Yesterday, the U.S. House Agriculture Committee advanced H.R. 2289 which reauthorizes the Commodity Futures Trading Commission (CFTC) for the next five years and provides much needed relief for end users who rely on derivatives markets to manage their risks.
The measure is similar to legislation that passed the House last year, but was not taken up in the U.S. Senate. The Senate will take up CFTC reauthorization this year, however, it is highly probable that the U.S. Senate Agriculture Committee, who held a CFTC hearing yesterday, will not include provisions for end users and cross-border applications for swaps that are contained in the House measure.
The House measure intends to curb CFTC overreach in implementing authorities granted under the Dodd-Frank Act that was adopted after the 2008 financial crisis. The Dodd-Frank Act amended the Commodity Exchange Act (CEA) to establish comprehensive regulation of swaps by CFTC. Under section 2(i) of the CEA, as amended, the swaps provisions of the CEA (including any CEA rules or regulations) apply to cross-border activities when certain conditions are met, namely, when such activities have a “direct and significant connection with activities in, or effect on, commerce of the United States” or when they contravene Commission rules or regulations as are necessary or appropriate to prevent evasion of the swaps provisions of the CEA enacted under Title VII of the Dodd-Frank Act.
One of those regulations includes CFTC’s oversight of cross-border derivatives trading. HR 2289 would require CFTC to promulgate rules that allow U.S. firms to carry out trades in eight of the largest foreign markets that maintain similar U.S. oversight without CFTC supervision.
Other provisions in the reauthorization legislation include:
- Allows non-bank swap dealers/participants to use similar calculations for minimum capital requirements and minimum initial and variation margin requirements as those used by banks;
- CFTC must provide a plan for regulating cross-border trading;
- Provides relief for grain elevator operators, agricultural counterparties and commercial market participants from record-keeping requirements. Written records would be deemed sufficient if it includes the final agreement between the parties and the material economic terms of the transaction; and
- Establishes a judicial review process of CFTC rules modelled from the Securities Exchange Commission.