, President, NFA
For many years, grain hedgers and the futures
commission merchants (FCMs) with whom they work to
manage their risk have relied on a consistent
interpretation of the Commodity Exchange Act by the
Commodity Futures Trading Commission (CFTC) with regard
to posting margin funds to their hedge accounts.
Unfortunately, in the name of customer protection, that
interpretation recently has been thrown into question
by a new proposal from the CFTC that we believe would
dramatically increase customer risk. We understand that
CFTC Commissioners currently are evaluating a final
staff draft of this rule, with the goal of voting on a
final rule later this month. The rule seeks to bolster
futures customer protections--a laudable goal that the
NGFA supports fully. However, two very troublesome
provisions would have the perverse effect of
significantly increasing financial risk to futures
customers--and in the process, dramatically changing
the way business has been conducted in futures markets
for decades . . . [t]he second provision potentially is
even more troublesome and more expensive to futures
customers. It would change the timing of FCMs'
calculation of residual interest for futures accounts--
in other words, it appears the proposal would require
all customers to be fully margined at all times. While
this may sound like common sense, it is a huge
departure from the CFTC's interpretation for decades
that FCMs be allowed a certain period of time to ``top
up'' hedge accounts while they wait for customers to
make margin calls. This new proposal would lead to one
of two outcomes: either the FCM would have to move more
of its own funds (i.e., residual interest) into
customers' hedge accounts; or FCMs would be forced to
require pre-margining and, perhaps, intra-day
margining, to ensure that each individual customer is
fully margined at any moment. The practical end result
would be that futures customers would be required to
send much more money to their FCMs in advance in
anticipation of futures market moves that might never
happen. Some customers likely would exit futures
markets in favor of lower-cost risk management
alternatives. We believe this potential exodus from
futures markets would be most clearly seen among
agricultural producers who utilize futures for risk
management purposes and among smaller grain-hedging
firms. Taken to its logical conclusion, we believe
strongly that neither proposal accomplishes the
Commission's stated goal of enhancing customer
protection. To the contrary, customers would be sending
much larger amounts to their FCMs, leading to much
greater volume of funds at risk if another MF Global
situation occurs. If this rule had been in place when
MF Global failed, perhaps twice as much customer money
would have been missing and a correspondingly larger
amount still would not be returned to customers.--Mr.
Michael J. Anderson, Regional Sales Manager, The
Andersons Inc., on behalf of the National Grain and
Feed Association
Requiring FCMs to increase risk management standards,
increasing the requirements for residual interest in
segregation, and the reduction in days to collect
margin calls before they become capital charges are all
aimed at protecting an FCM's customer from losses
incurred by other customers of the FCM. Most of these
changes have significant costs associated with them . .
. [t]he requirement to maintain residual interest in
segregated funds greater than all margin calls at all
times will not only be very difficult to track, but
force us to choose between doubling or possibly
tripling our capital, or greatly increasing the funds
we require our customers to deposit to ensure they
never have a margin call. For smaller customers, or
those who can't follow the markets on a minute to
minute basis, meeting margin calls on a moment's notice
is a difficult thing to do. This is especially true of
small hedge customers, who would then be faced with
liquidation of hedges. For Frontier Futures as a firm,
the option to increase our capital by that much may not
be possible, and increasing margins may cause many of
our customers to either leave us for other firms or
cease trading altogether. The broader consequence of
the residual interest rule may be to force a
consolidation in the number of small to mid-sized FCMs.
Currently, FCMs charge margins based on margin
requirements set by the exchanges. The new rules will
create a competitive imbalance favoring firms with
access to large amounts of capital, such as the bank
owned FCMs, as these firms will be able to fund margin
calls by their customers with this capital. Firms
without this access will be forced to charge much
higher margin rates to their customers, and may result
in a migration of some customers out of these firms.
With fewer customers available to some firms, there is
bound to be consolidation. This will mostly affect
small to mid-sized FCMs who clear small hedgers as well
as guarantee Introducing Brokers.--Mr. Theodore
Johnson, President, Frontier Futures, Inc.
In order to address the significant concerns voiced by
market participants, regulators, and other stakeholders, the
Committee directs the CFTC, in carrying out the requirements of
Section 105, to consider an FCM in compliance with any
requirements to use its own proprietary funds, in the form of
residual interest, to satisfy margin deficits of the FCM's
customers if such requirements are met at the end of the first
business day following a trade date. This would obviate the
need for pre-funded margin accounts.
Section 106--Certainty for Futures customers and market participants
Section 190.08(a)(1)(ii)(J) of the CFTC's regulations (17
C.F.R. Sec. 190) defines customer property as including ``cash,
securities or other property of the debtor's estate, including
the debtor's trading or operating accounts and commodities of
the debtor held in inventory, but only to the extent that the
property enumerated is insufficient to satisfy in full all
claims of public customers.'' The Committee's plain reading of
this CFTC regulation is that property of the debtor FCM, even
though not held as customer property, becomes customer property
to the extent necessary to satisfy net equity claims of
``public customers,'' who are defined in CFTC Regulations
Section 190.01 as all customers other than certain control
persons, affiliates, and related parties (i.e.: non-public
customers). In effect, in order to protect the funds of
customers held in segregation, CFTC Regulation 190.08
subordinates the claims of non-public customers and non-
customer creditors, other than properly perfected liens on such
property of the debtor, to the claims of public customers with
respect to the property of the FCM that was not held (and not
required to be held) as customer property.
However, in 2000, doubts as to the validity of CFTC
Regulation Part 190.08(a)(1)(ii)(J) arose after a federal
bankruptcy court (In re Griffin Trading Co., 245 B.R. 291
(Bankr. N.D. Ill. 2000)) rejected an attempt by the trustee to
use a bankrupt commodity broker's estate to pay shortfalls in
the customer accounts. Among the issues in the case, which was
later settled and the court's holding vacated therefore
resulting in no binding judicial precedent, was whether the
CFTC's broad definition of ``customer property'' in section
190.08 of the CFTC regulations would determine which assets
could be used to repay customers. The court found that the CFTC
exceeded its statutory authority in enacting section 190.08
with a definition of customer property more expansive than that
used in the U.S. bankruptcy code. Further, the court found
that, ``any shortfall in the customer property as defined in
[the bankruptcy code] must be treated as a general unsecured
claim.'' This vacated court decision has left uncertainty about
whether, in the event that customer assets are insufficient to
cover all customer claims, customers can have first priority to
an FCM's general estate assets until all customer claims are
paid in full.
On October 2, 2013, testifying before the Committee at a
hearing entitled ``The Future of the CFTC: Perspectives on
Customer Protections,'' Mr. Daniel Roth, President, NFA,
provided the following testimony with respect to the need for
the provisions included in Section 106:
NFA believes, however, that Congress should consider
a statutory change to strengthen customer protections
and priorities in the event of a future FCM bankruptcy.
Over 30 years ago the CFTC adopted rules regarding FCM
bankruptcies. Among other things, those rules provided
that if there was a shortfall in customer segregated
funds, the term ``customer funds'' would include all
assets of the FCM until customers had been made whole.
Several years ago, a district court decision cast doubt
on the validity of the CFTC's rule. That decision was
subsequently vacated but a cloud of doubt lingers.
Congress can and should remove that doubt about the
priority customers should received if there is a
shortfall in segregated funds and can do so by amending
Section 20 of the Act. Section 20 gives the CFTC
authority to adopt regulations regarding commodity
brokers that are debtors under Chapter 7 of Title 11 of
the United States Code. We would suggest an amendment
to clarify the CFTC's authority to adopt the rule that
it did.
In order to provide clarity for the marketplace and make
clear that the CFTC did not exceed its authority to promulgate
Rule 190.08 under Section 20(a) of the Commodity Exchange Act,
the Committee intends for Section 106 to provide for the broad
use of the assets of a commodity broker's estate, other than
secured property (such as property held at a clearinghouse,
including offset or netting rights of creditors with respect to
such type of property), to satisfy shortfalls in customer
property beyond what was held in customer segregated accounts
at the time of a firm's failure.
Section 107--Study on high frequency trading
The Committee recognizes growing public concern and
multiple questions arising from the practice in derivative
markets commonly known as ``automated'' or ``high frequency''
trading. During hearings in the 112th and 113th Congresses, one
CFTC Commissioner and two end-user groups testified as to their
apprehension about this practice and its implications for
derivative markets. Before taking any action, it is prudent for
the Committee to learn more about high frequency trading. To
that end, the Commission is charged with providing the
Committee with a report examining the impact this practice has
upon markets under its jurisdiction. It should be noted that
the Committee recognizes that on September 9, 2013, the CFTC
approved a ``concept release'' on ``Risk Controls and System
Safeguards for Automated Trading Environments'' that examines
marketplace conditions and explores possible regulatory changes
with respect to high frequency trading. To speed compilation of
the results, the Committee would view that the Commission has
completed the requirements of Section 107 if the study results
are incorporated as part of further action on its concept
release.
Title 2--Commodity Futures Trading Commission Reforms
Section 202--Extension of operations
The most recent reauthorization for CFTC budgetary
appropriations was approved in 2008 as a part of the Food,
Conservation and Energy Act (P.L. 110-246), prior to the
financial crisis of 2008 and the enactment of the Dodd-Frank
Wall Street Reform and Consumer Protection Act (P.L. 111-203)
(The Dodd-Frank Act). That statutory authorization expired
September 30, 2013. Although the CFTC relied on unauthorized
appropriations between 2005 and 2008, successful legislative
reauthorizations occurred in 1978, 1983, 1986, 1992, 1995, and
2000. These have ranged from basic legislative
reauthorizations, such as the CFTC Reauthorization Act of 1995,
to significant changes in the law, such as the Commodity
Futures Modernization Act of 2000. Section 202 would
reauthorize the Commission to receive budgetary appropriations
through 2018.
Section 203--Consideration by the Commodity Futures Trading Commission
of the costs and benefits of its regulations and orders
Section 15(a) of the Commodity Exchange Act sets forth
requirements for the CFTC to consider the costs and benefits of
the Commission's actions. In each proposed rule, however, the
CFTC identifies the limitations of Section 15(a) in requiring
cost-benefit analysis, stating ``[b]y 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 its costs; rather, it requires that the
Commission `consider' the costs and benefits of its actions.''
Consequently, the CFTC's Office of Inspector General (OIG)
issued an investigative report in April of 2011 that examined
the cost-benefit analysis performed by the Commission in
connection with Dodd-Frank rulemakings. In that report, the OIG
stated ``. . . 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 . . . [w]e do not believe this approach enhanced the
economic analysis performed. . . .''
On January 18, 2011, President Obama issued Executive Order
No. 13563, which requires non-independent executive branch
agencies to conduct cost-benefit analyses to ensure that both
the quantitative and qualitative costs and benefits of proposed
rulemakings are taken into account. The Executive Order also
requires that regulations be accessible, consistent, written in
plain language, and easy to understand. Because the CFTC is an
independent agency, it was not required to abide by the order
for any of its Dodd-Frank Act rulemakings.
As the CFTC continues to advance new rules that govern a
large sector of the derivatives marketplace for the first time,
this section raises the legal standard for cost-benefit
analysis and evaluation. Further, the legislation is intended
to operate consistently with Executive Order 13563. However, so
as to not disrupt the regulatory process, this legislation is
not retroactive in nature and would not impact previously
proposed or finalized rules promulgated by the CFTC.
On March, 14, 2013, at a hearing entitled ``Examining
Legislative Improvements to Title VII of the Dodd-Frank Act,''
the following testimony was provided with respect to provisions
included in Section 203:
. . . SIFMA has encouraged regulators to conduct
comprehensive cost-benefit analysis for all Dodd-Frank
Rules. This is consistent with the Obama
Administration's efforts to promote better cost benefit
analysis for Federal agencies through Executive Order
13563, which requires all agencies proposing or
adopting regulations to include cost-benefit analyses
in an attempt to minimize burdens, maximize net
benefits and specify performance objectives. The
President also stated that regulations should be
subject to meaningful public comment, be harmonized
across agencies, ensure objectivity and be subject to
periodic review. In 2012, in testimony before the House
Committee on Government Reform, SEC Chairman Schapiro
stated ``I continue to be committed to ensuring that
the Commission engages in sound, robust economic
analysis in its rulemaking, in furtherance of the
Commission's statutory mission, and will continue to
work to enhance both the process and substance of that
analysis.'' Congressman Conaway has introduced
legislation (H.R. 1003) that would require the CFTC's
cost-benefit analysis to be both quantitative and
qualitative and specifies in greater detail the costs
and benefits that the CFTC must take into account as
part of their cost-benefit analyses.--Hon. Kenneth E.
Bentsen, Acting President and CEO, the Securities
Industry and Financial Markets Association (SIFMA)
Finally, because of our experience with the $25
million sub-threshold, we are intrigued by another
bipartisan bill recently introduced in the House. The
legislation, H.R. 1003, would require the CFTC to
quantify the costs and benefits of future regulations
and orders. Sadly, the legislation is prospective, but
we believe that had such an analysis been made, it
could have prevented the turmoil currently being caused
by the $25 million special entity sub-threshold.--Mr.
Terrance P. Naulty, General Manager and CEO, Owensboro
Municipal Utilities (Owensboro, KY)
On May 21, 2013, at a hearing entitled ``The Future of the
CFTC: Market Perspectives,'' Mr. Stephen O'Connor, Chairman,
International Swaps and Derivatives Association, Inc. (ISDA),
provided the following testimony with respect to provisions
included in Section 203:
An appropriate cost-benefit analysis was both
required and desirable prior to finalization of rules;
however in a number of instances the CFTC's analysis
did not comply with the regulatory standard. As the
Jun. 2012 report by the CFTC Inspector General stated:
``. . . Generally speaking, it appears CFTC employees
did not consider quantifying costs when conducting
cost-benefit analyses for the definitions rule. As
indicated in the rule's preamble, the costs and
benefits associated with coverage under the various
definitions (in light of the various regulatory burdens
that could eventually be associated with coverage) were
not addressed . . .'' The lack of an appropriate cost-
benefit analysis makes it especially important that the
application and implementation of the final rules be
phased in a flexible manner. Doing so would help ensure
that rules achieve the purposes for which they are
intended and do not impose burdensome costs on the
financial system. It would also help regulators to
identify and avoid unintended consequences of their
actions. And it would encourage regulators to properly
allocate limited resources.
Section 204--Division Directors
In order to ensure Division Directors are responsive to the
entire Commission, this section requires that the heads of each
of the units of the Commission serve at the pleasure of the
Commission, perform functions as the Commission may prescribe
and report directly to the Commission. Given this language is
modeled after identical language currently in the CEA
applicable to the General Counsel and Executive Director, the
Committee expects this section to be implemented in a similar
manner to those two positions.
Section 205--Office of the Chief Economist
In order to enhance the legitimacy of economic analysis of
rules promulgated by the Commission, this section establishes
an Office of the Chief Economist (OCE) with structure and power
mirroring that of the Office of the General Counsel. Again, to
prevent the Chief Economist from serving solely at the pleasure
of the Chairman, this section establishes that the Chief
Economist will be appointed by the Commission, report directly
to the Commission, and perform functions at the request of the
Commission in a manner similar with the General Counsel and
Executive Director.
Section 206--Procedures governing actions taken without a commission
vote
With respect to Title VII of the Dodd-Frank Act alone, the
Commission has finalized 43 rules, with 15 additional rules
proposed, while CFTC staff has issued over 170 non-binding
staff ``no-action relief'' letters since July 2012 alone. At
least 24 of these no-action letters are self-described as
permanent. At times, ``no-action'' letters provide market
participants with guidance on how the Enforcement Division
staff of the CFTC would act in the event of market emergencies
or would interpret recently proposed rules, at least in the
short term. However, it appears that over the past year, staff
``no-action'' letters have become commonplace to revise the
implementation of key regulations of Dodd-Frank, and as such do
not require a vote of the Commission. Additionally, regardless
of a designation as permanent, ``no-action'' letters are still
non-binding in the legal sense that CFTC staff could decide to
withdraw the letter at anytime or the Commission could take a
different position and overrule the letter.
On July 23, 2013, at a hearing entitled ``The Future of the
CFTC: Commission Perspectives,'' CFTC Commissioner Scott
O'Malia provided the following testimony with respect to
problems with this approach:
. . . [i]nstead of undertaking Commission action to
amend problematic rules, CFTC staff has issued an
unprecedented number of no-action letters, some of
which are indefinite and have no expiration. So far,
CTFC staff has issued over 100 no-action letters
granting relief from its new regulations under Dodd-
Frank, and I won't be surprised if this number
continues to grow. No-action letters are not voted on
by the Commission and are not published in the Federal
Register. They do not include comment periods and many
impose conditions on affected parties. This process is
at odds with basic principles of the APA, like public
participation and the opportunity to be heard. It also
goes against President Obama's Executive Orders Nos.
13563 and 13579, mandating that administrative agencies
``create an unprecedented level of openness in
Government'' and ``establish a system of transparency,
public participation, and collaboration.''
In order to bring policy making back to a more open and
transparent manner, Section 206 requires that the Commission be
provided 7 days notice before any division or office of the
Commission issues a response to a formal, written petition for
an exemptive, no-action or interpretive letter. The Committee
would view any attempt to needlessly delay providing notice to
the Commission until a regulatory deadline or need for no-
action relief is imminent (so as to avoid the statutorily
required 7 day review period) as a violation of the
requirements contained in Section 206.
After receiving notice, any member of the Commission may
request a meeting of the Commission to further consider the
staff-proposed action, and if the Commission decides to hold
the meeting by majority vote, the matter may not be issued
until the meeting has concluded. The 7 day notice requirement
can be waived by a majority vote of the Commission, but only if
the Commission determines that requiring such notice would be
impracticable, unnecessary, or contrary to the public interest.
Section 207--Strategic technology plan
On July 23, 2013, at a hearing entitled ``The Future of the
CFTC: Commission Perspectives,'' Commissioner Scott O'Malia
provided the following testimony with respect to the need for
provisions the Committee included in Section 207:
A critically important component to any solution for
the Commission's approach to its greatly expanded
mission is the use of technology in order to accept,
sort, aggregate, and analyze the new sources of market
information provided for under the Dodd-Frank Act. I'd
like to highlight two major challenges in data and
technology: (1) problems faced by market participants
in the swap data reporting rules and (2) problems faced
by the Commission in understanding the massive data
flows as a result of our enhanced oversight of the
swaps and futures markets . . . [g]iven the
Commission's expanded regulatory responsibilities, it
is imperative for the Commission to develop a
technology plan that can assist the Commission with
meeting its regulatory objective. I believe the
Commission must develop a five-year strategic plan that
is focused on technology, with annual milestones and
budgets. To keep up to speed with the challenges of
enhanced regulatory oversight, this technology plan
would require each CFTC division to develop a
technology budget that reflects the regulatory needs
and responsibilities of that particular division.
In order to solve the problems enumerated by Commissioner
O'Malia, Section 207 requires the Commission to develop and
file a strategic technology plan every 5 years with the House
and Senate Agriculture Committees. The plan shall include a
detailed technology strategy focused on market surveillance and
risk detection, market data collection, aggregation,
interpretation, normalization, standardization, harmonization,
streamlining, and internal management and protection of data
collected by the Commission. The report must also include a
detailed accounting of how appropriated funds provided for
technology will be used, and set annual goals to be
accomplished along with the annual budgets necessary to
accomplish those goals.
Section 208--Internal risk controls
On December 14, 2012, it was widely reported that the CME
Group, Inc., wrote a letter to the CFTC expressing concern that
confidential and sensitive market data had been shared with
non-CFTC employees who then used the data to write academic
papers. CME attorneys claimed that the use of the data for the
preparation of non-Commission sponsored publications was a
violation of federal law meant to protect trade secrets. At
least two academic papers written on the subject of high-
frequency trading were either co-written or advised by Andrei
Kirilenko during his time as the CFTC Chief Economist. Upon
leaving the CFTC in late 2012, Kirilenko took a position at
MIT. As a result of the CME letter and corresponding internal
investigation, the CFTC halted the research program which
allowed outside academic researchers and economists almost
unlimited access to proprietary trading information across
various markets and the CFTC OIG launched an internal
investigation.
On July 23, 2013, at a hearing entitled ``The Future of the
CFTC: Commission Perspectives,'' Commissioner Scott O'Malia
provided the following testimony:
Currently the Commission's Inspector General is
investigating whether or not market data was properly
controlled by the Office of the Chief Economist when
visiting scholars/contractors were assisting the Office
of the Chief Economist in research efforts. While I
support collaborative study programs that bring in new
and innovative thinking, it is vital that the
Commission has policies and procedures in place to
protect against the illegal release of market data.
On March 21, 2014, a heavily redacted version of the CFTC's
OIG report was released to the public. In this report, the OIG
found that:
The administrative review revealed that there had
been poor recordkeeping with regard to the so-called
``on-boarding'' process for OCE economists. The
deficiencies included inadequate documentation of
security clearances, issues regarding nondisclosure
agreements, and non-submission of employment data to
the National Finance Center, as well as incomplete
personnel forms, one contract lacking the contractor's
signature, and other administrative errors. There were
no indications of fraud by OCE economists, or that OCE
economists were not actually appointed by the Chief
Economist, just a number of administrative errors
pertaining to the Agency's so-called on-boarding
process. The review also uncovered information security
concerns. Specifically, personally owned external hard
drives and thumb drives were found in close vicinity to
the computers that served the OCE economists. In
addition, badges for former CFTC OCE economists were
located in the Chief Economist's desk.
