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Congress seeks to rein in CFTC

The House of Congress has passed legislation to reauthorise the CFTC for another five years; the Commodity End-User Relief Act (H.R. 2289) passed with a healthy majority 246-171. As with all things Dodd-Frank, the bill is already complex, controversial and may prove to be consequential. The bill’s policy statement is  blunt and uncompromising  in its intention to draw a firm line under the shoot from the hip legislative method that characterised the Gensler-period CFTC.

“…the CFTC has also issued an unprecedented 258 ‘no-action’ letters, 56 exemptive letters and 43 statements of guidance, interpretation and advice in order to delay, revise, or exempt the application of these regulations upon various market participants. This haphazard patchwork of exemptions has been widely used in lieu of a thorough and well-reasoned rulemaking process. H.R. 2289 reauthorizes the CFTC through 2019 and makes reforms to CFTC operations to help ensure that all Commissioners’ voices are heard as a part of a more deliberative rulemaking process.”

To this and other ends, the Republican-led Congress has added a number of conditions to the Agency’s authority, the most notable of which are summarised below:

  • Cross-Border. The bill orders the CFTC to define and issue rules governing cross-border regulation. It directs the Agency to consider the regulations of the eight jurisdictions with the largest swap markets as equivalent to the US rules and exempts non-US persons in those jurisdictions from US compliance
  • Cost-Benefit. Requires the Office of the Chief Economist to undertake more stringent analysis of new rules, in line with 2011’s Executive Order 13563- Improving Regulation and Regulatory Review
  • Customer Protection. FCM’s and SRO’s must establish and maintain written rules with respect to the treatment of residual interest in customer-segregated accounts. The property of FCM’s in Chapter 7 will contribute to client equity claims if needed
  • De Minimis Threshold . The CFTC must make a new rule to adjust the SD registration trigger from $8bn. to $3bn.
  • Bona Fide Hedging. Instructs the Agency to comply with the CEA and define bona fide hedging
  • Judicial Review. The DC circuit would be the first stop for rule review, bypassing the federal district court

The bill will now be passed to the Senate, where majority Republicans require a scant six more votes for it to pass. President Obama has threatened to veto the bill on the grounds that it contains no provision to increase the Agency’s funding through to 2019.

There is little doubt that the requirement to show an economic justification for each new rule will materially affect the CFTC’s legislative firepower. However, legislation and “Guidance” are uncomfortable bedfellows, and it is difficult to make the case that the CFTC should be exempt from a rule which already applies to its peers at the SEC and other Agencies. Equally, there is no doubt that the CFTC is woefully underfunded, the imposition of significant extra burdens  without increased carrying capacity may result in legislation that is “deliberative” to the point of standstill.

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