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HAC slams CFTC stable door

The House Agriculture Committee has approved H.R. 4413, the Customer Protection and End-User Relief Act, bipartisan legislation to reauthorise the CFTC and fine-tune its procedures; the Act has been passed to Congress for full debate. The CFTC’s 2008 authority expired on 30th September 2013, the resulting authority-gap does not seem to be cause for concern. However, the process is not a mere rubber-stamping exercise, reauthorisation is an opportunity for the Committee to assess the agency’s work over the previous years and define the parameters for the next 5 or so. As implied by its title, the Act contains a number of items offering relief to end-users:

  • ·         Allow “commercial market participants” to escape classification as financial entities
  •  ·         New procedures for the issuance of no-action letters and associated Guidance
  •  ·         A definition of bona fide hedging
  •  ·         The potential loosening of the de minimis $8bn swap dealer classification threshold
  •  ·         Recordkeeping relief for specified end-users
  •  ·         Relief for end users of contracts with embedded volume optionality

The Act proposes two major changes to CFTC procedures and structure: a requirement for detailed cost-benefit analyses and an alteration in the agency’s hierarchy. The Act mandates that the CFTC’s future rulemaking must consider the following factors:

  • ·The impact on liquidity in the affected markets
  •  The possibility of alternatives to formal regulation
  •  The cost of compliance for regulated entities and a cost quantification methodology 
  • An assessment of the regulation’s consistency, compatibility and lack of duplication with other Federal rule
  •  The net benefit of each regulatory election, taking into account potential economic effects and distributive impacts

The Act also requires the creation of the office of Chief Economist, who shall report with the Directors of each Division to the whole Commission, as opposed to just the Chairman. It requires the agency to introduce a judicial review process mirroring that of the SEC, and directs the Government Accountability Office to examine the CFTC’s expenditure on market surveillance and data use and handling. The cost-benefit requirements are essentially a statutory institution of Executive Order 13563, to which the agency has already subscribed. However, these and other requirements in the Act look like a pointed rejoinder to the less-consultative style typified by ex-Chairman Gary Gensler. The Act codifies a necessarily more-measured style of legislation and represents a significant diminution of the Chairman’s power. If the Act is finally passed in its current form, autocratic and rushed rulemaking by CFTC fiat will be somewhat on the way to becoming an aberration rather than a defining feature.

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