With respect to the potentially harmful data breaches that
occurred at the CFTC and the need to correct them to ensure
integrity of the marketplace, the OIG's report concluded that:
We agree that the physical and information technology
concerns exist; however, they are Agency-wide, and are
currently being addressed at least in part in
connection with an OIG audit of CFTC's Fiscal Year 2013
implementation of the Federal Information Security
Management Act. The absence of controls is significant:
lacking a reliable way to determine whether
confidential information was improperly taken from the
CFTC, we will not jump to the conclusion that
misconduct did or did not occur based on contradictory
opinions of Agency employees. We can make no finding.
To guard against these sorts of leaks, this section
requires the Commission, led by the Chief Economist, to develop
internal risk control mechanisms to safeguard the storage and
privacy of market data by the Commission. Special attention
should be given to market data sharing agreements and academic
research performed at the Commission using market data. The
Commission shall report to the authorizing congressional
committees on progress made in implementing the internal risk
controls 60 days after enactment, and again 120 days after
enactment of the Act.
Section 209--Subpoena duration and renewal
On July 23, 2013, at a hearing entitled ``The Future of the
CFTC: Commission Perspectives,'' Commissioner Scott O'Malia
provided the following testimony with respect to his concerns
on the operation of the Commission's subpoena power:
CFTC regulations ensure that the Commission is made
accountable for all enforcement matters by requiring a
Commission order to initiate investigations by the
Division of Enforcement. Just recently, I dissented on
an enforcement matter that involved a radical
procedural shift in the authorization of investigations
for potential violations of the CEA. What I found
troubling is that the Division of Enforcement sought to
circumvent the powers of the Commission by proposing to
bring investigations on a summary basis through the use
of an ``absent objection'' process. I was surprised to
be advised by the Commission's Office of General
Counsel that the Commission cannot block a staff-
initiated absent objection circulation because this
process is not a Commission ``vote.'' To ensure
fairness in terms of true separation of functions,
Congress gave power to the members of the Commission to
reconsider CFTC staff recommendations by independently
assessing facts and legal justifications for initiating
various actions. In other words, Congress intended that
any decision to bring an investigation by the CFTC is
reflective of a shared opinion of the majority of the
Commissioners, rather than a unilateral assessment by
the Division of Enforcement's staff. The new absent
objection process described by the Office of General
Counsel is a clear abrogation of the Commission's
powers and a violation of Commission rules relating to
investigations.
In order to ensure continuing investigations by the
Commission's Division of Enforcement are warranted and properly
reviewed by the Commission, Section 209 would ensure that the
Commission complies with controlling Supreme Court precedent on
the issuance and duration of subpoenas. As such, a subpoena
authorized to be issued by the Commission shall state in good
faith the purpose of the investigation, shall require only
information reasonably relevant to the purpose of the
investigation and shall be for a finite period. Renewal of a
subpoena may only occur by Commission vote.
Section 210--Implementation plan for commission rulemakings
In order to increase market certainty through the
rulemaking process, Section 210 would require that all proposed
rules include a plan for when and how long a comment period
will be open, and when compliance with the final rule will be
required. As Commissioner O'Malia stated when he testified
before the Committee on July 23, 2013, ``it is virtually
impossible to achieve good policy outcomes without establishing
a sound process for reaching those outcomes. Unfortunately, the
Commission has failed to do so in our implementation of the
Dodd-Frank Act.'' The Committee does not intend for these
requirements to become duplicative of requirements already
demanded under the Administrative Procedure Act (APA).
Section 211--Applicability of notice and comment requirements of the
Administrative Procedure Act to guidance voted on by the
Commission
As the Committee learned from numerous witnesses through
testimony and saw firsthand through press reports and letters
from foreign financial regulators, the Commission voted on
guidance to interpret key provisions of the cross-border
provisions of the Dodd-Frank Act instead of conducting
rulemaking under the APA, which requires notice and comment.
The Commission now has a set of guidelines to govern the cross-
border application of the Dodd-Frank Act, setting up probable
legal conflicts between the CFTC's guidance and the SEC's
proposed cross border rule that followed all requirements of
the law and allowed for extensive public comment. Concerns
about ``guidance'' that has the practical effect of an official
rulemaking was described in testimony before the Committee on
March 14, 2013, by the Hon. Kenneth E. Bentsen, Acting
President and CEO, SIFMA, when he stated that:
[E]qually significant, the CFTC has issued its
proposed cross-border release as ``guidance'' rather
than as formal rulemaking process subject to the
Administrative Procedure Act. By doing so, the CFTC
avoids the need to conduct a cost-benefit analysis,
which is critical for ensuring that the CFTC
appropriately weighs any costs imposed on market
participants as a result of implementing an overly
broad and complex U.S. person definition against
perceived benefits.
On July 23, 2013, at a hearing entitled ``The Future of the
CFTC: Commission Perspectives,'' Commissioner Scott O'Malia
voiced additional concerns in testimony about the approach
taken by the Commission:
I believe that putting the label of ``guidance'' on
this document did not change its content or
consequences. The courts have held that when agency
action has the practical effect of binding parties
within its scope, it has the force and effect of law,
regardless of the name it is given. Legally binding
regulations that impose new obligations on affected
parties--``legislative rules''--must conform to the
APA. As a threshold matter, the cross-border swaps
guidance rests on thin statutory authority, because
Congress limited the extraterritorial application of
U.S. swap regulations, and therefore the CFTC's
jurisdiction, to foreign activities that have a
``direct and significant'' impact on the U.S. economy.
Despite the statutory limitation, the cross-border
swaps guidance sets out standards that it applies to
virtually all cross-border activities in the swaps
markets, in a broad manner similar to the application
of the swap dealer definition to market participants.
For practical reasons, market participants cannot
afford to ignore detailed regulations imposed upon
their activities that may result in enforcement or
other penalizing action. Accordingly, I believe that
the cross-border swaps guidance has a practical binding
effect on market participants and it should have been
promulgated as a legislative rule under the APA.
Similarly, I cannot support any future interpretive
guidance that would be more properly issued as a
notice-and-comment rulemaking.
In an attempt to address concerns highlighted above,
Section 211 applies the notice and comment provisions of the
APA to any future guidance voted on and issued by the
Commission. Importantly, to ensure responsiveness to the
regulated marketplace, the Committee intends that Section 211
only apply to guidance voted on by the CFTC Commissioners (and
therefore officially issued by the CFTC) but not to any
guidance provided by the Commission staff in response to
inquiries from the public.
Section 212--Judicial review of Commission rules
In order to address concerns from stakeholders to fairly
and efficiently challenge CFTC final rules in court, Section
212 aligns the CFTC judicial review process with that of the
U.S. Securities and Exchange Commission (SEC) set forth in
section 25(b) of the Securities Exchange Act of 1934. As such,
the Committee intends for Section 212 to allow review of a CFTC
final rule may be obtained directly with the United States
Court of Appeals for the District of Columbia Circuit or the
U.S. Court of Appeals for the circuit where the adversely
affected party resides or situates its principal place of
business.
On July 24, 2013, at a hearing entitled ``The Future of the
CFTC: End-User Perspectives,'' Mr. Andrew Soto, Senior Managing
Counsel, Regulatory Affairs, American Gas Association (AGA),
provided the following testimony with respect to the need for
provisions included in Section 212:
First, AGA recommends that Congress amend the
Commodity Exchange Act (CEA) to provide clear and
defined procedures for challenging CFTC rules and
orders in court. Although the CEA currently contains
provisions allowing for judicial review by a U.S. Court
of Appeals of certain agency actions, the provisions
are very limited and provide no defined avenue for
challenging CFTC rules and orders generally. A broad
judicial review provision allowing for the direct
challenge of CFTC rules and orders would have both a
rehabilitative effect on the current process and a
prophylactic effect on future agency action. Specific
judicial review provisions would allow interested
parties to challenge particular agency actions that are
unreasonable and hold the CFTC accountable for its
decisions. In addition, judicial review would have an
important prophylactic effect by requiring the agency
to think through its decisions before they are made to
ensure that they are sustainable in court, thus
enabling the agency to be a more conscientious and
prudent regulator. In the absence of specific judicial
review provisions, the general review provisions of the
Administrative Procedure Act (APA) would apply,
requiring parties seeking to challenge CFTC rules to
file a claim before a U.S. District Court, move for
summary judgment (as a hearing would likely be
unnecessary), obtain a ruling and then, if necessary,
seek further judicial review before a U.S. Court of
Appeals. In the recent litigation over the CFTC's
position limits rule, which followed the review
provisions of the APA, the CFTC's General Counsel
acknowledged the efficiency and desirability of direct
review by the U.S. Court of Appeals of agency rules,
and stated that the agency would have no objection to
such direct review assuming Congress were to authorize
it. Accordingly, provisions allowing for direct review
by a U.S. Court of Appeals of rules and orders of the
CFTC would enable both the industry and the agency to
benefit from the administrative economy, procedural
efficiency and certainty of having a dedicated forum in
which agency decisions are reviewed.
Section 213--GAO study on adequacy of CFTC resources
In each of the five full and subcommittee hearings held
this Congress related to the CFTC, some witnesses have spoken
out for additional resources for the Commission. Whether it is
from the Commission itself, end-user groups, or regulated
market participants, varying levels of concern have been voiced
that the CFTC lacks sufficient funds to do the job that
Congress has asked. To obtain an impartial view on whether more
resources are necessary, the Committee charges the Government
Accountability Office (GAO) to conduct a study to look into
this question.
The Committee would expect the GAO, as part of its study,
to also closely examine and report on whether the CFTC has
efficiently used its resources related to hiring and firing
practices within the Commission, especially related to
positions that are duplicative, outdated in their purpose, or
underutilized. The efficient expenditure of funds related to
computer programs, technology upgrades, consultants, and other
noteworthy usages of Commission funds should also be closely
examined.
Title 3--End-User Relief
SUBTITLE A--END-USER EXEMPTION FROM MARGIN REQUIREMENTS
Section 311--End-user margin requirements
Section 311 amends Section 4s(e) of the Commodity Exchange
Act (CEA) as added by Section 731 of the Dodd-Frank Act to
provide an explicit exemption from margin requirements for swap
transactions involving end-users that qualify for the clearing
exception under 2(h)(7)(A).
``End-users'' are thousands of companies across the United
States who utilize derivatives to hedge risks associated with
their day-to-day operations, such as fluctuations in the prices
of raw materials. Because these businesses do not pose systemic
risk, Congress intended that the Dodd-Frank Act provide certain
exemptions for end-users to ensure they were not unduly
burdened by new margin and capital requirements associated with
their derivatives trades that would hamper their ability to
expand and create jobs.
Indeed, Title VII of the Dodd-Frank Act includes an
exemption for non-financial end-users from centrally clearing
their derivatives trades. This exemption permits end-users to
continue trading directly with a counterparty, (also known as
trading ``bilaterally,'' or over-the-counter (OTC)) which means
their swaps are negotiated privately between two parties and
they are not executed and cleared using an exchange or
clearinghouse. Generally, it is common for non-financial end-
users, such as manufacturers, to avoid posting cash margin for
their OTC derivative trades. End-users generally will not post
margin because they are able to negotiate such terms with their
counterparties due to the strength of their own balance sheet
or by posting non-cash collateral, such as physical property.
End-users typically seek to preserve their cash and liquid
assets for reinvestment in their businesses. In recognition of
this common practice, the Dodd-Frank Act included an exemption
from margin requirements for end-users for OTC trades.
Section 731 of the Dodd-Frank Act (and Section 764 with
respect to security-based swaps) requires margin requirements
be applied to swap dealers and major swap participants for
swaps that are not centrally cleared. For swap dealers and
major swap participants that are banks, the prudential banking
regulators (such as the Federal Reserve or Federal Deposit
Insurance Corporation) are required to set the margin
requirements. For swap dealers and major swap participants that
are not banks, the CFTC is required to set the margin
requirements. Both the CFTC and the banking regulators have
issued their own rule proposals establishing margin
requirements pursuant to Section 731.
Following the enactment of the Dodd-Frank Act in July of
2010, uncertainty arose regarding whether this provision
permitted the regulators to impose margin requirements on swap
dealers when they trade with end-users, which could then result
in either a direct or indirect margin requirement on end-users.
Subsequently, Senators Blanche Lincoln and Chris Dodd sent a
letter to then-Chairmen Barney Frank and Collin Peterson on
June 30, 2010, to set forth and clarify congressional intent,
stating:
The legislation does not authorize the regulators to
impose margin on end-users, those exempt entities that
use swaps to hedge or mitigate commercial risk. If
regulators raise the costs of end-user transactions,
they may create more risk. It is imperative that the
regulators do not unnecessarily divert working capital
from our economy into margin accounts, in a way that
would discourage hedging by end-users or impair
economic growth.
In addition, statements in the legislative history of
section 731 (and Section 764) suggests that Congress did not
intend, in enacting this section, to impose margin requirements
on nonfinancial end-users engaged in hedging activities, even
in cases where they entered into swaps with swap entities.
In the CFTC's proposed rule on margin, it does not require
margin for un-cleared swaps when non-bank swap dealers transact
with non-financial end-users. However, the prudential banking
regulators proposed rules would require margin be posted by
non-financial end-users above certain established thresholds
when they trade with swap dealers that are banks. Many of end-
users' transactions occur with swap dealers that are banks, so
the banking regulators' proposed rule is most relevant, and
therefore of most concern, to end-users.
By the prudential banking regulators' own terms, their
proposal to require margin stems directly from what they view
to be a legal obligation under Title VII. The plain language of
section 731 provides that the Agencies adopt rules for covered
swap entities imposing margin requirements on all non-cleared
swaps. Despite clear congressional intent, those sections do
not, by their terms, exclude a swap with a counterparty that is
a commercial end-user. By providing an explicit exemption under
Title VII through enactment of this provision, the prudential
regulators will no longer have a perceived legal obligation,
and the congressional intent they acknowledge in their proposed
rule will be implemented.
The Committee notes that in September of 2013, the
International Organization of Securities Commissions (IOSCO)
and the Bank of International Settlements published their final
recommendations for margin requirements for uncleared
derivatives. Representatives from a number of U.S. regulators,
including the CFTC and the Board of Governors of the Federal
Reserve participated in the development of those margin
requirements, which are intended to set baseline international
standards for margin requirements. It is the intent of the
Committee that any margin requirements promulgated under the
authority provided in Section 4s of the Commodity Exchange Act
should be generally consistent with the international margin
standards established by IOSCO.
On March 14, 2013, at a hearing entitled ``Examining
Legislative Improvements to Title VII of the Dodd-Frank Act,''
the following testimony was provided to the Committee with
respect to provisions included in Section 311:
In approving the Dodd-Frank Act, Congress made clear
that end-users were not to be subject to margin
requirements. Nonetheless, regulations proposed by the
Prudential Banking Regulators could require end-users
to post margin. This stems directly from what they view
to be a legal obligation under Title VII. While the
regulations proposed by the CFTC are preferable, they
do not provide end-users with the certainty that
legislation offers. According to a Coalition for
Derivatives End-Users survey, a 3% initial margin
requirement could reduce capital spending by as much as
$5.1 to $6.7 billion among S&P 500 companies alone and
cost 100,000 to 130,000 jobs. To shed some light on
Honeywell's potential exposure to margin requirements,
we had approximately $2 billion of hedging contracts
outstanding at year-end that would be defined as a swap
under Dodd-Frank. Applying 3% initial margin and 10%
variation margin implies a potential margin requirement
of $260 million. Cash deposited in a margin account
cannot be productively deployed in our businesses and
therefore detracts from Honeywell's financial
performance and ability to promote economic growth and
protect American jobs.--Mr. James E. Colby, Assistant
Treasurer, Honeywell International Inc.
On May 21, 2013, at a hearing entitled ``The Future of the
CFTC: Market Perspectives,'' Mr. Stephen O'Connor, Chairman,
ISDA, provided the following testimony with respect to
provisions included in Section 311:
Perhaps most importantly, we do not believe that
initial margin will contribute to the shared goal of
reducing systemic risk and increasing systemic
resilience. When robust variation margin practices are
employed, the additional step of imposing initial
margin imposes an extremely high cost on both market
participants and on systemic resilience with very
little countervailing benefit. The Lehman and AIG
situations highlight the importance of variation
margin. AIG did not follow sound variation margin
practices, which resulted in dangerous levels of credit
risk building up, ultimately leading to its bailout.
Lehman, on the other hand, posted daily variation
margin, and while its failure caused shocks in many
markets, the variation margin prevented outsized losses
in the OTC derivatives markets. While industry and
regulators agree on a robust variation margin regime
including all appropriate products and counterparties,
the further step of moving to mandatory IM [initial
margin] does not stand up to any rigorous cost-benefit
analysis.
Based on the extensive background that accompanies the
statutory change provided explicitly in Section 311, the
Committee intends that initial and variation margin
requirements cannot be imposed on uncleared swaps entered into
by cooperative entities if they similarly qualify for the
CFTC's cooperative exemption with respect to cleared swaps.
Cooperative entities did not cause the financial crisis and
should not be required to incur substantial new costs
associated with posting initial and variation margin to
counterparties. In the end, these costs will be borne by their
members in the form of higher prices and more limited access to
credit, especially in underserved markets, such as in rural
America. Therefore, the Committee's clear intent when drafting
Section 311 was to prohibit the CFTC and prudential regulators,
including the Farm Credit Administration, from imposing margin
requirements on cooperative entities.
SUBTITLE B--INTER-AFFILIATE SWAPS
Sec. 321--Treatment of affiliate transactions
``Inter-affiliate'' swaps are contracts executed between
entities under common corporate ownership. Section 321 would
amend the Commodity Exchange Act to provide an exemption for
inter-affiliate swaps from the clearing and execution
requirements of the Dodd-Frank Act so long as the swap
transaction hedges or mitigates the commercial risk of an
entity that is not a financial entity. The section also
requires that an ``appropriate credit support measure or other
mechanism'' be utilized between the entity seeking to hedge
against commercial risk if it transacts with a swap dealer or
major swap participant, but this credit support measure
requirement is effective prospectively from the date H.R. 4413
is enacted into law.
Importantly, with respect to Section 321's use of the
phrase ``credit support measure or other mechanism,'' the
Committee unequivocally does not intend for the CFTC to
interpret this statutory language as a mandate to require
initial or variation margin for swap transactions. The
Committee intends for the CFTC to recognize that credit support
measures and other mechanisms have been in use between
counterparties and affiliates engaged in swap transactions for
many years in different formats, and therefore, there is no
need to engage in a rulemaking to define such broad
terminology.
Section 321 originated from the need to provide relief for
a parent company that has multiple affiliates within a single
corporate group. Individually, these affiliates may seek to
offset their business risks through swaps. However, rather than
having each affiliate separately go to the market to engage in
a swap with a dealer counterparty, many companies will employ a
business model in which only a single or limited number of
entities, such as a treasury hedging center, face swap dealers.
These designated external facing entities will then allocate
the transaction and its risk mitigating benefits to the
affiliate seeking to mitigate its underlying risk.
Companies that use this business model argue that it
reduces the overall credit risk a corporate group poses to the
market because they can net their positions across affiliates,
reducing the number of external facing transactions overall. In
addition, it permits a company to enhance its efficiency by
centralizing its risk management expertise in a single or
limited number of affiliates.
Should these inter-affiliate transactions be treated as all
other swaps, they could be subject to clearing, execution and
margin requirements. Companies that use inter-affiliate swaps
are concerned that this could substantially increase their
costs, without any real reduction in risk in light of the fact
that these swaps are purely for internal use. For example,
these swaps could be ``double-margined''--when the centralized
entity faces an external swap dealer, and then again when the
same transaction is allocated internally to the affiliate that
sought to hedge the risk.
The uncertainty that exists regarding the treatment of
inter-affiliate swaps spans multiple rulemakings that have been
proposed or that will be proposed pursuant to the Dodd-Frank
Act. Section 321 provides certainty and clarity as to what
inter-affiliate transactions are and how they are not to be
regulated as swaps when the parties to the transaction are
under common control.
