By Jon H. Harsch

© Copyright Agri-Pulse Communications, Inc.

WASHINGTON, March 31 – The House Agriculture Committee wrote tough new rules last year to regulate the $600 trillion derivatives market. In a hearing Thursday, Committee Chair Frank Lucas, R-Okla., called for delaying the new rules which the Dodd-Frank financial reform law tasked the Commodity Futures Trading Commission (CFTC) to implement by July this year.

Lucas told CFTC Chair Gary Gensler at the hearing that “Under the current time frame, the CFTC can’t possibly comprehend the cumulative impact over 40 proposed regulations will have on the markets and the economy. We cannot impose a wave of new regulations that are rushed and poorly vetted.” Lucas complained that although the CFTC is proposing sweeping new regulatory authority over all swaps transactions, it is proposing “very narrow interpretations of the exemptions Congress authorized” for financial institutions which use derivatives to hedge their risks.

Commodity Futures Trading Commission Chair Gary Gensler at Thursday's House Agriculture Committee hearing.

Responding to Lucas and other Republicans who called for delay and reconsideration of proposed regulations they say go far beyond congressional intent, Gensler assured the committee that the CFTC is far from finalizing its proposed new rules. He pointed out that the CFTC has held over 600 meetings and received thousands of public comments. He said the CFTC would even take into account the comments in today's House Agriculture Committee hearing before finalizing its proposals.

Ranking Member Collin Peterson, D-Minn., who chaired the committee when it wrote new derivatives market oversight provisions last year, agreed with the Republicans' main concern: that the CFTC must not impose burdensome, costly restrictions on “end users using the markets to mitigate risk.” But he added that he is “equally concerned that some of the big financial firms, whose irresponsible behavior Dodd-Frank seeks to address, are looking at ways to use the end user concerns to create loopholes for themselves.”

Peterson explained that “While I'm not a big fan of regulation,” new rules to bring transparency to the previously unregulated swaps market “are necessary to ensure we don't get in another situation where the American taxpayer has to bail out large financial firms.”

Gensler offered assurances that institutions which do not pose systemic risks will not be adversely affected by the new rules. He noted that “The Dodd-Frank Act and the Commissions’ joint proposed rule provide an exemption for a person who 'engages in a de minimis quantity of swap dealing in connection with transactions with or on behalf of its customers.'” He said it's likely that “only a handful of entities” will be regulated as “major swap participants” which “have risk large enough to pose a threat to the U.S. financial system.”

Gensler also emphasized that “Under the Commodity Exchange Act, the CFTC does not regulate forward contracts . . . the Dodd-Frank Act excluded from the definition of swaps 'any sale of a nonfinancial commodity or security for deferred shipment or delivery, so long as the transaction is intended to be physically settled.'”

On the hot-button issue of end-user exemptions, Gensler made it clear that “Congress excepted swaps transactions involving non-financial end-users from the clearing requirement because they do not pose the same risk as transactions between two financial entities.” He said the CFTC is proposing that “if a non-financial company is using a swap to hedge an asset, liability, input or service that it currently has or uses or anticipates having or using, it would qualify for the end-user exception. In addition, the proposal says that if a swap meets generally accepted accounting principles as a hedge or if it is used for bona fide hedging, then the transaction would qualify for the end-user exception. Non-financial entities would be able to hedge interest rate risk, currency risk, physical commodity risk or other types of risk.”

Gensler added his assurance on margin requirements, saying Dodd-Frank “recognized that swaps transactions involving non-financial end-users do not pose the same risk as transactions between two financial entities. Thus, the CFTC does not intend to impose margin requirements with regard to these transactions.”

Gensler also assured the committee that Dodd-Frank gave the CFTC the authority to phase in implementation, so that the effective dates might be delayed until 2012 for new rules which finalized this summer. As well, he pointed out that “Regardless of the eventual effective dates of the swaps rules, to provide regulatory certainty to the market, rules relating to mandatory clearing, real time reporting, the trading requirement, margin and business conduct standards will apply only prospectively to those transactions that are executed after the rules go into effect.”

While Gensler's assurances didn't satisfy Republicans or witnesses representing small banks, the Farm Credit Council, the energy industry and Deere, Rep. Joe Courtney, D-Conn., warned Gensler that “not acting swiftly enough potentially could be exposing us to what happened in 2008.”