WASHINGTON, April 15, 2015 – The Commodity Futures Trading Commission (CFTC) has been regulating futures markets – and since the Dodd-Frank act was passed in 2010, swaps markets too – without congressional authorization for nearly two years.
At a hearing Tuesday of the House Agriculture subcommittee that has oversight of commodity exchanges, Republican Chairman Austin Scott and Democrat David Scott, both from Georgia, agreed that CFTC would be reauthorized soon, but didn’t say when.
Separately, Senate Agriculture Committee Chairman Pat Roberts, R-Kan., said Tuesday he was hopeful a reauthorization bill would be proposed shortly. “We need to pass the reauthorization,” he said. “Farmers have to have (regulatory certainty) to manage their risk.”
In an interview, Roberts said he hopes Republicans will be able to garner the bipartisan support needed to pass a reauthorization bill that would be signed by President Obama. “It’s an agreement in the committee that we have to do this,” he continued. Roberts did not rule out giving CFTC more money to beef up enforcement, a longstanding priority for Democrats.
Obama has asked for $322 million for the CFTC for FY 2016, a 29 percent increase from the $250 million appropriated for the agency for the current year. Obama had requested $280 million for FY 2015.
During Tuesday’s subcommittee hearing, Democrat David Scott asked the three CFTC commissioners who were present to weigh in on what “improvements” they would like to see added to a reauthorization bill, which will be different from the Customer Protection and End-User Relief Act that was passed by the House last year, but never voted on in the U.S. Senate.
Sharon Bowen, a Democrat, said many of the issues stakeholders complained about in the bill, such as undue regulatory burdens on end-users, are “already being addressed” within the commission, so the reauthorization bill needn’t focus on end-user protections.
Mark Wetjen, also a Democrat, echoed Bowen’s assurance on end-user policy. He said that the commission was working to finalize a rule that would exempt commercial end-users from margin requirements that apply to swap dealers and certain financial entities. A final margin rule would be coming out “soon,” Wetjen said, but said he couldn’t specify an exact timeframe.
Both he and Bowen asked the committee to write in “as much flexibility as possible” in the legislation so that the commission may respond to market changes more quickly and “continue executing (its) mission.”
J. Christopher Giancarlo, currently the only Republican on the commission (one Republican seat is vacant) said there were several issues that the committee could help rectify, including cross-border compliance.
First, he said there needs to be more work on a coordinated, international regulatory approach to swaps clearing, so that banks within the European Union can clear swap trades through U.S. clearinghouses. Global leaders discussed such an approach and agreed to move forward toward a unified framework at the G-20 Summit in 2009.
In addition, an informal CFTC rule that requires non-U.S. market operators and participants to comply with CFTC swap transaction rules when they trade with U.S. entities should be nullified, he said. Both practices, he contended, have “driven away global capital” and have led to fragmentation and a loss of liquidity in global derivatives markets.
Giancarlo also suggested that improvements should be made in the core regulatory principles that govern swap trading so that bona fide hedging of risk is not unduly regulated as “excessive speculation.” The CFTC has used the existing regulatory framework that governs futures markets for swaps markets, he said, even though the swaps and futures markets are “as different as the stock market is from the bond market.”
Finally, there is an indemnification provision in Dodd Frank that requires overseas regulators to contractually agree to pay for a U.S. swap or derivative clearinghouse’s potential legal expenses if litigation results from any type of information transaction between them. Giancarlo and Wetjen agreed that the provision is “unworkable” and its elimination should be stipulated in the reauthorization bill.
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