On March, 14, 2013, at a hearing entitled ``Examining
Legislative Improvements to Title VII of the Dodd-Frank Act,''
the following testimony was provided with respect to efforts to
address the problem with inter-affiliate swaps:
[I]nter-affiliate swaps provide important benefits to
corporate groups by enabling centralized management of
market, liquidity, capital and other risks inherent in
their businesses and allowing these groups to realize
hedging efficiencies. Since the swaps are between
affiliates, rather than with external counterparties,
they pose no systemic risk and therefore there are no
significant gains to be achieved by requiring them to
be cleared or subjecting them to margin posting
requirements. In addition, these swaps are not market
transactions and, as a result, requiring market
participants to report them or trade them on an
exchange or swap execution facility provides no
transparency benefits to the market--if anything, it
would introduce useless noise that would make Dodd-
Frank's transparency rules less helpful.--Hon. Kenneth
E. Bentsen, Acting President and CEO, SIFMA
This legislation would ensure that inter-affiliate
derivatives trades, which take place between affiliated
entities within a corporate group, do not face the same
demanding regulatory requirements as market-facing
swaps. The legislation would also ensure that end-users
are not penalized for using central hedging centers to
manage their commercial risk. There are two serious
problems facing end-users that need addressing. First,
under the CFTC's proposed inter-affiliate swap rule,
financial end-users would have to clear purely internal
trades between affiliates unless they posted variation
margin between the affiliates or met specific
requirements for an exception [i]f these end-users have
to post variation margin, there is little point to
exempting inter-affiliate trades from clearing
requirements, as the costs could be similar. And let's
not forget the larger point--internal end-user trades
do not create systemic risk and, hence, should not be
regulated the same as those trades that do. Second,
many end-users--approximately one-quarter of those we
surveyed--execute swaps through an affiliate. This of
course makes sense, as many companies find it more
efficient to manage their risk centrally, to have one
affiliate trading in the open market, instead of dozens
or hundreds of affiliates making trades in an
uncoordinated fashion. Using this type of hedging unit
centralizes expertise, allows companies to reduce the
number of trades with the street and improves pricing.
These advantages led me to centralize the treasury
function at Westinghouse while I was there. However,
the regulators' interpretation of the Dodd-Frank Act
confronts nonfinancial end-users with a choice: either
dismantle their central hedging centers and find a new
way to manage risk, or clear all of their trades.
Stated another way, this problem threatens to deny the
end-user clearing exception to those end-users who have
chosen to hedge their risk in an efficient, highly-
effective and risk-reducing way. It is difficult to
believe that this is the result Congress hoped to
achieve.--Ms. Marie N. Hollein, C.T.P., President and
CEO, Financial Executives International, on behalf of
the Coalition for Derivatives End-Users
SUBTITLE C--INDEMNIFICATION REQUIREMENTS RELATED TO SWAP DATA
REPOSITORIES
Section 331--Indemnification requirements
Section 331 strikes the indemnification requirements found
in Sections 725 and 728 of the Dodd-Frank Act related to swap
data gathered by swap data repositories (SDRs) and derivatives
clearing organizations (DCOs). The section does maintain,
however, that before an SDR, DCO, or the CFTC shares
information with domestic or international regulators, they
have to receive a written agreement stating that the regulator
will abide by certain confidentiality agreements.
Swap data repositories serve as electronic warehouses for
data and information regarding swap transactions. Historically,
SDRs have regularly shared information with foreign regulators
as a means to cooperate, exchange views and share information
related to OTC derivatives CCPs and trade repositories. Prior
to Dodd-Frank, international guidelines required regulators to
maintain the confidentiality of information obtained from SDRs,
which facilitated global information sharing that is critical
to international regulators' ability to monitor for systemic
risk.
Under Sections 725 and 728 of the Dodd-Frank Act, when a
foreign regulator requests information from a U.S registered
SDR or DCO, the SDR or DCO is required to receive a written
agreement from the foreign regulator stating that it will abide
by certain confidentiality requirements and will ``indemnify''
the Commissions for any expenses arising from litigation
relating to the request for information. In short, the concept
of ``indemnification''--requiring a party to contractually
agree to pay for another party's possible litigation expenses--
is only well established in U.S. tort law, and does not exist
in practice or in legal concept in foreign jurisdictions.
These indemnification provisions--which were not included
in the financial reform bill passed by the House of
Representatives in December 2009--threaten to make data sharing
arrangements with foreign regulators unworkable. Foreign
regulators will most likely refuse to indemnify U.S. regulators
for litigation expenses in exchange for access to data. As a
result, foreign regulators may establish their own data
repositories and clearing organizations to ensure they have
access to data they need to perform their supervisory duties.
This would lead to the creation of multiple databases,
needlessly duplicative data collection efforts, and the
possibility of inconsistent or incomplete data being collected
and maintained across multiple jurisdictions.
In testimony before the House Committee on Financial
Services in March of 2012, the then-Director of International
Affairs for the SEC, Mr. Ethiopis Tafara, endorsed a
legislative solution to the problem, stating that:
The SEC recommends that Congress consider removing
the indemnification requirement added by the Dodd-Frank
Act . . . the indemnification requirement interferes
with access to essential information, including
information about the cross-border OTC derivatives
markets. In removing the indemnification requirement,
Congress would assist the SEC, as well as other U.S.
regulators, in securing the access it needs to data
held in global trade repositories. Removing the
indemnification requirement would address a significant
issue of contention with our foreign counterparts . . .
At the same hearing, the then-General Counsel for the CFTC,
Mr. Dan Berkovitz, acknowledged that they too have received
growing concerns from foreign regulators, but that they intend
to issue interpretive guidance, stating that ``access to swap
data reported to a trade repository that is registered with the
CFTC will not be subject to the indemnification provisions of
the Commodity Exchange Act if such trade repository is
regulated pursuant to foreign law and the applicable requested
data is reported to the trade repository pursuant to foreign
law.''
To provide clarity to the marketplace and remove any legal
barriers to swap data being easily shared with various domestic
and foreign regulatory agencies, this section would remove the
indemnification requirements found in Sections 725 and 728 of
the Dodd-Frank Act related to swap data gathered by SDRs and
DCOs.
On March, 14, 2013, at a hearing entitled ``Examining
Legislative Improvements to Title VII of the Dodd-Frank Act,''
Mr. Larry Thompson, Managing Director and General Counsel, the
Depository Trust and Clearing Corporation, provided the
following testimony with respect to provisions of H.R. 742,
which were included in Section 331:
The Swap Data Repository and Clearinghouse
Indemnification Correction Act of 2013 would make U.S.
law consistent with existing international standards by
removing the indemnification provisions from sections
728 and 763 of Dodd-Frank. DTCC strongly supports this
legislation, which we believe represents the only
viable solution to the unintended consequences of
indemnification. H.R. 742 is necessary because the
statutory language in Dodd-Frank leaves little room for
regulators to act without U.S. Congressional
intervention. This point was reinforced in the CFTC/SEC
January 2012 Joint Report on International Swap
Regulation, which noted that the Commissions ``are
working to develop solutions that provide access to
foreign regulators in a manner consistent with the DFA
and to ensure access to foreign-based information.'' It
indicates legislation is needed, saying that ``Congress
may determine that a legislative amendment to the
indemnification provision is appropriate.'' H.R. 742
would send a clear message to the international
community that the United States is strongly committed
to global data sharing and determined to avoid
fragmenting the current global data set for over-the-
counter (OTC) derivatives. By amending and passing this
legislation to ensure that technical corrections to
indemnification are addressed, Congress will help
create the proper environment for the development of a
global trade repository system to support systemic risk
management and oversight.
SUBTITLE D--RELIEF FOR MUNICIPAL UTILITIES
Sections 341, 342, 343--Transactions with the utility special entities;
utility special entity defined; utility operations-related swap
Sections 341, 342, and 343 of H.R. 4413 would preserve the
ability of government-owned utilities, classified in the bill
as ``utility special entities,'' to have uninterrupted and
cost-effective access to the customized, non-financial
commodity swaps that utility special entities have used for
years. In effect, the counterparties of utility special
entities would now be subject to the much higher $8 billion de
minimis swap dealer registration threshold. Importantly, the
legislation does not include an exemption for interest rate,
credit, equities, currency asset classes, or agriculture
commodities, other than commodities used for electric energy or
natural gas production or generation. Instead, H.R. 4413
creates a new category of swap known as the ``utility
operations-related swap'' and provides relief to counterparties
of utility special entities only when those specific types of
swaps are used. To ensure transparency, the bill still requires
all special entity swap transactions to be reported to the
CFTC.
On May 23, 2012, the CFTC published a rule further defining
who is considered a ``swap dealer'' under the Dodd-Frank Act,
which directly impacted many swap counterparties of government-
owned non-profit utilities. The rule became effective on July
23, 2012, with registration as a swap dealer not being required
until on or after October 12, 2012. The CFTC's swap dealer rule
includes an exception for entities from having to register as a
swap dealer if their outstanding annual gross notional swap
positions do not exceed either of the two following thresholds:
1. $3 billion (subject to an initial three year
phase-in level of $8 billion), referred to as the
``general de minimis threshold''; and
2. $25 million with regard to swaps where an entity's
counterparty is a ``special entity'' as defined in
Section 731 of the Dodd-Frank Act, referred to as the
``special entity de minimis threshold.''
On October 12, 2012, after several public power groups
petitioned the CFTC to relieve their counterparties from
compliance with the much lower registration threshold, CFTC
staff issued a non-binding ``no-action relief'' letter instead,
which increased the ``special entity sub-threshold'' to $800
million from $25 million.
As mentioned above, a ``special entity'' is broadly defined
in Section 731 of the Dodd-Frank Act to include any government-
owned enterprise, such as public school boards, state
governments, and any publicly-owned producer or supplier of
electricity or natural gas. Casting such a broad net in
defining ``special entity'' was a policy decision made by the
drafters of the Dodd-Frank Act which sought to protect
taxpayers from the use of complex financial swaps by their
municipality. For example, the use of fixed-for-floating
interest rate swaps tied to municipal bonds issued by Jefferson
County, Alabama, contributed to the county's multi-billion
dollar debt that rapidly expanded during the 2008 financial
crisis, later resulting in what was at the time the largest
municipal bankruptcy filing in U.S. history.
Prior to enactment of the Dodd-Frank Act, however, many
publicly-owned utilities relied on their non-financial
counterparties, such as natural gas producers, independent
power generators, and investor-owned utility companies to enter
into swaps in order to hedge against operational risks. Many of
these utilities have heard from numerous counterparties who are
evaluating their future business plans in light of the final
CFTC rules. These counterparties are strictly limiting their
business, or completely cutting all ties with utility special
entities given the special entity sub-threshold and uncertainty
surrounding the new regulatory regime for the swaps
marketplace.
Unless counterparties can determine with certainty that
their swap activities with special entities will not result in
them being classified as a ``swap dealer'' under the Dodd-Frank
Act, it appears that numerous counterparties may avoid doing
business with them altogether. This ultimately limits
competition and forces special entities to do business with
financial institutions or large swap dealers, which
concentrates risk and may raise costs for many utility special
entities eventually leading to increased costs for ratepayers.
The Committee recognizes that on March 21, 2014, the Commission
staff provided a ``no-action letter'' to utility special
entities so they are not subjected to the $25 million de
minimis threshold. However, permanent statutory relief that
would be provided in Sections 341, 342, and 343 is still needed
due to the questionable legal certainty contained in this--and
all--CFTC no-action letters, which state that ``[a]s with all
no-action letters, the Division retains the authority, in its
discretion, to further condition, modify, suspend, terminate or
otherwise restrict the terms of the no-action relief provided
herein.''
On May 22, 2014, the CFTC released a proposed rulemaking to
permanently correct the missteps that would be corrected by
Sections 341, 342, and 343. While a regulatory change is
welcomed by the Committee, statutory certainty can provide
millions of consumers across the country with greater certainty
that their utility rates will not increase due to the Dodd-
Frank Act.
On March, 14, 2013, at a hearing entitled ``Examining
Legislative Improvements to Title VII of the Dodd-Frank Act,''
Mr. Terrance P. Naulty, General Manager and CEO, Owensboro
Municipal Utilities, provided the following testimony with
respect to the provisions included in Sections 341, 342, and
343:
Government-owned utilities depend on nonfinancial
commodity transactions, trade options, and ``swaps,''
as well as the futures markets, to hedge commercial
risks that arise from their utility facilities,
operations, and public service obligations. Together,
nonfinancial commodity markets play a central role in
the ability of government-owned utilities to secure
electric energy, fuel for generation, and natural gas
supplies for delivery to consumers at reasonable and
stable prices . . . [t]he CFTC has said that it
retained the $25 million threshold in light of the
special protections that the Dodd-Frank Act affords to
special entities. However, the statute does not
require--even mention--special protections for special
entities in regard to the swap dealer definition. As
noted above, the law imposes requirements on swap
dealers and major swap participants advising or
entering into swaps with special entities. Nowhere does
the law mention deeming a participant to be a swap
dealer solely based on its volume of swaps with
government-owned entities. Government-owned utilities
understand the operations-related swap transactions
they use to manage their commercial risks and do not
need the special protections provided by the $25
million sub-threshold. In fact, and ironically, these
``protections'' are likely to limit the ability of
these utilities to hedge operational and price risks
rather than to protect these utilities and their
customers from risk. On July 12, 2012, APPA, the Large
Public Power Council (LPPC), the American Public Gas
Association (APGA), the Transmission Access Policy
Study Group (TAPS), and the Bonneville Power
Administration (BPA), filed with the CFTC a ``Petition
for Rulemaking to Amend CFTC Regulation 1.3(ggg)(4).''
. . . [t]he legislation [H.R. 1038] largely mirrors the
intent and effect of the NFP EEU petition to the CFTC,
providing narrowly targeted relief for operations-
related swaps for government-owned utilities.
Specifically, the legislation would provide that the
CFTC, in making a determination to exempt a swap dealer
under the de minimis exception, shall treat a utility
operations-related swap with a utility special entity
the same as a utility operations-related swaps with any
entity that is not a special entity. . . . [t]he
legislation carefully defines which entities would
qualify as a ``utility special entity.'' It also
specifically defines the types of swaps that could and
could not be considered a ``utility operations-related
swap.'' For example, the legislation specifically
prohibits interest, credit, equity, and currency swaps
from being considered as a utility operations-related
swap. Likewise, except in relation to their use as a
fuel, commodity swaps in metal, agricultural, crude
oil, or gasoline would not qualify either. Finally, the
legislation also confirms that utility operations-
related swaps are fully subject to swap reporting
requirements. When implemented, this legislation should
provide the certainty to nonfinancial entities that
they can enter into swap transactions with government-
owned utilities without fear of being deemed a swap
dealer. It truly levels the playing field. And, it does
nothing to otherwise alter the CFTC's implementation of
the Dodd-Frank Act.
SUBTITLE E--END-USER REGULATORY RELIEF
Section 351--End-users not treated as financial entities
Section 351 is intended to remove non-financial end-users
that were unintentionally captured in the definition of
``financial entity'' in Section 2(h)(7)(C) of the Commodity
Exchange Act due to a cross-reference to Section 4(k) of the
Bank Holding Company Act of 1956. By defining ``commercial
market participants'' using longstanding CFTC terminology found
in the Joint CFTC-SEC Rule Defining Swap (CFTC Reference: 77 FR
48207) and current CFTC Regulations governing Trade Options
(CFTC Regulations Part 32.3(a)(1)(ii)), the Committee seeks to
provide narrow relief to these entities who are not traditional
financial institutions that may incidentally be swept in to the
Dodd-Frank regime simply because they engage in futures
contracts, forward contracts, or commodity options which call
for physical delivery of a commodity.
On July 24, 2013, at a hearing entitled ``The Future of the
CFTC: End-User Perspectives,'' Mr. Richard F. McMahon, Jr.,
Vice President, Edison Electric Institute (EEI), provided the
following testimony with respect to the need for the provisions
included in Section 351:
The Dodd-Frank Act defines the term ``financial
entity'', in part, as an entity that is ``predominantly
engaged in activities that are in the business of
banking, or in activities that are financial in nature,
as defined in section 4(k) of the Bank Holding Company
Act of 1956.'' Incorporating banking concepts into a
definition that also applies to commercial commodity
market participants has had unintended consequences.
Unlike our members, banks and bank holding companies
generally cannot take or make delivery of physical
commodities. However, banks and bank holding companies
can invest and trade in certain commodity derivatives.
As a result, the definition of ``financial in nature''
includes investing and trading in futures and swaps as
well as other physical transactions that are settled by
instantaneous transfer of title of the physical
commodity. An entity that falls under the definition of
a ``financial entity'' is generally not entitled to the
end-user exemption--an exemption that Congress included
to benefit commercial commodity market participants--
and can therefore be subject to many of the
requirements placed upon swap dealers and major swap
participants. In addition, the CFTC has used financial
entity as a material term in numerous rules, no-action
relief, and guidance, including, most recently, its
cross-border guidance. The Dodd-Frank Act allows
affiliates or subsidiaries of an end-user to rely on
the end-user exception when entering into the swap on
behalf of the end-user. However, swaps entered into by
end-user hedging affiliates who fall under the
definition of ``financial entity'' cannot take
advantage of the end-user exemption, despite the fact
that the transactions are entered into on behalf of the
end-user. Many energy companies structure their
businesses so that a single legal entity within the
corporate family acts as a central hedging, trading and
marketing entity--allowing companies to centralize
functions such as credit and risk management. However,
when the banking law definitions are applied in this
context, these types of central entities may be viewed
as engaging in activity that is ``financial in
nature,'' even with respect to physical transactions.
Hence, some energy companies may be precluded from
electing the end-user clearing exception for swaps used
to hedge their commercial risks and be subject to
additional regulations applicable to financial
entities. Importantly, two similar energy companies may
be treated differently if, for example, one entity uses
a central affiliate to conduct these activities and
another conducts the same activity in an entity that
also owns physical assets or that has subsidiaries that
own physical assets. Accordingly, Congress should amend
the definition of ``financial entity'' to ensure that
commercial end-users are not inadvertently regulated as
``financial entities.''
Section 352--Reporting of illiquid swaps so as not to disadvantage
certain non-financial end-users
Real-time public reporting of swap transactions as required
by the CFTC may ultimately lead to more efficient prices for
commercial end-users. However, based on the fact that liquidity
diminishes for longer-dated contracts further out in time,
there is a point where the benefits derived from public
reporting do not outweigh the detriment to those who are
trading in illiquid markets. While transparency is helpful in
establishing a price between buyers and sellers, if market
participants become easier to identify in certain sparsely
traded swaps, other market participants will be able to take
advantage of their positions and increase their cost of doing
business for future trades. These sparsely traded swaps are
used by a handful of companies with excellent credit ratings to
provide long-term protection against price fluctuations for
commodities such as oil and jet fuel.
While the goal of increasing market transparency was well
intended, the CFTC's final rule on reporting requirements does
not differentiate between the appropriate times needed for
reporting between different types of swaps contracts. Instead,
this rule has led to a change in market behavior that affects
long-established business models which traditionally allowed
companies to protect against commodity price increases.
Effective risk management helped these companies keep prices
low for consumers. Southwest Airlines offers a prime example of
how this new CFTC regulation has impacted its business and its
customers. Because their exact market positions became known by
competitors due to near instantaneous reporting of market
positions, Southwest Airlines has been forced to pay more in
order to protect against the rising cost of fuel.
There is precedent in CFTC policy in recognizing the
sensitivity around transaction counterparty identities in
public data reporting. The Commission has for years issued
publicly a weekly ``Commitment of Traders Report'' (COT). In
describing the issuance of this report, the Commission states:
``The [COT] reports provide a breakdown of each Tuesday's open
interest for markets in which 20 or more traders hold positions
equal to or above the reporting levels established by the
CFTC.'' In other words, when the number of market participants
in a reportable contract drops below a certain level, the
Commission has recognized there can be damage to counterparty
anonymity when there are a limited number of participants in a
given market, and therefore does not issue a report for that
contract. Because the Committee believes that the number of
participants and transactions in a given market diminishes for
longer-dated contracts, the Commission shall create a standard
for reporting all swap asset classes based off of when
liquidity in a contract lowers to the level of being able to
easily identify market participants.
As such, Section 352 would correct the unintended
consequences of the new CFTC reporting regime while still
maintaining the goal of increasing market transparency. This
section preserves the real-time reporting of these sparsely
traded swaps directly to the CFTC to ensure that government
regulators have the information they need to police the
markets. By simply making a technical change to the timeframe
in which end-users are required to release their trading
information to the general public, Section 352 achieves market
transparency in a manner that does not harm long-standing
business models and that helps keep costs low for millions of
Americans.
On July 24, 2013, at a hearing entitled ``The Future of the
CFTC: End-User Perspectives,'' Mr. Chris Monroe, Treasurer,
Southwest Airlines, Co., provided the following testimony with
respect to the need for provisions included in Section 352:
One key to our unparalleled success has been our
ability to hedge fuel through legitimate end-user
derivatives purchased in the futures markets. Hedging
at Southwest is enterprise risk management--essential
in our view given our $6 billion annual fuel bill. To
hedge, we commonly enter into transactions many months
or years in advance of needing the physical product.
Trading in these illiquid markets allows us to manage
our fuel costs, which in turn helps us to keep fares
low and maintain large jet (Boeing 737) flights in the
communities we serve. I am here today to highlight a
few issues that have begun to impact these important
markets that companies such as Southwest relay on to
manage risk. One area where we are seeing a negative
commercial impact is the Commodity Futures Trading
Commission's (``CFTC's'') Real-Time Public Reporting of
Swap Transaction Data Rule (``Real-Time Reporting
Rule'') . . . [i]mportantly, trades between a
legitimate commercial end-user and a dealer must be
reported within the dealer's shorter time limit. Given
that the vast majority of bilateral trades entered into
by commercial end-users are transacted with a dealer,
this means nearly all commercial end-user trades are
reported on the accelerated time limit. The dealer time
delays may be sufficient for liquid markets, but the
timeframes are not sufficient for illiquid markets,
which, as I said before, is where Southwest commonly
trades. Only a few market participants trade that far
out the curve, which makes the contracts highly
illiquid, even in contracts that may be liquid in the
front months such as crude oil. Additionally, Southwest
has a particularly identifiable trading strategy, a
hedging ``DNA'' if you will, which makes us quite
visible in a market with few participants. This is
particularly harmful. When a dealer has to report
illiquid trades to the market quickly, the dealer is
less likely to be able to lay off the risk of that
trade in the prescribed time. If the dealer is still
holding a large amount of the risk when the trade is
shown to the public, the dealer can be front-run and,
as a result, take a loss on the trade. That increased
risk to the dealer will either curtail trades or
materially increase the costs of the trade to the end-
users.) If an end-user like Southwest can no longer
access the markets to hedge fuel it would be contrary
to the purposes of the legislation and in our view
hostile to Congressional intent.
Section 353--Relief for grain elevator operators, farmers, agricultural
counterparties, and commercial market participants
As a service to their customers, farmer-owned cooperative
FCMs have a network of branch operations embedded in locations
such as grain elevators, whose primary business is handling the
cash grain volume of their farmer customers. As a branch office
of a cooperatively-owned FCM, these commercial grain elevators
have chosen to provide brokerage services as a means of
providing access to risk management tools for their farmer
customers who want to hedge their production volume through
futures and/or options.
In response to the Dodd-Frank Act, the CFTC greatly
expanded record keeping requirements by making it necessary for
brokers to retain all forms of written and oral communication
that might ``lead to the execution of a transaction in a
commodity interest''. Given the infrequent and low volume of
futures/options transactions handled by ``branches'' associated
with those FCMs, complying with the recording requirements
under this vague regulation would not be economically feasible.
The necessary investment to put in place and maintain a system
to record every form of communication that might ``lead to the
execution of a transaction'' would exceed not only any profits,
but in many cases the total revenues of those FCM branches.
Local branches could no longer provide brokerage services
resulting in reduced risk management options, and their use, by
farmers and ranchers.
Section 353 does not eliminate a grain elevator's record
keeping responsibilities, but merely relieves them from
purchasing and maintaining costly technology to record and save
all incoming communication that may lead to a transaction in a
commodity interest. Grain elevators and other end-users will
still be required to maintain a written record of such
transactions that include all of the transactions' material
economic terms. Without Section 353, the vague, sweeping
language of the CFTC's current regulation will result in
significant time and financial costs to commercial grain
elevators attempting to comply with the rule. Rather than
facilitating the collection of useful transaction records, the
rule is likely to result in grain elevators' no longer
providing useful brokerage services to their customers. As a
result, countless farmers and ranchers will lose access to
valuable risk management tools that allow them to hedge their
production volume.
On July 24, 2013, at a hearing entitled ``The Future of the
CFTC: End-User Perspectives,'' the following witnesses provided
testimony with respect to provisions included in Section 353:
A significant and concerning expansion of current
data requirements beyond the scope of Dodd-Frank is
related to record-keeping requirements in Part 1 of
Commission regulations. In accordance with Dodd-Frank,
the CFTC expanded the futures record-keeping
requirements that existed for certain markets
participants to swaps. However, they also significantly
expanded the written requirements, as well as created a
new requirement to record oral conversations.
Compliance costs have already been incredibly
substantial now that compliance with the written
requirements is mandatory and will only increase once
compliance with the oral recording requirement comes
into effect later this year. Again, the market is
searching for a reason for and measurable benefit of
all of this new information that must be maintained and
archived in a particular way. In addition, the rule is
vague as to which communications must be retained, so
in an abundance of caution, market participants are
effectively saving every e-mail, news article, or any
other piece of information that might ``lead to the
execution of a transaction'' and soon will have to
begin recording every phone call that might ``lead to
the execution of a transaction.'' This vague ``lead to
. . .'' language appears nowhere in any prior iteration
of Rule 1.35 or in any prior CFTC Advisory relating to
the rule, and operates to expand substantially the
scope and burdens of the rule. Also, the application of
the requirements to members of an exchange seems to
have no regulatory rationale and only serves as a
disincentive to be an exchange member. Finally, the
cost figures contained in the cost-benefit analysis in
the final rule are not justified. Compliance costs are
exponentially higher than they estimate, and in some
cases the technology is not even available to market
participants. Requests for clarification have not yet
been answered, and CMC will be submitting a written
request soon in a continued effort to clarify and
hopefully narrow the scope of what must be retained
and, therefore, reduce what we view as unnecessary
compliance costs.--Mr. Lance Kotschwar, Senior
Compliance Attorney, The Gavilon Group, LLC, on behalf
of the Commodity Markets Council
Given the infrequent and low volume of futures/
options transactions handled by ``branches'' associated
with those FCMs, complying with the oral recording
requirements (recording of all phone calls) under this
regulation would not be economically feasible. The
necessary investment to put in place and maintain a
system to comply with the regulations would exceed not
only any profits, but in many cases the total revenues
of those FCM branches--to the point that those local
branches could no longer provide brokerage services.
The effect would be reduced risk management options,
and their use, by farmers and ranchers.--Mr. Scott
Cordes, President, CHS Hedging, Inc., on behalf of the
NCFC
Section 354--Relief for end-users who use physical contracts with
volumetric optionality
Forward contracts that result in the physical delivery of
commodities are expressly exempted from the definition of a
``swap'' under the Commodity Exchange Act. Section 354 would
clarify the application of this exemption in order to prevent
unnecessary and costly regulations on companies that enter into
transactions to ensure the efficient physical delivery of
commodities necessary to conduct their core business
operations. Without clarification, the CFTC could impose costly
regulations on risk management transactions, which increases
companies' operating costs and ultimately results in increased
costs to consumers across the nation.
Risk management contracts that allow for an adjustment of
the quantity of a commodity delivered do not pose a threat to
the stability of financial markets and should not be regulated
the same as financial derivatives. These contracts do provide
companies with an efficient and cost effective means of
acquiring the commodities they need to conduct their daily
business, such as providing affordable sources of energy to
millions of American households. The misguided regulation of
these harmless transactions will actually have the effect of
increasing companies' costs of doing business, will consolidate
risk in the marketplace because some businesses will be forced
out of the market, and will ultimately raise costs for everyday
American consumers. Such costly and unnecessary regulation
defies the intent of Congress and needlessly subjects a large
segment of the energy marketplace to burdensome regulation
under the Dodd-Frank Act.
The Dodd-Frank Act, passed to reform the U.S. financial
system, should not result in increased utility rates for
consumers of natural gas, electricity, and other forms of
energy used to heat homes, run factories, and power the
American economy. Without relief, many utilities and energy
companies will not be able to effectively manage risk--which
will only increase their costs and possibly lead to higher
energy rates for millions of Americans--an unacceptable result
during a period of tremendous economic uncertainty.
As such, Section 354 would exempt forward contracts between
end-users that allow for deferred delivery or shipment of a
non-financial commodity, so long as the contract results in an
actual physical settlement obligation, is between commercial
market participants, and the option to receive more or less of
a commodity cannot be sold separately for financial gain. The
Committee notes that optionality includes both allowing a
counterparty to reduce the amount of commodity delivered and
allowing a counterparty to increase the amount of commodity
delivered.
On July 24, 2013, at a hearing entitled ``The Future of the
CFTC: End-User Perspectives,'' the following witnesses provided
testimony with respect to provisions included in Section 354:
Because gas consumption to residential and commercial
customers is largely weather driven (consumption
increases as the weather gets colder) and predicting
the weather is not an exact science, gas supply
contracts with delivery flexibility help AGA members
make sure gas supplies are, or can be made, available
when the customers actually need the gas without having
to pay excessively higher prices at the actual time of
need and/or other fees associated with pipeline
imbalance penalties. There remain disagreements and
confusion within the natural gas industry as to which
types of gas supply transactions, if any, will be
subject to CFTC regulation. These transactions are
normal commercial merchandising transactions that
parties use to buy and sell natural gas for ultimate
delivery to end-use customers. They would not normally
be considered speculative, financial transactions as
the parties contemplate physical delivery of the
commodity. Nevertheless, transactions that contain some
option or choice for one or the other counterparty,
raise questions for some as to whether they would be
considered commodity options regulated as swaps, meet a
three part test and a seven-part test to be excluded as
options embedded in forward contracts, be viewed as
trade options subject to a lessened reporting burden,
or be considered facility use agreements that meet a
three-part test and then a five-part test and not
subject to regulation at all.--Andrew K. Soto, Senior
Managing Counsel, Regulatory Affairs, AGA
Recently, however, in light of the CFTC's seven-part
interpretation in the rule, some NCFC members have
raised concerns over the appropriate treatment of
forward contracts commonly used in physical supply
arrangements that contain volumetric optionality. If
the CFTC were to take a narrow view of the seven-part
interpretation, it may view as options many other
routine physical supply contracts in which the
predominant feature is delivery. Such an interpretation
would require those common commercial forward contracts
to come under the regulations intended for swaps such
as reporting and position limits. The uncertainty of
the CFTC interpretation of these types of contracts,
all previously covered under the forward contracting
exclusion, will require NCFC members to expend
significant labor and costs to review hundreds of sales
transactions to determine if they continue to meet the
forward contract exclusion. Again, this is an
unnecessary resource and cost burden on end-users that
should be avoided. We hope CFTC will interpret this
exclusion consistently with its historical
understanding and prior guidance.--Mr. Scott Cordes,
President, CHS Hedging, Inc., on behalf of the NCFC
Section 355--Commission vote required before automatic change of swap
Dealer de minimis level
Section 355 would simply require the CFTC Commissioners to
vote before changing the current $8 billion swap dealer de
minimis exemption from registering as a swap dealer. Without
Section 355, a CFTC rule will automatically set the de minimis
exemption at $3 billion, potentially requiring dozens of end-
users to register with the Commission in the coming years as
``swap dealers'' and imposing costly new regulations on public
utilities, energy companies, and other end-users that played no
part in the financial crisis.
As the regulations currently stand, if a company does more
than $8 billion worth of swap business per year (known as the
de minimis level of swap dealing), it must register with the
CFTC as a ``swap dealer.'' The CFTC's regulations will
arbitrarily lower the registration threshold to $3 billion
starting five years from October of 2012 (and possibly sooner)
with no Commission vote, despite rules requiring a Commission
``study'' to determine if the swap dealer registration
threshold is appropriately set at $8 billion.
An arbitrary 60% decline in the swap dealer registration
threshold from $8 billion to $3 billion creates significant
uncertainty for non-financial companies that engage in
relatively small levels of swap dealing to manage business risk
for themselves and their customers. Lowering the swap dealer
registration threshold below its current level of $8 billion
could drive many non-financial companies out of the business of
offering their customers risk management products, which will
limit risk management options for end-users, and ultimately
consolidate marketplace risk in only a few large swap dealers.
This consolidation runs counter to the goals of the Dodd-Frank
Act to reduce systemic risk in the marketplace.
CFTC regulations should not arbitrarily change the swap
dealer registration de minimis level without a formal
rulemaking process. The regulations themselves require a formal
study by the Commission to determine if the current $8 billion
level is appropriate. However, the study is completely
irrelevant because the de minimis level is moved to $3 billion
in five years regardless of the study's findings. Because
provisions embedded deep within CFTC regulations failed to
mandate that the Commission must vote to determine what policy
is best for future market conditions, our markets could be
forced to adhere to outdated policies for years to come.
Further, as demonstrated in the context of utility special
entities, a de minimis exception threshold that is too low can
significantly disrupt markets, hinder competition, and leave
non-financial businesses with limited ways to manage their
economic and operational risks. Section 355 would result in a
Commission review of whether lowering the de minimis exception
threshold would drive participants out of the swap market,
limit competition and potentially harm end-users. In
particular, pursuant to Section 355, the Committee expects that
the Commission would periodically review the de minimis
exception threshold to consider whether, in light of changes in
prices and market structure, the de minimis exception threshold
should also be increased to greater than $8 billion to ensure
non-financial end-users are able to obtain risk management
solutions from a broad range of counterparties.
On July 24, 2013, at a hearing entitled ``The Future of the
CFTC: End-User Perspectives,'' the following witnesses provided
testimony with respect to the need for the provisions included
in Section 355:
Current regulations have arbitrarily established a de
minimis level, the breach of which requires
registration as a swap dealer, at $8 billion with a
drop to $3 billion following an unpredictable CFTC
decision making process. The only certainty in the
process is that a lack of action will result in the de
minimis level declining in 5 years. This $3 billion
level is also arbitrary and would significantly affect
the number of firms defined and regulated as swap
dealers. Changes should not be made through such a long
and ill-defined process, which includes several
unpredictable and difficult to follow steps for market
participants. We need a more predictable process.--Mr.
Lance Kotschwar, Senior Compliance Attorney, The
Gavilon Group, LLC, on behalf of the Commodity Markets
Council
A new category of market participants, swap dealers,
was created by the Dodd-Frank Act. These swap dealers
must register with the CFTC and are subject to
extensive record-keeping, reporting, business conduct
standards, clearing, and--in the future--regulatory
capital and margin requirements. However, the Act
directed the CFTC to exempt from designation as a swap
dealer entities that engage in a de minimis quantity of
swap dealing. The CFTC issued a proposed rule on the de
minimis threshold for comment in early 2011. After
review of hundreds of comments, a series of
Congressional hearings and after dozens of meetings
with market participants, the CFTC set this de minimis
threshold at $8 billion. However, it will then be
reduced automatically to $3 billion in 2018 absent CFTC
action. We oppose such a dramatic reduction in the de
minimis threshold without deliberate CFTC action.
Inaction is always easier than action, and inaction
should not be the default justification for such a
major regulatory action. In addition, we believe the
CFTC should not have the authority to change the de
minimis level without a formal rulemaking process that
allows stakeholders to provide input on what the
appropriate threshold should be. Absent these
procedural changes, we are concerned a deep reduction
in the de minimis level could result in commercial end-
users being misclassified as swap dealers, hindering
end-users' ability to hedge market risk while imposing
unnecessary costs that eventually will be borne by
consumers.--Mr. Richard F. McMahon, Jr., Vice
President, EEI
Section 356--Capital requirements for bon-bank swap dealers
Under currently-proposed CFTC regulations for capital and
margin, non-bank swap dealers would be forced by the CFTC to
adhere to an inflexible capital requirement standard (based
partially on the capital requirements based on the soon-to-be
outdated Basel II Accords first proposed in 2004, which have
since been eclipsed by the Basel III Accords proposed in 2011).
According to testimony received from Mr. William J. Dunaway,
CFO, INTL FCSTONE, Inc., before the Committee on May 21, 2013,
under the CFTC's proposal, a firm could be assessed a capital
charge beyond their net position in a contract, especially in
relation to commodity swaps. Furthermore, the CFTC's capital
requirements stand in stark contrast to the SEC's capital
requirements for security-based swap dealing due to the SEC's
allowance for dealers to utilize pre-approved internal capital
models. As a result, the Committee learned that, under a worst
case scenario, ``the same derivatives portfolio that would
require a bank-affiliated Swap Dealer to hold $10 Million in
regulatory capital using standard internal models would require
us to set aside up to $1 Billion in capital''. At the same
hearing on May 21, 2013, entitled ``The Future of the CFTC:
Market Perspectives,'' Mr. Dunaway provided more insight on how
to correct such a potentially harmful result for the
marketplace:
The Commodity Exchange Act requires the CFTC, the
prudential regulators, and the SEC to establish and
maintain ``comparable'' minimum capital requirements
for all Swap Dealers. However, the proposed Capital
Rules clearly are not ``comparable.'' Pursuant to its
mandate under the CEA, we believe that the CFTC should
revise its proposed capital rules to ensure that the
capital and margin requirements applicable to non-bank
Swap Dealers are comparable to those applicable to
bank-affiliated Swap Dealers. This can be accomplished
by altering the rules to permit the following:
[i]nternal Models--The CFTC could permit all Swap
Dealers, including Commodity Swap Dealers, to request
approval of, and rely upon, internal models to measure
market risk. To the extent that the CFTC currently
lacks the resources to review and approve such internal
models, it should permit Swap Dealers to certify to the
CFTC or the NFA that their models produce reasonable
measures of risk, subject to verification by the CFTC
when its resources enable it to do so.--Mr. William J.
Dunaway, CFO, INTL FCSTONE, Inc.
Because this potential disparity in capital charges for
non-bank versus bank affiliated swap dealers could harm more
than one market participant, Section 356 would require that the
CFTC amend its proposed rule so as to closely consult with the
SEC and prudential financial regulators and to allow the use of
comparable capital requirements that will be utilized by swap
dealers regulated by the SEC and prudential regulators.
Section 357--Harmonization with the Jumpstart Our Business Startups Act
In letters to the CFTC, stakeholders representing a wide
variety of market participants, such as SIFMA, the Managed
Funds Association (MFA), and the Financial Services Roundtable
requested that the Commission harmonize its ``private
offering'' requirements in CFTC Rules 4.7 and 4.13(a)(3) with
the broadened scope of solicitation permitted by the SEC after
it proposed amendments to Rule 506 of Regulation D and Rule
144A under the Securities Act of 1933. The SEC's proposed
changes to the solicitation rules for securities offerings came
about after the Jumpstart Our Business Startups Act (JOBS Act)
(P.L. 112-106) was signed into law in April of 2012 which
allows for solicitation of accredited investors for private
securities offerings in order to raise needed capital for
companies to expand and create jobs.
While the JOBS Act mandates consistent treatment of
Regulation D, Rule 506 offerings across the federal securities
laws, unintentionally omitted harmonizing changes to the CFTC's
regulations, which creates an inconsistency between the SEC's
rules and the CFTC's rules governing solicitation. Accordingly,
because the relief is needed quickly as to not impede use of
the JOBS Act by the marketplace, Section 357 would directly
amend CFTC regulations (which would obviate the need for a
Commission rulemaking) to provide an exemption for any
registered commodity pool operator to engage in the general
solicitation for the sale of commodity pools parallel to the
exemption provided for general solicitation of securities under
the JOBS Act.
Section 358--Bona fide hedge defined to protect end-user risk
management
In 2010, the Dodd-Frank Act instructed the CFTC on how to
define what constitutes a bona fide hedging transaction (i.e.:
non-speculative trading) or position so those trades would not
count towards any positions limits. The statutory definition
states that the reduction of risk inherent to a commercial
enterprise is a component in determining what qualifies as a
bona fide hedging transaction. However, in a change from prior
practice, the CFTC's approach in both the originally proposed
2011 position limits rule (which was overturned by a federal
district court for the District of Columbia in September 2012)
and the position limits rule proposed in November of 2013 was
to limit the availability of the bona fide hedge exemption to a
limited set of transactions, unless the CFTC gave specific
approval to a particular form of transaction.
In the most-recently proposed position limits rule, instead
of providing a clear bona fide exemption from position limits
to allow end-users of physical commodities to properly hedge
their commercial risk was not included, many risk-reducing
practices commonly used in the futures markets today were
excluded from the list of bona fide hedging transactions
prescribed in CFTC Rule 151.5(a)(2). This concern was confirmed
by Mr. Jeffrey Sprecher, CEO of Intercontinental Exchange,
Inc., in testimony before the Committee on May 21, 2013, when
he stated that ``[t]he narrow definition of bona fide hedge
will likely hurt commercial end-users that these markets are
intended to serve, and thus support the bona fide hedge
exemption relied upon historically would bring greater
certainty to end-users in executing their risk management
operations.''
The CFTC's limitation of bona fide hedges to only a handful
of transaction types places significant limitations on many
end-users' ability to hedge risk efficiently. As such, the
Committee formulated Section 358 to provide for a workable
hedge exemption process. The bona fide hedge provisions in
Section 4a(c) of the Commodity Exchange Act are intended to
provide market participants with certain relief from position
limits therefore give end-users with the flexibility necessary
to hedge their legitimate anticipated business risks.
One of the main purposes of Section 358 is to make clear
that the statutory requirements with respect to what
constitutes a bona fide hedge transaction must be reflected in
the CFTC's further definition of that term. Specifically,
changing ``may'' to ``shall'' in Section 4a(c)(1) reflects the
intent of the Committee that the CFTC is not authorized to
promulgate a further definition of ``bona fide hedge
transaction'' that is narrower or more restrictive than what is
described in the CEA. In addition, Section 358 intended to
clarify that the CFTC's further definition of ``bona fide hedge
transaction'' must include hedges of legitimate anticipated
business needs.
Section 358 is also intended to provide more flexibility to
market participants as hedging practices evolve. It is
Congress' intent that the CFTC provide bona fide hedge status
to all legitimate risk management practices now and in the
future. A narrow definition of what constitutes bona fide
hedging that is limited to an enumerated list of transactions
will place significant limitations on many end-users' ability
to hedge risk properly and efficiently. In further defining
what constitutes a bona fide hedging transaction, the CFTC
should provide flexibility such that changes and advances in
hedging practices so they can easily be incorporated into the
bona fide hedging regime in an efficient and timely manner,
without further Commission rulemakings that would add
uncertainty to the marketplace.
On July 24, 2013, at a hearing entitled ``The Future of the
CFTC: End-User Perspectives,'' the following witnesses provided
testimony with respect to the need for provisions included in
Section 358:
Congress provided a definition of a bona fide hedge
within Dodd-Frank that the CFTC has unnecessarily
narrowed, including related to anticipatory hedging,
and has created at least five different definitions in
various rules of what constitutes a bona fide hedge.
This is nonsensical and creates unnecessary confusion,
while disrupting legitimate risk mitigation practices.
We are committed to working with Congress to set
clearer direction on bona fide hedges so that
transactions that limit economic risks are viewed as
bona fide hedges by the CFTC.--Mr. Lance Kotschwar,
Senior Compliance Attorney, The Gavilon Group, LLC, on
behalf of the Commodity Markets Council
On September 28, 2012, the U.S. District Court for
the District of Columbia vacated final CFTC rules
regarding position limits. These vacated rules defined
the term bona fide hedging. As written in the CFTC's
rule that was vacated, the definition was unnecessarily
narrow and would have discouraged a significant amount
of important and beneficial risk management activity.
Specifically, the rule narrowed the existing definition
considerably by providing that a transaction or
position that would otherwise qualify as a bona fide
hedge also must fall within one of eight categories of
enumerated hedging transactions, a definitional change
neither supported in nor required by the Dodd-Frank
Act. This restrictive definition of bona fide hedging
transactions could disrupt the commodity markets, make
hedging more difficult and costly, and may increase
systemic risk by encouraging end-users to leave a
relatively large portion of their portfolios un-
hedged.--Mr. Richard F. McMahon, Jr., Vice President,
EEI
Section 359--Cross-border regulation of derivatives transactions.
As the global financial system has evolved, U.S.
institutions have expanded their derivatives operations
overseas to provide services to both U.S. and non-U.S.
customers. At the same time, foreign institutions have
established subsidiaries and branches in the U.S. to offer
derivatives directly to U.S. customers. The growth of this
cross-border activity makes questions regarding the application
of the Dodd-Frank Act to activities that occur outside the U.S.
(known as ``extraterritorial'') complex and critical.
Section 722(d) of Title VII sets forth that provisions of
the Dodd-Frank Act shall not apply to activities outside the
United States unless those activities: (1) have a direct and
significant connection with activities in, or effect on,
commerce of the United States, or (2) contravene such rules or
regulations as the CFTC prescribes are necessary to prevent
evasion of the Dodd-Frank Act. This is consistent with
historical practice by both the CFTC and the prudential
regulators in their treatment of foreign entities with
operations in the U.S., or of U.S. entities with regard to
their operations in foreign jurisdictions. Generally, the
regulatory agencies have deferred to foreign regulatory
authorities for the supervision of entities located abroad if
the agencies found that those entities were subject to a
regulatory regime comparable to that imposed by the U.S.
However, in April of 2012, the prudential regulators
proposed a rule for the application of margin requirements as
required by Title VII for Major Swap Participants and Swap
Dealers. Under the prudential regulators' proposal, margin
requirements would apply to all transactions of U.S. financial
institutions--whether they involve their U.S. or non-U.S.
customers. For example, a foreign subsidiary of a U.S. bank in
Europe would be subject to the Dodd-Frank Act's margin rules
even when dealing with European customers.
On June 29, 2012, the CFTC issued proposed ``interpretive
guidance'' for the cross-border application of Title VII of the
Dodd-Frank Act. The release of this guidance, approved by all
five commissioners, was done so without the concurrent release
of similar guidance from the SEC for security-based swaps and,
as it was not in the form of a proposed rule, did not include a
cost-benefit analysis. When the guidance was released, then-
CFTC Commissioner Jill Sommers stated that ``[CFTC] staff had
been guided by what could only be called the `Intergalactic
Commerce Clause' of the United States Constitution, in that
every single swap a U.S. person enters into, no matter what the
swap or where it was transacted, was stated to have a direct
and significant connection with activities in, or effect on,
commerce of the United States. This statutory and
constitutional analysis of the extraterritorial application of
U.S. law was, in my view, nothing short of extra-statutory and
extra-constitutional.''
On December 13, 2012, the Committee on Agriculture
Subcommittee on General Farm Commodities and Risk Management
held a hearing where Commissioners Sommers and Chilton
testified alongside top regulators from Japan and the European
Commission. Combined, the three regulatory jurisdictions
testifying at the hearing represented an overwhelming majority
of the global derivatives marketplace. Based on testimony the
subcommittee received, there appeared to be a serious lack of
coordination between both foreign and domestic regulators.
For example, Mr. Masamichi Kono with the Financial Services
Agency of Japan (who at the time was Chairman of IOSCO)
testified during the hearing that ``much needs to be done'' by
the CFTC and that ``it is important that the details of the
applicable laws and regulations are made clear as much as
possible before their implementation in order to minimize
regulatory uncertainty.'' Further, with respect to minimizing
risk in the marketplace--a goal central to the creation of the
Dodd-Frank Act--Mr. Kono testified that:
[S]uch risks need not be addressed by
extraterritorial application of the U.S. laws and
regulations; rather, the U.S. authorities could rely on
foreign regulators upon establishing of course that the
foreign regulators have the required authority and
competence to exercise appropriate regulation and
oversight over those entities and activities. This is
what we consider as the most efficient and effective
approach, in line with the principles of international
comity between sovereign jurisdictions.
At the same hearing, Mr. Patrick Pearson with the European
Commission also testified before the Committee about regulatory
conflicts between the United States and 27 member nations of
the European Union. With respect to the risk posed to global
markets if international regulators do not properly coordinate
the regulation of the markets, he stated that:
[T]rades will not be able to be cleared. If they
can't be cleared, they won't take place. This means
that firms and users will not hedge their risks, or
firms will hedge their risks but they will only take
place within one jurisdiction, which means that risk
will be concentrated in one jurisdiction on the planet.
That could be the United States. If your firms can't
hedge their risks outside of the United States, they'll
have to hedge them here. The consequences of that is
obviously a fragmented market and a significant
concentration of financial risk in the U.S. system, and
this is exactly what we tried to prevent with our
global regulatory reform.
In the 113th Congress, on March 14, 2013, at a Committee
hearing entitled ``Examining Legislative Improvements to Title
VII of the Dodd-Frank Act,'' the Hon. Kenneth E. Bentsen,
Acting President and CEO, SIFMA, provided the following
testimony that informed the drafting of Section 359:
Though Title VII was signed into law 2\1/2\ years
ago, we still do not know which swaps activities will
be subject to U.S. regulation and which will be subject
to foreign regulation. Section 722 of the Dodd-Frank
Act limits the CFTC's jurisdiction over swap
transactions outside of the United States to those that
``have a direct and significant connection with
activities in, or effect on, commerce of the U.S.'' or
are meant to evade Dodd-Frank. Section 772 limits the
SEC's jurisdiction over security based swap
transactions outside of the United States to those
meant to evade Dodd- Frank. However, the CFTC and SEC
have not yet finalized (or, in the SEC's case,
proposed) rules clarifying their interpretation of
these statutory provisions. The result has been
significant uncertainty in the international
marketplace and, due to the aggressive position being
taken by the CFTC as described below, a reluctance of
foreign market participants to trade with U.S.
financial institutions until that uncertainty is
resolved. While the CFTC has proposed guidance on the
cross-border impact of their swaps rules, that guidance
inappropriately recasts the restriction that Congress
placed on CFTC jurisdiction over swap transactions
outside the United States into a grant of authority to
regulate cross-border trades. The CFTC primarily does
so with a very broad definition of ``U.S. Person,''
which it applies to persons with even a minimal
jurisdictional nexus to the United States. In addition,
the CFTC has released several differing interim and
proposed definitions of ``U.S. Person'' for varying
purposes, resulting in a great deal of ambiguity and
confusion for market participants. SIFMA supports a
final definition of U.S. Person that focuses on real,
rather than nominal, connections to the United States
and that is simple, objective and determinable so a
person can determine its status and the status of its
counterparties.
On April 18, 2013, the finance ministers of the European
Commission, France, Germany, United Kingdom, Japan,
Switzerland, Russia, South Africa and Brazil wrote to Treasury
Secretary Jacob Lew stating that ``[w]e are already starting to
see evidence of fragmentation in this vitally important
financial market as a result of lack of regulatory
coordination'' and ``[w]e are concerned that, without clear
direction from global policymakers and regulators, derivatives
markets will recede into localised and less efficient
structures, impairing the ability of business across the globe
to manage risk.''
On May 21, 2013, testifying before the Committee at a
hearing entitled ``The Future of the CFTC: Market
Perspectives,'' the following testimony was provided by
witnesses with respect to provisions included in Section 359:
If regulators fail to harmonize, the effects of
uncertainty and the prospect for regulatory arbitrage
will be damaging. Because markets are global and
capital flows across borders, no single country or
regulatory regime oversees the derivatives market. In
order to make long-term business decisions, market
participants require certainty that their transactions
will not be judged on conflicting standards. The
derivatives markets are international: the majority of
companies that operate globally use derivatives to
manage price risks, and they conduct these transactions
with both U.S. and non-U.S. counterparties. The likely
outcome will be that regulators deem other countries'
financial regulatory systems as ``nonequivalent'',
which would lead to those countries erecting barriers
to its financial markets. It is crucial to understand
that if countries erect these barriers, WE markets and
market participants will be damaged. Currently, the
U.S. derivatives markets are home to vital global
benchmark contracts in agriculture, energy, financial
asset classes. These have become benchmark contracts
because Asian and European market participants have
direct access to U.S. markets. Importantly, the long-
standing global nature of the derivatives markets and
the resulting international competition has lead to
advances in transparency, risk management, and
historically, regulatory cooperation. Over the past
year, ICE has been delivering this message to domestic
and international regulators, yet regulations continue
to diverge, particularly in the U.S. and Europe. We ask
the Committee, in its oversight role, to impress upon
the Commodity Futures Trading Commission the importance
of working with European and Asian counterparts to
harmonize regulation and avoid creating unintended,
unpredictable impacts on financial markets and their
users. The time for agreement is closing.--Mr. Jeffrey
C. Sprecher, Founder, Chairman, and CEO of
IntercontinentalExchange, Inc.
ISDA and our members believe that a globally
harmonized approach to cross-border regulation is of
paramount importance. What they face now is
considerable uncertainty. Uncertainty is never a good
thing in financial markets, as there are typically only
two things to do in face of that uncertainty. One
response is to pull back and wait until such time as
greater certainty is provided. On a firm level, that
means missed opportunity. On a market level, that
translates to less efficient, less liquid and more
volatile markets, material harm to financing and
investing activities and a drag on the economy in
general. To achieve the goal of a globally harmonized
framework, the CFTC and SEC should work together to
achieve consensus with global regulators. H.R. 1256
would help the U.S. regulators to provide a unified
front when addressing the extraterritorial application
of U.S. rules and when dealing with non-U.S.
regulators. Harmonization of regulatory approaches,
particularly on issues with systemic risk implications,
and a concerted program of mutual recognition of
regulatory regimes by global regulators are essential
parts of the solution to ET.--Mr. Stephen O'Conner,
Chairman, ISDA
As of the writing of this Report, global regulators have
yet to harmonize their approach to global derivatives
regulation. In order to address the serious concerns voiced by
both international and domestic regulators, Section 359 would
require the CFTC to propose and finalize a rule, not
``guidance'' to which the APA does not apply, on cross-border
swaps regulation. The bill would also require that the CFTC
grant the top 9 global jurisdictions for swaps transactions by
volume substituted compliance to regulate institutions
operating within their borders unless the CFTC makes a
determination that a jurisdiction's rules are not equivalent to
the regulations of the United States.
Section-by-Section
Sec. 1 is the short title of the bill.
Sec. 2 is the table of contents.
Title I--Customer Protections
Sec. 101 is the short title of title I.
Sec. 102 amends section 17 of the Commodity Exchange Act
(CEA) to require that each member of a registered futures
association (NFA) maintain written policies concerning the
residual interest in segregated accounts, cleared swaps
collateral accounts, and secured amount funds in foreign
futures and options customer accounts. The member must also
establish rules to govern the withdrawal, transfer or
disbursement by a futures commission merchant (FCM) of the same
funds.
Sec. 103 amends section 17 of the CEA to require an FCM to
use an electronic system to report financial and operational
information to the NFA in accordance with such terms and
conditions that the NFA establishes. A registered FCM must
require any depository institution that holds segregated
accounts and the customer secured amount funds to report
balances to the NFA. If the depository institution will not
report the fund balances, the registered member cannot use the
depository institution to hold customer segregated funds or
secured amount funds.
Sec. 104 amends section 17 of the CEA to require an FCM to
immediately report to the CFTC and the NFA when the funds in a
customer's account, segregated account or secured amount
account are less than required by regulation. It also requires
the chief compliance officer of the FCM to file with the
Commission a yearly assessment of the FCM's internal compliance
programs.
Sec. 105 amends section 4d of the CEA to allow an FCM one
business day after a trade to comply with the amounts of money,
securities and property required to be held in a customer
account by section 4d(a)(2) of the CEA.
Sec. 106 amends section 20(a) of the CEA to allow the use
of the cash, securities or other property of a bankrupt
commodity broker to satisfy any deficient public customer
account.
Sec. 107 requires the CFTC to report to the authorizing
committees on high-frequency trading on markets under its
jurisdiction. The report shall examine the technology,
personnel and other resources the Commission may require to
monitor high-frequency trading; the role the trading plays in
providing market liquidity; whether the technology creates
discrepancies in the marketplace; and whether the Commission's
existing authority protects the market and fosters
transparency.
Title II
Sec. 201 is the short title of title II.
Sec. 202 amends section 12(d) of the CEA to reauthorize the
CFTC through FY 2018.
Sec. 203 amends section 15(a) of the CEA to harmonize the
cost benefit requirements of the CFTC with those of executive
order 13563. The section also requires that the cost benefit
analysis be performed by the Chief Economist and published
within the proposed rule along with the rule's statutory
justification.
Sec. 204 amends section 2(a) of the CEA to require that
each division of the CFTC have a Director that is hired by the
Commission, and performs functions as the Commission may
prescribe.
Sec. 205 amends section 2(a) of the CEA to establish the
Office of the Chief Economist. The structure and powers of the
Office of the Chief Economist mirrors the structure and powers
of the General Counsel.
Sec. 206 amends section 2(a)(12) of the CEA to require 7
days notice to the Commission before any division or office of
the Commission issues an interpretive rule of general
applicability, a statement of general policy, response to a
petition for guidance, or an exemptive, a no-action, or an
interpretive letter. After receiving notice, any member of the
Commission may request a meeting of the Commission to further
consider the staff-proposed action, and if the Commission
decides to hold the meeting by majority vote, the matter may
not be issued until the meeting has concluded. The 7 day notice
requirement can be waived by a majority vote of the Commission
if the Commission determines that requiring such notice would
be impracticable, unnecessary, or contrary to the public
interest.
Sec. 207 amends section 2(a) of the CEA to require the
Commission to file with the authorizing committees a strategic
technology plan every 5 years. The plan shall include a
detailed technology strategy focused on market surveillance and
risk detection, and must include a detailed accounting of how
the funds provided for technology will be used.
Sec. 208 amends section 2(a)(12) of the CEA to require the
Commission staff, led by the Chief Economist, to develop
internal risk control mechanisms to safeguard the storage and
privacy of market data by the Commission. Special attention
should be given to market data sharing agreements and academic
research performed at the Commission using market data. The
Commission shall report to the authorizing committees on
progress made in implementing the internal risk controls 60
days after enactment, and again 120 days after enactment of the
Act.
Sec. 209 amends section 6(c)(5) of the CEA to require that
subpoenas issued by the Commission comply with the common law
standards set forth by the United States Supreme Court. A
subpoena authorized to be issued by the Commission shall state
in good faith the purpose of the investigation, shall require
only information reasonably relevant to the purpose of the
investigation and shall be for a finite period. A subpoena may
be renewed only by Commission vote.
Sec. 210 amends section 2(a)(12) of the CEA to require that
all proposed rules include a plan for when and for how long a
comment period will be open, and when compliance with the final
rule will be required.
Sec. 211 amends section 2(a)(12) to apply the notice and
comment provisions of the Administrative Procedure Act to
guidance that is issued and voted on by the Commission.
Sec. 212 amends the CEA by adding a new section (section
24) committing the original jurisdiction of the review of a
CFTC issued final rule to the United States Court of Appeals
for the District of Columbia Circuit or the U.S. Court of
Appeals for the circuit where the party resides. This is
similar to the judicial review process for rules and orders of
the Securities and Exchange Commission set forth in section
25(b) of the Securities Exchange Act of 1934.
Sec. 213 requires the GAO to conduct a study of the
Commission's resources and assess whether the resources are
sufficient to enable the Commission to effectively carry out
its duties. The study shall also examine the prior expenditures
of the Commission on hardware, software and analytical
processes designed to protect customers in the areas of market
surveillance and data collection.
Title III
Sec. 301 is the short title for title III.
SUBTITLE A--END-USER EXEMPTION FROM MARGIN REQUIREMENTS
Sec. 311 amends section 4s(e) of the CEA to clarify that
initial and variation margin requirements shall not apply to a
swap in which one of the counterparties to the swap is not a
financial entity and qualifies for the end-user clearing
exception in Section 2(h)(7)(A).
Sec. 312 excludes the amendments made by this subtitle from
the requirements of the Paperwork Reduction Act and from notice
and comment requirements of the Administrative Procedure Act.
SUBTITLE B--INTER-AFFILIATE SWAPS
Sec. 321(a) amends 2(h)(7)(D)(i) of the CEA to clarify that
transactions between affiliates need not be cleared provided
that a credit support measure is utilized with a swap entered
into with a swap dealer or major swap participant.
Subsection (b) clarifies that the credit support measure
requirement contained in (a) shall only be effective in a
prospective manner starting on the date of enactment of the
act.
SUBTITLE C--INDEMNIFICATION REQUIREMENTS RELATED TO SWAP DATA
REPOSITORIES
Sec. 331 amends section 5b(k)(5) of the CEA by striking the
confidentiality and indemnification agreement paragraph of the
derivatives clearing organization reporting requirements and
inserting a new confidentiality agreement paragraph,
eliminating the need to indemnify the Commission for any
expense arising from litigation related to information provided
under section 8. An identical amendment is made to section
21(d) of the CEA eliminating the indemnification requirement
for swap data repositories.
SUBTITLE D--RELIEF FOR MUNICIPAL UTILITIES
Sec. 341 amends section 1a(49) of the CEA by creating
within the definition of swap dealer, a new category of
transactions in utility operations-related swaps, which shall
be reported according to the reporting requirements of
uncleared swaps and exempted from inclusion in an entity's
general de minimis calculation established in (D).
Sec. 342 amends section 4s(h)(2) of the CEA to add the
definition of a ``utility special entity'': an entity
established by a state, or political subdivision thereof, which
owns or operates an electric or natural gas facility; supplies
natural gas or electric energy to another utility special
entity; has public service obligation under federal, state or
local law or regulation to deliver electric energy or natural
gas service to customers; or is a Federal power marketing
agency.
Sec. 343 amends section 1a(47) of the CEA to add to the
definition of swap a list of ``commonly known'' transactions to
further describe a utility operations-related swap. It further
amends section 1a to define a ``utility operations related
swap'' as a swap that is entered into to hedge or mitigate
risk, is not based on an interest rate, credit, equity, or
currency asset class nor a metal, agriculture commodity, or
crude oil or gasoline commodity for any grade except as used as
fuel for electric energy generation, and is associated with the
generation, production or sale of natural gas or electric
energy.
SUBTITLE E--END-USER REGULATORY RELIEF
Sec. 351(a) amends section 2(h)(7)(C)(iii) of the CEA to
exclude from the definition of a financial entity those
entities not supervised by a prudential regulator and that are
commercial market participants, but considered financial
entities because they predominantly engage in physical delivery
contracts or enter into swaps, futures and other derivatives on
behalf of, or to hedge the commercial risk of, non-financial
affiliates.
Subsection (b) amends section 1a of the CEA to define a
commercial market participant as a producer, processor,
merchant, or commercial user of an exempt or agricultural
commodity, or the products or byproducts of such commodity.
Sec. 352 amends section 2(a)(13) of the CEA to require the
Commission to promulgate a rule that would delay the public
reporting of a non-cleared swap traded in an illiquid market
and entered into by a non-financial entity to no sooner than 30
days after the transaction has been executed. An illiquid
market is defined as any market in which the volume and
frequency of trading in swaps is at such a level as to allow
identification of individual market participants.
Sec. 353 amends the CEA by adding a new section, 4u, which
clarifies the record keeping requirements of non-registered
members of a designated contract market (DCM) or swap execution
facility (SEF). All recordkeeping requirements, and rules
promulgated pursuant to the CEA, shall be satisfied if such
entities maintain written records of each transaction in a
contract for future delivery, option on a future, swap,
swaption, trade option, or related cash or forward transaction.
Such records must be searchable by transaction and include the
final agreement between the parties as well as the material
economic terms of the transaction.
Sec. 354 amends section 1a(47)(B)(ii) of the CEA to clarify
that the exclusion from the definition of the term swap
includes contracts that are intended to be physically settled
that include any stand-alone or embedded option which, if
exercised, results in a physical delivery obligation.
Sec. 355 amends section 1a(49)(D) of the CEA to require the
Commission to take an affirmative action by rule or regulation
to reduce the $8 billion de minimis exception from the swap
dealer definition.
Sec. 356 amends section 4s(e) of the CEA to require the
Commission to permit swap dealers and major swap participants
that are not banks to use financial models that calculate
minimum capital requirements and minimum initial and variation
margin requirements that have been approved for use by banks by
prudential regulators or the SEC.
Sec. 357 requires the CFTC to change the regulation
regarding the advertisement of participation in commodity
pools. The changes will allow any registered commodity pool
that also qualifies for an exemption from the registration
requirements of the Securities Act to be sold pursuant to the
changes made to section 4 of the Securities Act under the
Jumpstart our Business Startups Act (P.L. 112-106).
Sec. 358 amends section 4a(c) of the CEA to require the
Commission to recognize anticipatory hedging transactions as
part of the exemption from trading limits.
Sec. 359(a) requires the CFTC to issue rules setting forth
the application of the U.S. swaps requirements relating to
swaps transacted between U.S. and non-U.S. persons. The rules
shall address the nature of connections to the U.S. which would
require a non-U.S. person to register as a swap dealer or major
swap participant; which of the U.S. swap requirements shall
apply to the activities of non-U.S. persons, U.S. persons, and
their branches, agencies, subsidiaries and affiliates outside
the U.S.; and the circumstances under which a non-U.S. person
shall be exempt from U.S. swap requirements.
Subsection (b) prohibits the issuance of guidance,
memorandum of understanding or any such other agreement in
place of the Commission's requirement to issue a rule in
accordance with the APA.
Subsection (c) requires the Commission to exempt from U.S.
swaps requirements non-U.S. persons that are in compliance with
the swaps regulatory requirements of a country or
administrative region that has 1 of the world's 9 largest swap
markets by notional amount in the preceding calendar year, or
other foreign jurisdictions as determined by the Commission,
unless the Commission determines that the regulatory
requirements are not broadly equivalent to the United States
swap requirements.
Exemptions for the 5 largest swap markets by notional
amount shall go into effect on the date the final rule is
issued. The remaining market exemptions will occur one year
after the date the final rule is issued.
Once the final rules are issued, the Commission shall
assess the regulatory requirements of the countries or
administrative regions described in this subsection to
determine if the regulatory requirements of a foreign
jurisdiction are not broadly equivalent to U.S. swaps
requirements.
Subsection (d) requires the Commission to report to
Congress any determination that a foreign jurisdiction is not
broadly equivalent to the U.S. swaps requirements within 30
days of that determination.
Subsection (e) defines the terms ``U.S. person'' and
``United States swaps requirements.''
Subsection (f) is a conforming amendment.
SUBTITLE F--EFFECTIVE DATE
Sec. 371 sets the effective date for this title as July 21,
2010.
COMMITTEE CONSIDERATION
I. HEARINGS
The Committee on Agriculture held five hearings during the
113th Congress in anticipation of legislation to extend and
reform the operations of the Commodity Futures Trading
Commission.
On March 14, 2013, the Full Committee on Agriculture held a
hearing entitled, ``Examining Legislative Improvements to Title
VII of the Dodd-Frank Act'' where the following witnesses
testified on several measures that where included in H.R. 4413:
The Honorable Gary Gensler, Chairman, U.S.
Commodity Futures Trading Commission, Washington, D.C.
The Honorable Kenneth E. Bentsen, Jr., Acting
President and CEO, Securities Industry and Financial Markets
Association (SIFMA), Washington, D.C.
Mr. Jim Colby, Assistant Treasurer, Honeywell
International Inc., Morristown, New Jersey; on behalf of the
Coalition for Derivatives End-Users
Mr. Terrance Naulty, General Manager & CEO,
Owensboro Municipal Utilities, Owensboro, Kentucky; on behalf
of the American Public Power Association
Mr. Larry Thompson, General Counsel, Depository
Trust and Clearing Corporation (DTCC), New York, New York
Ms. Marie Hollein, President and CEO, Financial
Executives International (FEI) and Financial Executives
Research Foundation, Washington, D.C.; on behalf of the
Coalition for Derivatives End-Users
Mr. Wallace C. Turbeville, Senior Fellow, Demos,
New York, New York; on behalf of Americans for Financial Reform
On May 21, 2013, the Full Committee on Agriculture held a
hearing entitled, ``The Future of the CFTC: Market
Perspectives'' where the following witnesses testified on
matters included in H.R. 4413:
Mr. Terrence A. Duffy, Executive Chairman and
President, CME Group, Inc., Chicago, Illinois
Mr. Jeffrey C. Sprecher, Chairman and CEO,
IntercontinentalExchange, Inc., Atlanta, Georgia
Mr. Daniel J. Roth, President and CEO, National
Futures Association, Chicago, Illinois
The Honorable Walter L. Lukken, President and CEO,
Futures Industry Association, Washington, D.C.
Mr. Stephen O'Connor, Chairman, International
Swaps and Derivatives Association, Inc., New York, New York
Mr. William Dunaway, Chief Financial Officer, INTL
FCStone, Inc., Kansas City, Missouri
On July 23, 2013, the Full Committee on Agriculture held a
hearing entitled, ``The Future of the CFTC: Commission
Perspectives'' where the following witnesses testified on
matters included in H.R. 4413:
The Honorable Scott D. O'Malia, Commissioner, U.S.
Commodity Futures Trading Commission, Washington, D.C.
The Honorable Mark P. Wetjen, Commissioner, U.S.
Commodity Futures Trading Commission, Washington, D.C.
On July 24, 2013, the Full Committee on Agriculture held a
hearing entitled, ``The Future of the CFTC: End-User
Perspectives'' where the following witnesses testified on
matters included in H.R. 4413:
Mr. Scott Cordes, President, CHS Hedging, Inc.,
St. Paul, Minnesota, on behalf of the National Council of
Farmer Cooperatives
Mr. Lance Kotschwar, Senior Compliance Attorney,
The Gavilon Group, LLC, Omaha, Nebraska, on behalf of the
Commodity Markets Council
Mr. Richard F. McMahon, Jr., Vice President,
Edison Electric Institute, Washington, D.C.
Mr. Chris Monroe, Treasurer, Southwest Airlines,
Dallas, Texas
Mr. Andrew K. Soto, Senior Managing Counsel,
Regulatory Affairs, American Gas Association, Washington, DC
Mr. Gene A. Guilford, National & Regional Policy
Counsel, Connecticut Energy Marketers Association, Cromwell,
Connecticut, on behalf of the Commodity Markets Oversight
Coalition
On October 2, 2013, the Full Committee on Agriculture held
a hearing entitled, ``The Future of the CFTC: Perspectives on
Customer Protections'' where the following witnesses testified
on matters included in H.R. 4413:
Mr. Terrence A. Duffy, Executive Chairman and
President, CME Group, Inc., Chicago, Illinois
Mr. Daniel J. Roth, President and CEO, National
Futures Association, Chicago, Illinois
Dr. Christopher L. Culp, Senior Advisor, Compass
Lexecon, Chicago, Illinois
Mr. Michael J. Anderson, Regional Sales Manager,
The Andersons Inc., Union City, Tennessee, on behalf of the
National Grain and Feed Association
Mr. James L. Koutoulas, Esq., President and Co-
Founder, Commodity Customer Coalition, Inc., Chicago, Illinois
Mr. Theodore L. Johnson, President, Frontier
Futures, Inc., Cedar Rapids, Iowa
II. FULL COMMITTEE
The Committee on Agriculture met, pursuant to notice, with
a quorum present, on April 9, 2014, to consider H.R. 4413.
Chairman Lucas called the meeting to order to consider the
Customer Protection and End User Relief Act. Chairman Lucas
gave a statement as did Mr. Peterson, Mr. Conaway, and Mr.
David Scott.
Without objection the Customer Protection and End User
Relief Act was brought before the Committee, the first reading
of the text was waived, and it was open for amendment at any
point.
Mr. Conaway offered an amendment to sunset all new CFTC
rules or regulations promulgated after the enactment of this
act, unless the CFTC reissues the rule or regulation, in a
manner consistent with the Administrative Procedure Act and by
a majority vote of the Commission, and determines it to have
force or effect. Mr. Conaway then withdrew his amendment.
Mr. Goodlatte offered an amendment to require the CFTC to
report on actions taken to ensure a stable aluminum market. Mr.
Goodlatte then withdrew his amendment.
Mr. Peterson offered a motion that the Committee favorably
report the Customer Protection and End User Relief Act to the
House with the recommendation that it do pass. By voice vote,
the motion was adopted.
At the conclusion of the meeting, Chairman Lucas advised
Members that pursuant to the rules of the House of
Representatives Members had 2 calendar days to file any
supplemental or minority 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.
Committee Votes
In compliance with clause 3(b) of rule XIII of the House of
Representatives, H.R. 4413 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, May 19, 2014.
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. 4413, the Customer
Protection and End User Relief Act.
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.
Enclosure.
H.R. 4413--Customer Protection and End User Relief Act
Summary: H.R. 4413 would authorize appropriations for the
Commodity Futures Trading Commission (CFTC) through 2018 and
make changes in some of the agency's operating procedures. The
bill also would amend the Commodity Exchange Act to provide
greater protections for customer funds held by entities that
broker transactions in commodity futures and to relax
requirements on certain participants in swap transactions in a
number of different circumstances. (A swap is a contract that
calls for an exchange of cash between two participants, based
on an underlying rate or index or on the performance of an
asset.)
CBO estimates that implementing H.R. 4413 would cost $207
million in 2015 and $948 million over the 2015-2019 period,
assuming appropriation of the necessary amounts. CBO expects
that enacting H.R. 4413 would affect direct spending and
revenues; therefore, pay-as-you-go procedures apply. However,
CBO estimates that those effects would not be significant.
H.R. 4413 contains no intergovernmental or private-sector
mandates as defined in the Unfunded Mandates Reform Act (UMRA).
Estimated cost to the Federal Government: The estimated
budgetary effect of H.R. 4413 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--
-------------------------------------------------------
2015 2016 2017 2018 2019 2015-2019
----------------------------------------------------------------------------------------------------------------
CHANGES IN SPENDING SUBJECT TO APPROPRIATION
CFTC Reauthorization:
Estimated Authorization Level....................... 221 228 236 245 0 930
Estimated Outlays................................... 197 223 231 239 22 912
Other Provisions:
Estimated Authorization Level....................... 12 6 6 6 7 37
Estimated Outlays 10 7 6 6 7 36
Total Changes:
Estimated Authorization Level................... 233 234 242 251 7 967
Estimated Outlays............................... 207 230 237 245 29 948
----------------------------------------------------------------------------------------------------------------
Notes: CBO estimates that enacting H.R. 4413 would not have a significant effect on revenues or direct spending
over the 2014-2024 period.
CFTC = Commodity Futures Trading Commission.
Basis of Estimate: For this estimate, CBO assumes that the
bill will be enacted near the end of fiscal year 2014, the
necessary amounts will be appropriated near the beginning of
each fiscal year, and outlays will follow spending patterns for
similar activities at the CFTC.
Spending subject to appropriation
CFTC Reauthorization. H.R. 4413 would authorize
appropriations for CFTC operations through 2018; for 2014, the
CFTC received an appropriation of $215 million. Based on the
agency's current budget and adjusting for anticipated
inflation, CBO estimates that extending the authorization of
appropriations for the current functions of the CFTC through
2018 would cost $912 million over the 2015-2019 period,
assuming those inflation-adjusted amounts are appropriated each
year.
Other Provisions. H.R. 4413 would require the agency to
change certain procedures in its rulemaking process and to
improve safeguards of market data in the agency's control. The
bill also would direct the CFTC to prepare a report for the
Congress examining the effect of high-frequency trading (the
use of technology and computer algorithms to rapidly trade
contracts) on the markets it oversees.
In addition, the bill would require entities that broker
transactions in commodity futures, known as futures commission
merchants, and the national association that regulates them to
implement practices that provide additional protections for
funds held for their clients. Finally, under the bill, certain
swap transactions or participants in those transactions would
be exempt from new regulations developed to meet the
requirements of the Dodd-Frank Wall Street Reform and Consumer
Protection Act. For example, the bill would, under certain
circumstances, exempt nonfinancial entities that enter into a
swap transaction from meeting certain margin requirements.
Based on information from the CFTC, CBO estimates that the
agency would require 25 additional personnel annually to handle
the increased workload under these provisions, an increase of
about 4 percent over the agency's 2013 staffing level. We
estimate that salaries, benefits, and overhead for those
additional staff, as well as new administrative expenses, would
cost $36 million over the 2015-2019 period, assuming
appropriation of the necessary amounts.
Direct spending and revenues
H.R. 4413 would increase costs for the financial regulators
(the Federal Reserve System, the Federal Deposit Insurance
Corporation, and the Office of the Comptroller of the Currency)
to amend certain regulations, which would affect direct
spending and revenues. The bill also would affect federally
owned utilities by changing the way CFTC regulates certain
electric and natural gas utility contracts. Taken together, CBO
estimates that these costs would not be significant over the
2014-2024 period.
Pay-As-You-Go considerations: CBO expects that enacting
H.R. 4413 would affect direct spending and revenues; therefore,
pay-as-you-go procedures apply. However, CBO estimates that
those effects would not be significant.
Intergovernmental and Private-sector impact: H.R. 4413
contains no intergovernmental or private-sector mandates as
defined in UMRA and would impose no costs on state, local, or
tribal governments.
Previous CBO estimates: On April 1, 2013, CBO transmitted a
cost estimate for H.R. 1003, a bill to improve consideration by
the Commodity Futures Trading Commission of the costs and
benefits of its regulations and orders, as ordered reported by
the House Committee on Agriculture on March 20, 2013.
Provisions in title II of H.R. 4413 are similar to H.R. 1003,
and the CBO cost estimates are the same.
CBO prepared two cost estimates for H.R. 634, the Business
Risk Mitigation and Price Stabilization Act of 2013. On April
11, 2013, we transmitted a cost estimate for a version of the
bill ordered reported by the House Committee on Agriculture on
March 20, 2013. On May 29, 2013, we transmitted a cost estimate
for a version of the bill ordered reported by the House
Committee on Financial Services on May 7, 2013. Both versions
of the bill are similar to provisions in title III of H.R.
4413, and the CBO cost estimates for those similar provisions
are the same.
CBO prepared two cost estimates for H.R. 677, the Inter-
Affiliate Swap Clarification Act. On April 11, 2013, we
transmitted an estimate for a version of the bill ordered
reported by the House Committee on Agriculture on March 20,
2013. On May 30, 2013, we transmitted a cost estimate for a
version of the bill ordered reported by the House Committee on
Financial Services on May 7, 2013. Both versions of H.R. 677
would place new requirements on the CFTC and the Securities and
Exchange Commission. Provisions in title III of H.R. 4413 are
similar to the provisions of H.R. 677 that applied to the CFTC;
the CBO cost estimates for the similar provisions are the same.
CBO prepared two cost estimates for H.R. 742, the Swap Data
Repository and Clearinghouse Indemnification Correction Act of
2013. On April 11, 2013, we transmitted a cost estimate for a
version of the bill ordered reported by the House Committee on
Agriculture on March 20, 2013. On May 17, 2013, we transmitted
a cost estimate for a version of the bill ordered reported by
the House Committee on Financial Services on May 7, 2013. Both
versions of the bill are similar to provisions in title III of
H.R. 4413, and the CBO cost estimates for the similar
provisions are the same.
CBO prepared two cost estimates for H.R. 1256, the Swap
Jurisdiction Certainty Act. On May 3, 2013, we transmitted a
cost estimate for a version of the bill ordered reported by the
House Committee on Agriculture on March 20, 2013. On May 30,
2013, we transmitted a cost estimate for a version of the bill
ordered reported by the House Committee on Financial Services
on May 7, 2013. Both versions of the bill are similar to
provisions in title III of H.R. 4413, and the CBO cost
estimates for the similar provisions are the same.
On April 1, 2012, CBO transmitted a cost estimate for H.R.
1038, the Public Power Risk Management Act of 2013, as ordered
reported by the House Committee on Agriculture on March 20,
2013. Provisions in title III of H.R. 4413 are similar to H.R.
1038, and the CBO cost estimates are the same.
Estimate prepared by: Federal Costs: Susan Willie; Impact
on State, Local, and Tribal Governments: J'nell L. Blanco;
Impact on the Private Sector: Paige Piper/Bach.
Estimate approved by: Theresa Gullo, Deputy 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 objections of this legislation are to
reauthorize the Commodity Futures Trading Commission, to better
protect futures customers, to provide end users with market
certainty, to make basic reforms to ensure transparency and
accountability at the Commission, to help farmers, ranchers,
and end users manage risks to help keep consumer costs low, and
for other purposes.
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. 4413 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 of Representatives.
Duplication of Federal Programs
This bill does not establish or reauthorize a program of
the Federal Government known to be duplicative of another
Federal program, a program that was included in any report from
the Government Accountability Office to Congress pursuant to
section 21 of Public Law 111-139, or a program related to a
program identified in the most recent Catalog of Federal
Domestic Assistance.
Disclosure of Directed Rule Makings
The Committee estimates that H.R. 4413 specifically directs
CFTC to conduct one rule making proceedings within the meaning
of 5 U.S.C. 551.
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. 1A. DEFINITIONS.
As used in this Act:
(1) * * *
* * * * * * *
(7) Commercial market participant.--The term
``commercial market participant'' means any producer,
processor, merchant, or commercial user of an exempt or
agricultural commodity, or the products or byproducts
of such a commodity.
[(8)] (9) Commission.--The term ``Commission'' means
the Commodity Futures Trading Commission established
under section 2(a)(2).
[(9)] (10) Commodity.--The term ``commodity'' means
wheat, cotton, rice, corn, oats, barley, rye, flaxseed,
grain sorghums, mill feeds, butter, eggs, Solanum
tuberosum (Irish potatoes), wool, wool tops, fats and
oils (including lard, tallow, cottonseed oil, peanut
oil, soybean oil, and all other fats and oils),
cottonseed meal, cottonseed, peanuts, soybeans, soybean
meal, livestock, livestock products, and frozen
concentrated orange juice, and all other goods and
articles, except onions (as provided by the first
section of Public Law 85-839 (7 U.S.C. 13-1)) and
motion picture box office receipts (or any index,
measure, value, or data related to such receipts), and
all services, rights, and interests (except motion
picture box office receipts, or any index, measure,
value or data related to such receipts) in which
contracts for future delivery are presently or in the
future dealt in.
[(10)] (11) Commodity pool.--
(A) * * *
* * * * * * *
[(11)] (12) Commodity pool operator.--
(A) * * *
* * * * * * *
[(12)] (13) Commodity trading advisor.--
(A) * * *
* * * * * * *
[(13)] (14) Contract of sale.--The term ``contract of
sale'' includes sales, agreements of sale, and
agreements to sell.
[(14)] (15) Cooperative association of producers.--
The term ``cooperative association of producers'' means
any cooperative association, corporate, or otherwise,
not less than 75 percent in good faith owned or
controlled, directly or indirectly, by producers of
agricultural products and otherwise complying with the
Act of February 18, 1922 (42 Stat. 388, chapter 57; 7
U.S.C. 291 and 292), including any organization acting
for a group of such associations and owned or
controlled by such associations, except that business
done for or with the United States, or any agency
thereof, shall not be considered either member or
nonmember business in determining the compliance of any
such association with this Act.
[(15)] (16) Derivatives clearing organization.--
(A) * * *
* * * * * * *
[(16)] (17) Electronic trading facility.--The term
``electronic trading facility'' means a trading
facility that--
(A) * * *
* * * * * * *
[(17)] (18) Eligible commercial entity.--The term
``eligible commercial entity'' means, with respect to
an agreement, contract or transaction in a commodity--
(A) an eligible contract participant
described in clause (i), (ii), (v), (vii),
(viii), or (ix) of paragraph [(18)(A)] (19)(A)
that, in connection with its business--
(i) * * *
* * * * * * *
[(18)] (19) Eligible contract participant.--The term
``eligible contract participant'' means--
(A) * * *
(i) * * *
* * * * * * *
(vii)(I) a governmental entity
(including the United States, a State,
or a foreign government) or political
subdivision of a governmental entity;
(II) a multinational or supranational
government entity; or
(III) an instrumentality, agency, or
department of an entity described in
subclause (I) or (II);
except that such term does not
include an entity,
instrumentality, agency, or
department referred to in
subclause (I) or (III) of this
clause unless (aa) the entity,
instrumentality, agency, or
department is a person
described in clause (i), (ii),
or (iii) of paragraph [(17)(A)]
(18)(A); (bb) the entity,
instrumentality, agency, or
department owns and invests on
a discretionary basis
$50,000,000 or more in
investments; or (cc) the
agreement, contract, or
transaction is offered by, and
entered into with, an entity
that is listed in any of
subclauses (I) through (VI) of
section 2(c)(2)(B)(ii);
* * * * * * *
[(19)] (20) Excluded commodity.--The term ``excluded
commodity'' means--
(i) * * *
* * * * * * *
[(20)] (21) Exempt commodity.--The term ``exempt
commodity'' means a commodity that is not an excluded
commodity or an agricultural commodity.
[(21)] (22) Financial institution.--The term
``financial institution'' means--
(A) * * *
* * * * * * *
[(22)] (23) Floor broker.--
(A) * * *
* * * * * * *
[(23)] (24) Floor trader.--
(A) * * *
* * * * * * *
[(24)] (25) Foreign exchange forward.--The term
``foreign exchange forward'' means a transaction that
solely involves the exchange of 2 different currencies
on a specific future date at a fixed rate agreed upon
on the inception of the contract covering the exchange.
[(25)] (26) Foreign exchange swap.--The term
``foreign exchange swap'' means a transaction that
solely involves--
(A) * * *
* * * * * * *
[(26)] (27) Foreign futures authority.--The term
``foreign futures authority'' means any foreign
government, or any department, agency, governmental
body, or regulatory organization empowered by a foreign
government to administer or enforce a law, rule, or
regulation as it relates to a futures or options
matter, or any department or agency of a political
subdivision of a foreign government empowered to
administer or enforce a law, rule, or regulation as it
relates to a futures or options matter.
[(27)] (28) Future delivery.--The term ``future
delivery'' does not include any sale of any cash
commodity for deferred shipment or delivery.
[(28)] (29) Futures commission merchant.--
(A) * * *
* * * * * * *
[(29)] (30) Hybrid instrument.--The term ``hybrid
instrument'' means a security having one or more
payments indexed to the value, level, or rate of, or
providing for the delivery of, one or more commodities.
[(30)] (31) Interstate commerce.--The term
``interstate commerce'' means commerce--
(A) * * *
* * * * * * *
[(31)] (32) Introducing broker.--
(A) * * *
* * * * * * *
[(32)] (33) Major security-based swap participant.--
The term ``major security-based swap participant'' has
the meaning given the term in section 3(a) of the
Securities Exchange Act of 1934 (15 U.S.C. 78c(a)).
[(33)] (34) Major swap participant.--
(A) * * *
* * * * * * *
[(34)] (35) Member of a registered entity; member of
a derivatives transaction execution facility.--The term
``member'' means, with respect to a registered entity
or derivatives transaction execution facility, an
individual, association, partnership, corporation, or
trust--
(A) * * *
* * * * * * *
A participant in an alternative trading system that is
designated as a contract market pursuant to section 5f
is deemed a member of the contract market for purposes
of transactions in security futures products through
the contract market.
[(35)] (36) Narrow-based security index.--
(A) * * *
* * * * * * *
[(36)] (37) Option.--The term ``option'' means an
agreement, contract, or transaction that is of the
character of, or is commonly known to the trade as, an
``option'', ``privilege'', ``indemnity'', ``bid'',
``offer'', ``put'', ``call'', ``advance guaranty'', or
``decline guaranty''.
[(37)] (38) Organized exchange.--The term ``organized
exchange'' means a trading facility that--
(A) * * *
* * * * * * *
[(38)] (39) Person.--The term ``person'' imports the
plural or singular, and includes individuals,
associations, partnerships, corporations, and trusts.
[(39)] (40) Prudential regulator.--The term
``prudential regulator'' means--
(A) * * *
* * * * * * *
[(40)] (41) Registered entity.--The term ``registered
entity'' means--
(A) * * *
* * * * * * *
[(41)] (42) Security.--The term ``security'' means a
security as defined in section 2(a)(1) of the
Securities Act of 1933 (15 U.S.C. 77b(a)(1)) or section
3(a)(10) of the Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(10)).
[(42)] (43) Security-based swap.--The term
``security-based swap'' has the meaning given the term
in section 3(a) of the Securities Exchange Act of 1934
(15 U.S.C. 78c(a)).
[(43)] (44) Security-based swap dealer.--The term
``security-based swap dealer'' has the meaning given
the term in section 3(a) of the Securities Exchange Act
of 1934 (15 U.S.C. 78c(a)).
[(44)] (45) Security future.--The term ``security
future'' means a contract of sale for future delivery
of a single security or of a narrow-based security
index, including any interest therein or based on the
value thereof, except an exempted security under
section 3(a)(12) of the Securities Exchange Act of 1934
as in effect on the date of the enactment of the
Futures Trading Act of 1982 (other than any municipal
security as defined in section 3(a)(29) of the
Securities Exchange Act of 1934 as in effect on the
date of the enactment of the Futures Trading Act of
1982). The term ``security future'' does not include
any agreement, contract, or transaction excluded from
this Act under section 2(c), 2(d), 2(f), or 2(g) of
this Act (as in effect on the date of the enactment of
the Commodity Futures Modernization Act of 2000) or
title IV of the Commodity Futures Modernization Act of
2000.
[(45)] (46) Security futures product.--The term
``security futures product'' means a security future or
any put, call, straddle, option, or privilege on any
security future.
[(46)] (47) Significant price discovery contract.--
The term ``significant price discovery contract'' means
an agreement, contract, or transaction subject to
section 2(h)(5).
[(47)] (48) Swap.--
(A) In general.--Except as provided in
subparagraph (B), the term ``swap'' means any
agreement, contract, or transaction--
(i) * * *
* * * * * * *
(iii) that provides on an executory
basis for the exchange, on a fixed or
contingent basis, of 1 or more payments
based on the value or level of 1 or
more interest or other rates,
currencies, commodities, securities,
instruments of indebtedness, indices,
quantitative measures, or other
financial or economic interests or
property of any kind, or any interest
therein or based on the value thereof,
and that transfers, as between the
parties to the transaction, in whole or
in part, the financial risk associated
with a future change in any such value
or level without also conveying a
current or future direct or indirect
ownership interest in an asset
(including any enterprise or investment
pool) or liability that incorporates
the financial risk so transferred,
including any agreement, contract, or
transaction commonly known as--
(I) * * *
* * * * * * *
(XXI) an emissions swap;
[and]
(XXII) a commodity swap; and
(XXIII) a utility operations-
related swap;
* * * * * * *
(B) Exclusions.--The term ``swap'' does not
include--
(i) * * *
[(ii) any sale of a nonfinancial
commodity or security for deferred
shipment or delivery, so long as the
transaction is intended to be
physically settled;]
(ii) any purchase or sale of a
nonfinancial commodity or security for
deferred shipment or delivery, so long
as the transaction is intended to be
physically settled, including any
stand-alone or embedded option for
which--
(I) exercise results in a
physical delivery obligation;
(II) cannot be severed or
marketed separately from the
overall transaction for the
purpose of financial
settlement; and
(III) both parties are
commercial market participants.
* * * * * * *
[(48)] (49) Swap data repository.--The term ``swap
data repository'' means any person that collects and
maintains information or records with respect to
transactions or positions in, or the terms and
conditions of, swaps entered into by third parties for
the purpose of providing a centralized recordkeeping
facility for swaps.
[(49)] (50) Swap dealer.--
(A) * * *
* * * * * * *
[(D) De minimis exception.--The Commission ]
(D) De minimis exception._
(i) In general._The Commission shall
exempt from designation as a swap
dealer an entity that engages in a de
minimis quantity of swap dealing in
connection with transactions with or on
behalf of its customers. The Commission
shall promulgate regulations to
establish factors with respect to the
making of this determination to exempt.
(ii) The de minimis quantity of swap
dealing as described in clause (i) that
is currently set at a quantity of
$8,000,000,000 shall only be amended or
reduced through a new affirmative
action of the Commission undertaken by
rule or regulation.
(E) Certain transactions with a utility
special entity.--
(i) Transactions in utility
operations-related swaps shall be
reported pursuant to section 4r.
(ii) In making a determination to
exempt pursuant to subparagraph (D),
the Commission shall treat a utility
operations-related swap entered into
with a utility special entity, as
defined in section 4s(h)(2)(D), as if
it were entered into with an entity
that is not a special entity, as
defined in section 4s(h)(2)(C).
[(50)] (51) Swap execution facility.--The term ``swap
execution facility'' means a trading system or platform
in which multiple participants have the ability to
execute or trade swaps by accepting bids and offers
made by multiple participants in the facility or
system, through any means of interstate commerce,
including any trading facility, that--
(A) * * *
* * * * * * *
[(51)] (52) Trading facility.--
(A) * * *
* * * * * * *
(52) Utility operations-related swap.--The term
``utility operations-related swap'' means a swap that--
(A) is entered into to hedge or mitigate a
commercial risk;
(B) is not a contract, agreement, or
transaction based on, derived on, or
referencing--
(i) an interest rate, credit, equity,
or currency asset class; or
(ii) a metal, agricultural commodity,
or crude oil or gasoline commodity of
any grade, except as used as fuel for
electric energy generation; and
(C) is associated with--
(i) the generation, production,
purchase, or sale of natural gas or
electric energy, the supply of natural
gas or electric energy to a utility, or
the delivery of natural gas or electric
energy service to utility customers;
(ii) all fuel supply for the
facilities or operations of a utility;
(iii) compliance with an electric
system reliability obligation;
(iv) compliance with an energy,
energy efficiency, conservation, or
renewable energy or environmental
statute, regulation, or government
order applicable to a utility; or
(v) any other electric energy or
natural gas swap to which a utility is
a party.
* * * * * * *
SEC. 2. JURISDICTION OF COMMISSION; LIABILITY OF PRINCIPAL FOR ACT OF
AGENT; COMMODITY FUTURES TRADING COMMISSION;
TRANSACTION IN INTERSTATE COMMERCE.
(a) Jurisdiction of Commission; Commodity Futures Trading
Commission.--
(1) * * *
* * * * * * *
(6)(A) Except as otherwise provided in this paragraph
and in paragraphs [(4) and (5)] (4), (5), and (17) of
this subsection, the executive and administrative
functions of the Commission, including functions of the
Commission with respect to the appointment and
supervision of personnel employed under the Commission,
the distribution of business among such personnel and
among administrative units of the Commission, and the
use and expenditure of funds, according to budget
categories, plans, programs, and priorities established
and approved by the Commission, shall be exercised
solely by the Chairman.
* * * * * * *
(C) The appointment by the Chairman of the heads of
major administrative units under the Commission shall
be subject to the approval of the Commission, and the
heads of the units shall serve at the pleasure of the
Commission, report directly to the Commission, and
perform such functions and duties as the Commission may
prescribe.
* * * * * * *
[(12) The]
(12) Rules and regulations._
(A) In general._Subject to the other provisions of
this paragraph, the Commission is authorized to
promulgate such rules and regulations as it deems
necessary to govern the operating procedures and
conduct of the business of the Commission.
(B) Notice to commission.--
(i) General rule.--A division or office of
the Commission may not issue an interpretive
rule of general applicability, a statement of
general policy, a response to a formal, written
request or petition from any member of the
public for guidance, or an exemptive, a no-
action, or an interpretive letter, unless, at
least 7 calendar days before the issuance, the
division or office has provided the Commission
with a copy of the matter to be issued.
(ii) Opportunity for meeting required.--After
receiving a copy of the matter provided in
accordance with clause (i), any member of the
Commission may request that the Commission hold
a meeting to review the matter, and the
Chairman shall immediately put any such request
for a meeting before the Commission, and if the
Commission decides to hold the meeting by a
majority vote, the matter may not be issued
until the Commission has concluded the meeting.
(iii) Limitations on applicability.--By a
majority vote, the Commission may waive the 7-
day prior notice requirement of clause (i) when
the Commission finds that requiring such a
notice would be impracticable, unnecessary, or
contrary to the public interest.
(C) Internal risk controls.--The Commission staff and
the Chief Economist shall develop comprehensive
internal risk control mechanisms to safeguard and
govern the storage of all market data by the
Commission, all market data sharing agreements of the
Commission, and all academic research performed at the
Commission using market data.
(E) Requirement to publish implementation plan for
commission rules.--The Commission shall direct its
staff to develop and publish in any proposed rule a
plan for--
(i) when and for how long the proposed rule
will be subject to public comment; and
(ii) by when compliance with the final rule
will be required.
* * * * * * *
(F) Applicability of notice and comment rules to
guidance voted on by the commission.--The notice and
comment requirements of chapter 5 of title 5, United
States Code, shall also apply with respect to any
guidance issued by the Commission after being voted on
by the Commission.
(13) Public availability of swap transaction data.--
(A) * * *
* * * * * * *
(C) General rule.--[The Commission] Except as
provided in subparagraph (D), the Commission is
authorized and required to provide by rule for
the public availability of swap transaction and
pricing data as follows:
(i) * * *
* * * * * * *
(D) Requirements for swap transactions in
illiquid markets.--Notwithstanding subparagraph
(C):
(i) The Commission shall provide by
rule for the public reporting of swap
transactions, including price and
volume data, in illiquid markets that
are not cleared and entered into by a
non-financial entity that is hedging or
mitigating commercial risk in
accordance with subsection (h)(7)(A).
(ii) The Commission shall ensure that
the swap transaction information
referred to in clause (i) of this
subparagraph is available to the public
no sooner than 30 days after the swap
transaction has been executed or at
such later date as the Commission
determines appropriate to protect the
identity of participants and positions
in illiquid markets and to prevent the
elimination or reduction of market
liquidity.
(iii) In this subparagraph, the term
``illiquid markets'' means any market
in which the volume and frequency of
trading in swaps is at such a level as
to allow identification of individual
market participants.
[(D)] (E) Registered entities and public
reporting.--The Commission may require
registered entities to publicly disseminate the
swap transaction and pricing data required to
be reported under this paragraph.
[(E)] (F) Rulemaking required.--With respect
to the rule providing for the public
availability of transaction and pricing data
for swaps described in clauses (i) and (ii) of
subparagraph (C), the rule promulgated by the
Commission shall contain provisions--
(i) * * *
* * * * * * *
[(F)] (G) Timeliness of reporting.--Parties
to a swap (including agents of the parties to a
swap) shall be responsible for reporting swap
transaction information to the appropriate
registered entity in a timely manner as may be
prescribed by the Commission.
[(G)] (H) Reporting of swaps to registered
swap data repositories.--Each swap (whether
cleared or uncleared) shall be reported to a
registered swap data repository.
* * * * * * *
(17) Office of the chief economist.--
(A) Establishment.--There is established in
the Commission the Office of the Chief
Economist.
(B) Head.--The Office of the Chief Economist
shall be headed by the Chief Economist, who
shall be appointed by the Commission and serve
at the pleasure of the Commission.
(C) Functions.--The Chief Economist shall
report directly to the Commission and perform
such functions and duties as the Commission may
prescribe.
(D) Professional staff.--The Commission shall
appoint such other economists as may be
necessary to assist the Chief Economist in
performing such economic analysis, regulatory
cost-benefit analysis, or research the
Commission may direct.
(18) Strategic technology plan.--
(A) In general.--Every 5 years, the
Commission shall develop and submit to the
Committee on Agriculture of the House of
Representatives and the Committee on
Agriculture, Nutrition, and Forestry of the
Senate a detailed plan focused on the
acquisition and use of technology by the
Commission.
(B) Contents.--The plan shall--
(i) include for each related division
or office a detailed technology
strategy focused exclusively on market
surveillance and risk detection, market
data collection, aggregation,
interpretation, standardization,
harmonization, streamlining, and
internal management and protection of
data collected by the Commission,
including a detailed accounting of how
the funds provided for technology will
be used and the priorities that will
apply in the use of the funds; and
(ii) set forth annual goals to be
accomplished and annual budgets needed
to accomplish the goals.
* * * * * * *
(h) Clearing Requirement.--
(1) * * *
* * * * * * *
(7) Exceptions.--
(A) * * *
* * * * * * *
(C) Financial entity definition.--
(i) * * *
* * * * * * *
[(iii) Limitation.--Such definition
shall not include an entity whose
primary business is providing
financing, and uses derivatives for the
purpose of hedging underlying
commercial risks related to interest
rate and foreign currency exposures, 90
percent or more of which arise from
financing that facilitates the purchase
or lease of products, 90 percent or
more of which are manufactured by the
parent company or another subsidiary of
the parent company.]
(iii) Limitation.--Such definition
shall not include an entity--
(I) whose primary business is
providing financing, and who
uses derivatives for the
purpose of hedging underlying
commercial risks related to
interest rate and foreign
currency exposures, 90 percent
or more of which arise from
financing that facilitates the
purchase or lease of products,
90 percent or more of which are
manufactured by the parent
company or another subsidiary
of the parent company; or
(II) who is not supervised by
a prudential regulator, and is
not described in any of
subclauses (I) through (VII) of
clause (i), and--
(aa) is a commercial
market participant and
is considered a
financial entity under
clause (i)(VIII)
because the entity
predominantly engages
in physical delivery
contracts; or
(bb) enters into
swaps, contracts for
future delivery, and
other derivatives on
behalf of, or to hedge
or mitigate the
commercial risk of,
whether directly or in
the aggregate,
affiliates that are not
so supervised or
described.
(D) Treatment of affiliates.--
[(i) In general.--An affiliate of a
person that qualifies for an exception
under subparagraph (A) (including
affiliate entities predominantly
engaged in providing financing for the
purchase of the merchandise or
manufactured goods of the person) may
qualify for the exception only if the
affiliate, acting on behalf of the
person and as an agent, uses the swap
to hedge or mitigate the commercial
risk of the person or other affiliate
of the person that is not a financial
entity.]
(i) In general.--An affiliate of a
person that qualifies for an exception
under subparagraph (A) (including
affiliate entities predominantly
engaged in providing financing for the
purchase of the merchandise or
manufactured goods of the person) may
qualify for the exception only if the
affiliate enters into the swap to hedge
or mitigate the commercial risk of the
person or other affiliate of the person
that is not a financial entity,
provided that if the transfer of
commercial risk is addressed by
entering into a swap with a swap dealer
or major swap participant, a credit
support measure or other mechanism is
utilized.
* * * * * * *
Sec. 4. (a) * * *
* * * * * * *
(c)(1) In order to promote responsible economic or financial
innovation and fair competition, the Commission by rule,
regulation, or order, after notice and opportunity for hearing,
may (on its own initiative or on application of any person,
including any board of trade designated or registered as a
contract market or derivatives transaction execution facility
for transactions for future delivery in any commodity under
section 5 of this Act) exempt any agreement, contract, or
transaction (or class thereof) that is otherwise subject to
subsection (a) (including any person or class of persons
offering, entering into, rendering advice or rendering other
services with respect to, the agreement, contract, or
transaction), either unconditionally or on stated terms or
conditions or for stated periods and either retroactively or
prospectively, or both, from any of the requirements of
subsection (a), or from any other provision of this Act (except
subparagraphs (C)(ii) and (D) of section 2(a)(1), except that--
(A) unless the Commission is expressly authorized by
any provision described in this subparagraph to grant
exemptions, or except as necessary to effectuate
section 361 of the Customer Protection and End User
Relief Act, with respect to amendments made by subtitle
A of the Wall Street Transparency and Accountability
Act of 2010--
(i) with respect to--
(I) paragraphs (2), (3), (4), (5),
and [(7), paragraph (18)(A)(vii)(III),
paragraphs (23), (24), (31), (32),
(38), (39), (41), (42), (46), (47),
(48), and (49)] (8), paragraph
(19)(A)(vii)(III), paragraphs (24),
(25), (32), (33), (39), (40), (42),
(43), (47), (48), (49), and (50) of
section 1a, and sections 2(a)(13),
2(c)(1)(D), 4a(a), 4a(b), 4d(c), 4d(d),
4r, 4s, 5b(a), 5b(b), 5(d), 5(g), 5(h),
5b(c), 5b(i), 8e, and 21; and
* * * * * * *
Sec. 4a. (a) * * *
* * * * * * *
(c)(1) No rule, regulation, or order issued under subsection
(a) of this section shall apply to transactions or positions
which are shown to be bona fide hedging transactions or
positions, as such terms shall be defined by the Commission by
rule, regulation, or order consistent with the purposes of this
Act. Such terms [may] shall be defined to permit producers,
purchasers, sellers, middlemen, and users of a commodity or a
product derived therefrom to hedge their legitimate anticipated
business needs for that period of time into the [future for
which] future, to be determined by the Commission, for which
either an appropriate swap is available or an appropriate
futures contract is open and available on an exchange. To
determine the adequacy of this Act and the powers of the
Commission acting thereunder to prevent unwarranted price
pressures by large hedgers, the Commission shall monitor and
analyze the trading activities of the largest hedgers, as
determined by the Commission, operating in the cattle, hog, or
pork belly markets and shall report its findings and
recommendations to the Senate Committee on Agriculture,
Nutrition, and Forestry and the House Committee on Agriculture
in its annual reports for at least two years following the date
of enactment of the Futures Trading Act of 1982.
(2) For the purposes of implementation of [subsection
(a)(2) for contracts of sale for future delivery or
options on the contracts or commodities, the Commission
shall define what constitutes a bona fide hedging
transaction or position as] paragraphs (2) and (5) of
subsection (a) for swaps, contracts of sale for future
delivery, or options on the contracts or commodities, a
bona fide hedging transaction or position is a
transaction or position that--
(A)(i) * * *
(ii) is economically appropriate to the
reduction [of risks] or management of current
or anticipated risks in the conduct and
management of a commercial enterprise; and
* * * * * * *
(3) The Commission may further define, by rule or
regulation, what constitutes a bona fide hedging
transaction, provided that the rule or regulation is
consistent with the requirements of subparagraphs (A)
and (B) of paragraph (2).
* * * * * * *
Sec. 4d. (a) (1) It shall be unlawful for any person to be a
futures commission merchant unless--
[(1)] (A) such person shall have registered,
under this Act, with the Commission as such
futures commission merchant and such
registration shall not have expired nor been
suspended nor revoked; and
[(2)] (B) such person shall, whether a member
or nonmember of a contract market or
derivatives transaction execution facility,
treat and deal with all money, securities, and
property received by such person to margin,
guarantee, or secure the trades or contracts of
any customer of such person, or accruing to
such customer as the result of such trades or
contracts, as belonging to such customer. Such
money, securities, and property shall be
separately accounted for and shall not be
commingled with the funds of such commission
merchant or be used to margin or guarantee the
trades or contracts, or to secure or extend the
credit, of any customer or person other than
the one for whom the same are held: Provided,
however, That such money, securities, and
property of the customers of such futures
commission merchant may, for convenience, be
commingled and deposited in the same account or
accounts with any bank or trust company or with
the clearing house organization of such
contract market or derivatives transaction
execution facility, and that such share thereof
as in the normal course of business shall be
necessary to margin, guarantee, secure,
transfer, adjust, or settle the contracts or
trades of such customers, or resulting market
positions, with the clearing-house organization
of such contract market or derivatives
transaction execution facility or with any
member of such contract market or derivatives
transaction execution facility, may be
withdrawn and applied to such purposes,
including the payment of commissions,
brokerage, interest, taxes, storage, and other
charges, lawfully accruing in connection with
such contracts and trades: Provided further,
That in accordance with such terms and
conditions as the Commission may prescribe by
rule, regulation, or order, such money,
securities, and property of the customers of
such futures commission merchant may be
commingled and deposited as provided in this
section with any other money, securities, and
property received by such futures commission
merchant and required by the Commission to be
separately accounted for and treated and dealt
with as belonging to the customers of such
futures commission merchant: Provided further,
That such money may be invested in obligations
of the United States, in general obligations of
any State or of any political subdivision
thereof, and in obligations fully guaranteed as
to principal and interest by the United States,
such investments to be made in accordance with
such rules and regulations and subject to such
conditions as the Commission may prescribe.
(2) Any rules or regulations requiring a futures
commission merchant to maintain a residual interest in
accounts held for the benefit of customers in amounts
at least sufficient to exceed the sum of all
uncollected margin deficits of such customers shall
provide that a futures commission merchant shall meet
its residual interest requirement as of the end of each
business day calculated as of the close of business on
the previous business day.
* * * * * * *
(h) [Notwithstanding subsection (a)(2)] Notwithstanding
subsection (a)(1)(B) or the rules and regulations thereunder,
and pursuant to an exemption granted by the Commission under
section 4(c) of this Act or pursuant to a rule or regulation, a
futures commission merchant that is registered pursuant to
section 4f(a)(1) of this Act and also registered as a broker or
dealer pursuant to section 15(b)(1) of the Securities Exchange
Act of 1934 may, pursuant to a portfolio margining program
approved by the Securities and Exchange Commission pursuant to
section 19(b) of the Securities Exchange Act of 1934, hold in a
portfolio margining account carried as a securities account
subject to section 15(c)(3) of the Securities Exchange Act of
1934 and the rules and regulations thereunder, a contract for
the purchase or sale of a commodity for future delivery or an
option on such a contract, and any money, securities or other
property received from a customer to margin, guarantee or
secure such a contract, or accruing to a customer as the result
of such a contract. The Commission shall consult with the
Securities and Exchange Commission to adopt rules to ensure
that such transactions and accounts are subject to comparable
requirements to the extent practical for similar products.
* * * * * * *
SEC. 4Q. SPECIAL PROCEDURES TO ENCOURAGE AND FACILITATE BONA FIDE
HEDGING BY AGRICULTURAL PRODUCERS.
(a) Authority.--The Commission shall consider issuing rules
or orders which--
(1) prescribe procedures under which each contract
market is to provide for orderly delivery, including
temporary storage costs, of any agricultural commodity
enumerated in section [1a(9)] 1a(10) which is the
subject of a contract for purchase or sale for future
delivery;
* * * * * * *
SEC. 4S. REGISTRATION AND REGULATION OF SWAP DEALERS AND MAJOR SWAP
PARTICIPANTS.
(a) * * *
* * * * * * *
(e) Capital and Margin Requirements.--
(1) * * *
(2) Rules.--
(A) * * *
(B) Swap dealers and major swap participants
that are not banks.--The Commission, in
consultation with the prudential regulators and
the Securities and Exchange Commission, shall
adopt rules for swap dealers and major swap
participants, with respect to their activities
as a swap dealer or major swap participant, for
which there is not a prudential regulator
imposing--
(i) * * *
* * * * * * *
(3) Standards for capital and margin.--
(A) * * *
* * * * * * *
(D) Comparability of capital and margin
requirements.--
(i) * * *
(ii) Comparability.--The entities
described in clause (i) [shall, to the
maximum extent practicable,] shall
establish and maintain comparable
minimum capital requirements and
minimum initial and variation margin
requirements, including the use of non
cash collateral, for--
(I) * * *
* * * * * * *
(iii) Financial models.--To the
extent that swap dealers and major swap
participants that are banks are
permitted to use financial models
approved by the prudential regulators
or the Securities and Exchange
Commission to calculate minimum capital
requirements and minimum initial and
variation margin requirements,
including the use of non-cash
collateral, the Commission shall, in
consultation with the prudential
regulators and the Securities and
Exchange Commission, permit the use of
comparable financial models by swap
dealers and major swap participants
that are not banks.
(4) Applicability with respect to counterparties.--
The requirements of paragraphs (2)(A)(ii) and
(2)(B)(ii), including the initial and variation margin
requirements imposed by rules adopted pursuant to
paragraphs (2)(A)(ii) and (2)(B)(ii), shall not apply
to a swap in which a counterparty qualifies for an
exception under section 2(h)(7)(A), or an exemption
issued under section 4(c)(1) from the requirements of
section 2(h)(1)(A) for cooperative entities as defined
in such exemption, or satisfies the criteria in section
2(h)(7)(D).
(f) Reporting and Recordkeeping.--
(1) In general.--Each registered swap dealer and
major swap participant--
(A) * * *
* * * * * * *
(D) shall keep any such books and records
relating to swaps defined in section
[1a(47)(A)(v)] 1a(48)(A)(v) open to inspection
and examination by the Securities and Exchange
Commission.
* * * * * * *
(h) Business Conduct Standards.--
(1) * * *
(2) Responsibilities with respect to special
entities.--
(A) * * *
* * * * * * *
(D) Utility special entity.--For purposes of
this Act, the term ``utility special entity''
means a special entity, or any instrumentality,
department, or corporation of or established by
a State or political subdivision of a State,
that--
(i) owns or operates an electric or
natural gas facility or an electric or
natural gas operation;
(ii) supplies natural gas and or
electric energy to another utility
special entity;
(iii) has public service obligations
under Federal, State, or local law or
regulation to deliver electric energy
or natural gas service to customers; or
(iv) is a Federal power marketing
agency, as defined in section 3 of the
Federal Power Act.
* * * * * * *
(5) Special requirements for swap dealers as
counterparties to special entities.--
(A) Any swap dealer or major swap participant
that offers to enter or enters into a swap with
a Special Entity shall--
(i) comply with any duty established
by the Commission for a swap dealer or
major swap participant, with respect to
a counterparty that is an eligible
contract participant within the meaning
of subclause (I) or (II) of clause
(vii) of section [1a(18)] 1a(19) of
this Act, that requires the swap dealer
or major swap participant to have a
reasonable basis to believe that the
counterparty that is a Special Entity
has an independent representative
that--
(I) * * *
* * * * * * *
SEC. 4T. LARGE SWAP TRADER REPORTING.
(a) * * *
(b) Requirements.--
(1) In general.--Books and records described in
subsection (a)(2)(B) shall--
(A) * * *
* * * * * * *
(C) be open at all times to inspection and
examination by the Securities and Exchange
Commission, to the extent such books and
records relate to transactions in swaps (as
that term is defined in section [1a(47)(A)(v)]
1a(48)(A)(v)), and consistent with the
confidentiality and disclosure requirements of
section 8.
* * * * * * *
SEC. 4U. RECORDKEEPING REQUIREMENTS APPLICABLE TO NON-REGISTERED
MEMBERS OF CERTAIN REGISTERED ENTITIES.
Except as provided in section 4(a)(3), a member of a
designated contract market or a swap execution facility that is
not registered with the Commission and not required to be
registered with the Commission in any capacity shall satisfy
the recordkeeping requirements of this Act and any
recordkeeping rule, order, or regulation under this Act by
maintaining a written record of each transaction in a contract
for future delivery, option on a future, swap, swaption, trade
option, or related cash or forward transaction. The written
record shall be sufficient if it includes the final agreement
between the parties and the material economic terms of the
transaction and is identifiable and searchable by transaction.
SEC. 5. DESIGNATION OF BOARDS OF TRADE AS CONTRACT MARKETS.
(a) * * *
* * * * * * *
(d) Core Principles for Contract Markets.--
(1) * * *
* * * * * * *
(23) Securities and exchange commission.--The board
of trade shall keep any such records relating to swaps
defined in section [1a(47)(A)(v)] 1a(48)(A)(v) open to
inspection and examination by the Securities and
Exchange Commission.
(e) Current Agricultural Commodities.--
(1) Subject to paragraph (2) of this subsection, a
contract for purchase or sale for future delivery of an
agricultural commodity enumerated in section [1a(9)]
1a(10) that is available for trade on a contract
market, as of the date of the enactment of this
subsection, may be traded only on a contract market
designated under this section.
* * * * * * *
SEC. 5B. DERIVATIVES CLEARING ORGANIZATIONS.
(a) * * *
* * * * * * *
(k) Reporting Requirements.--
(1) * * *
* * * * * * *
(3) Reports on security-based swap agreements to be
shared with the securities and exchange commission.--
(A) In general.--A derivatives clearing
organization that clears security-based swap
agreements (as defined in section
[1a(47)(A)(v)] 1a(48)(A)(v)) shall, upon
request, open to inspection and examination to
the Securities and Exchange Commission all
books and records relating to such security-
based swap agreements, consistent with the
confidentiality and disclosure requirements of
section 8.
* * * * * * *
[(5) Confidentiality and indemnification agreement.--
Before the Commission may share information with any
entity described in paragraph (4)--
[(A) the Commission shall receive a written
agreement from each entity stating that the
entity shall abide by the confidentiality
requirements described in section 8 relating to
the information on swap transactions that is
provided; and
[(B) each entity shall agree to indemnify the
Commission for any expenses arising from
litigation relating to the information provided
under section 8.]
(5) Confidentiality agreement.--Before the Commission
may share information with any entity described in
paragraph (4), the Commission shall receive a written
agreement from each entity stating that the entity
shall abide by the confidentiality requirements
described in section 8 relating to the information on
swap transactions that is provided.
* * * * * * *
SEC. 5C. COMMON PROVISIONS APPLICABLE TO REGISTERED ENTITIES.
(a) * * *
* * * * * * *
(c) New Contracts, New Rules, and Rule Amendments.--
(1) * * *
* * * * * * *
(4) Prior approval.--
(A) * * *
(B) Prior approval required.--Notwithstanding
any other provision of this section, a
designated contract market shall submit to the
Commission for prior approval each rule
amendment that materially changes the terms and
conditions, as determined by the Commission, in
any contract of sale for future delivery of a
commodity specifically enumerated in section
[1a(10)] 1a(11) (or any option thereon) traded
through its facilities if the rule amendment
applies to contracts and delivery months which
have already been listed for trading and have
open interest.
* * * * * * *
SEC. 5H. SWAP EXECUTION FACILITIES.
(a) * * *
* * * * * * *
(f) Core Principles for Swap Execution Facilities.--
(1) * * *
* * * * * * *
(10) Recordkeeping and reporting.--
(A) In general.--A swap execution facility
shall--
(i) * * *
* * * * * * *
(iii) shall keep any such records
relating to swaps defined in section
[1a(47)(A)(v)] 1a(48)(A)(v) open to
inspection and examination by the
Securities and Exchange Commission.''
* * * * * * *
Sec. 6. (a) * * *
* * * * * * *
(c) Prohibition Regarding Manipulation and False
Information.--
(1) * * *
* * * * * * *
[(5) Subpoena.--For]
(5) Subpoena._
(A) In general._For the purpose of securing
effective enforcement of the provisions of this
Act, for the purpose of any investigation or
proceeding under this Act, and for the purpose
of any action taken under section 12(f), any
member of the Commission or any Administrative
Law Judge or other officer designated by the
Commission (except as provided in paragraph
(7)) may administer oaths and affirmations,
subpoena witnesses, compel their attendance,
take evidence, and require the production of
any books, papers, correspondence, memoranda,
or other records that the Commission deems
relevant or material to the inquiry.
(B) Content of subpoena order.--An order of
the Commission authorizing the issuance of a
subpoena--
(i) shall state in good faith the
purpose of the investigation;
(ii) shall require only the provision
of information reasonably relevant to
that purpose; and
(iii) shall not be for an indefinite
duration.
(C) Renewal.--An order issued under this
paragraph may be renewed only by Commission
action.
* * * * * * *
Sec. 12. (a) * * *
* * * * * * *
(d) There are authorized to be appropriated such sums as are
necessary to carry out this Act for each of the fiscal years
2008 through [2013] 2018.
* * * * * * *
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 and publish in the
regulation or order the costs and benefits, both
qualitative and quantitative, of the proposed
regulation or order, and the proposed regulation or
order shall state its statutory justification.
(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) the costs of complying with the proposed
regulation or order by all regulated entities,
including a methodology for quantifying the
costs (recognizing that some costs are
difficult to quantify);
(I) whether the proposed regulation or order
is inconsistent, incompatible, or duplicative
of other Federal regulations or orders;
(J) whether, in choosing among alternative
regulatory approaches, those approaches
maximize net benefits (including potential
economic and other benefits, distributive
impacts, and equity); and
(K) other public interest considerations.
* * * * * * *
Sec. 17. (a) * * *
* * * * * * *
(s) A registered futures association shall--
(1) require each member of the association that is a
futures commission merchant to maintain written
policies and procedures regarding the maintenance of--
(A) the residual interest of the member, as
described in section 1.23 of title 17, Code of
Federal Regulations, in any customer segregated
funds account of the member, as identified in
section 1.20 of such title, and in any foreign
futures and foreign options customer secured
amount funds account of the member, as
identified in section 30.7 of such title; and
(B) the residual interest of the member, as
described in section 22.2(e)(4) of such title,
in any cleared swaps customer collateral
account of the member, as identified in section
22.2 of such title; and
(2) establish rules to govern the withdrawal,
transfer or disbursement by any member of the
association, that is a futures commission merchant, of
the member's residual interest in customer segregated
funds as provided in such section 1.20, in foreign
futures and foreign options customer secured amount
funds, identified as provided in such section 30.7, and
from a cleared swaps customer collateral, identified as
provided in such section 22.2.
(t) A registered futures association shall require any member
of the association that is a futures commission merchant to--
(1) use an electronic system or systems to report
financial and operational information to the
association, including information related to customer
segregated funds, foreign futures and foreign options
customer secured amount funds accounts, and cleared
swaps customer collateral, in accordance with such
terms, conditions, documentation standards, and regular
time intervals as are established by the association;
(2) instruct each depository, including any bank,
trust company, derivatives clearing organization, or
futures commission merchant, holding customer
segregated funds under section 1.20 of title 17, Code
of Federal Regulations, foreign futures and foreign
options customer secured amount funds under section
30.7 of such title, or cleared swap customer funds
under section 22.2 of such title, to report balances in
the futures commission merchant's section 1.20 customer
segregated funds, section 30.7 foreign futures and
foreign options customer secured amount funds, and
section 22.2 cleared swap customer funds, to the
registered futures association or another party
designated by the registered futures association, in
the form, manner, and interval prescribed by the
registered futures association; and
(3) hold section 1.20 customer segregated funds,
section 30.7 foreign futures and foreign options
customer secured amount funds and section 22.2 cleared
swaps customer funds in a depository that reports the
balances in these accounts of the futures commission
merchant held at the depository to the registered
futures association or another party designated by the
registered futures association in the form, manner, and
interval prescribed by the registered futures
association.
(u) A futures commission merchant that has adjusted net
capital in an amount less than the amount required by
regulations established by the Commission or a self-regulatory
organization of which the futures commission merchant is a
member shall immediately notify the Commission and the self-
regulatory organization of this occurrence.
(v) A futures commission merchant that does not hold a
sufficient amount of funds in segregated accounts for futures
customers under section 1.20 of title 17, Code of Federal
Regulations, in foreign futures and foreign options secured
amount accounts for foreign futures and foreign options secured
amount customers under section 30.7 of such title, or in
segregated accounts for cleared swap customers under section
22.2 of such title, as required by regulations established by
the Commission or a self-regulatory organization of which the
futures commission merchant is a member, shall immediately
notify the Commission and the self-regulatory organization of
this occurrence.
(w) Within such time period established by the Commission
after the end of each fiscal year, a futures commission
merchant shall file with the Commission a report from the chief
compliance officer of the futures commission merchant
containing an assessment of the internal compliance programs of
the futures commission merchant.
* * * * * * *
Sec. 20. (a) Notwithstanding title 11 of the United States
Code, the Commission may provide, with respect to a commodity
broker that is a debtor under chapter 7 of title 11 of the
United States Code, by rule or regulation--
(1) * * *
* * * * * * *
(4) any persons to which customer property and
commodity contracts may be transferred under section
766 of title 11 of the United States Code; [and]
(5) how the net equity of a customer is to be
determined[.]; and
(6) that cash, securities, or other property of the
estate of a commodity broker, including the trading or
operating accounts of the commodities broker and
commodities held in inventory by the commodity broker,
shall be included in customer property, but only to the
extent that the property that is otherwise customer
property is insufficient to satisfy the net equity
claims of public customers (as such term may be defined
by the Commission by rule or regulation) of the
commodity broker.
* * * * * * *
SEC. 21. SWAP DATA REPOSITORIES.
(a) * * *
* * * * * * *
[(d) Confidentiality and Indemnification Agreement.--Before
the swap data repository may share information with any entity
described in subsection (c)(7)--
[(1) the swap data repository shall receive a written
agreement from each entity stating that the entity
shall abide by the confidentiality requirements
described in section 8 relating to the information on
swap transactions that is provided; and
[(2) each entity shall agree to indemnify the swap
data repository and the Commission for any expenses
arising from litigation relating to the information
provided under section 8.]
(d) Confidentiality Agreement.--Before the swap data
repository may share information with any entity described in
subsection (c)(7), the swap data repository shall receive a
written agreement from each entity stating that the entity
shall abide by the confidentiality requirements described in
section 8 relating to the information on swap transactions that
is provided.
* * * * * * *
(f) Core Principles Applicable To Swap Data Repositories.--
(1) * * *
* * * * * * *
(4) Additional duties developed by commission.--
(A) * * *
* * * * * * *
(C) Additional duties for commission
designees.--The Commission shall establish
additional duties for any registrant described
in section [1a(48)] 1a(49) in order to minimize
conflicts of interest, protect data, ensure
compliance, and guarantee the safety and
security of the swap data repository.
* * * * * * *
SEC. 24. JUDICIAL REVIEW OF COMMISSION RULES.
(a) A person aggrieved by a final rule of the Commission
under this Act may obtain review of the rule in the United
States Court of Appeals for the District of Columbia Circuit or
the United States Court of Appeals for the circuit where the
party resides, by filing in the court, within 60 days after
publication in the Federal Register of the entry of the rule, a
written petition requesting that the rule be modified or set
aside in whole or in part.
(b) A copy of the petition shall be transmitted forthwith by
the clerk of the court to an officer designated by the
Commission for that purpose. Thereupon the Commission shall
file in the court the record on which the rule complained of is
entered, as provided in section 2112 of title 28, United States
Code, and the Federal Rules of Appellate Procedure.
(c) On the filing of the petition, the court has
jurisdiction, which becomes exclusive on the filing of the
record, to affirm or modify and enforce or to set aside the
rule in whole or in part.
(d) The findings of the Commission as to the facts identified
by the Commission as the basis, in whole or in part, of the
rule, if supported by substantial evidence, are conclusive. The
court shall affirm and enforce the rule unless the Commission's
action in promulgating the rule is found to be arbitrary,
capricious, an abuse of discretion, or otherwise not in
accordance with law; contrary to constitutional right, power,
privilege, or immunity; in excess of statutory jurisdiction,
authority, or limitations, or short of statutory right; or
without observance of procedure required by law.
(e) If either party applies to the court for leave to adduce
additional evidence and shows to the satisfaction of the court
that the additional evidence is material and that there was
reasonable ground for failure to adduce it before the
Commission, the court may remand the case to the Commission for
further proceedings, in whatever manner and on whatever
conditions the court considers appropriate. If the case is
remanded to the Commission, it shall file in the court a
supplemental record containing any new evidence, any further or
modified findings, and any new order.