CFTC Potentially Escapes Congressional Gridlock

There’s new life, and the likelihood of new statutory authorities, at the Commodity Futures Trading Commission.

Following Senate confirmations earlier this month, the CFTC is filling out its five-member leadership ranks after operating with only two commissioners for much of this year. Timothy Massad was sworn in on June 5 as chairman, and Sharon Bowen joined as a commissioner four days later to fill another one of the Democratic vacancies. Christopher Giancarlo will occupy one of the open Republican seats.

Despite the gridlock that has become a hallmark of Washington politics, those officials may soon get new marching orders from Congress, which is working to reauthorize the agency tasked with regulating that $600 trillion swaps market. But it might also come with mixed messages on how Democrats want the agency to operate.

Earlier this month House Majority Leader Eric Cantor (R-Va.) said in a memo that he expects the chamber to vote in June on H.R. 4413, a bipartisan measure that would reauthorize certain programs at the CFTC while scaling back some of the derivatives regulations established under the 2010 Dodd-Frank law. Cantor reiterated his plan to put the legislation on the floor before he steps down from his leadership position at the end of July.

The bill’s supporters say the authorities given to the CFTC under the 2010 Dodd-Frank law have adversely affected farmers, hospitals, manufacturers and even government-owned utilities that use the derivatives market to manage risk. For that reason, many of the legislative provisions are designed to apply retroactively to July 2010, when Dodd-Frank was signed into law. The last five-year CFTC authorization expired on Sept. 30, and the agency has been operating since then without congressional authorization.

House Agriculture Committee Chairman Frank Lucas (R-Ok.) sponsored the 48-page measure, which his panel approved by voice vote on April 9. The legislation, known as the Customer Protection and End-User Act, is an omnibus bill that incorporates provisions from five other bills, a tactic that has helped attract Democrats who might otherwise be hesitant to roll back any Dodd-Frank protections. One bill sweetening the overall package is H.R. 634, which would exempt many small business owners from meeting margin and capital requirements when engaging in swaps because they’re not considered a systemic risk to the market. The House passed that measure 411-12 last June.

“I believe H.R. 4413 is reasonable legislation that ensures a well-functioning CFTC, regulates financial entities dealing in the swaps market, and allows end-users to continue using derivatives to hedge the risks associated with their underlying business,” Rep. Collin Peterson of Minnesota, the top Democrat on the House Agriculture Committee and a cosponsor of the bill, said before the panel voted on the measure.

The CFTC plays a major role in regulating the swaps market, an industry that operated with little supervision leading up to the 2008 financial crisis. Swaps are agreements allowing investors to hedge their risks, or just speculate, on anything from interest rates to default. In addition to Wall Street, the transactions are used by farmers and some energy suppliers to guard against price swings.

While the House measure enjoys broad bipartisan support at the committee level, groups such as Americans for Financial Reform and the Consumer Federation of America oppose the legislation, saying the measure would weaken the CFTC’s ability to regulate overseas activities that pose a risk to U.S. markets.

Last year the CFTC published guidance to market participants and foreign regulators regarding how the agency plans to regulate overseas swaps that could impact the world’s largest economy. While the CFTC has delayed implementation of the rule until at least 2015, the House measure would make it easier for the CFTC to accept the regulatory framework for swaps in other countries that involve a U.S. participant.

Not all Democrats are onboard with the bill. The issue of overseas swaps is of concern to Rep. Maxine Waters (D-Calif.), the top Democrat on the House Financial Services Committee.

“Given that large Wall Street banks routinely transact half of their swaps activities through foreign subsidiaries, it is important that U.S. market regulators both work with each other, and with global regulators, towards the goal of international regulatory convergence.,” Waters wrote last week in a letter to the CFTC. “As that process continues, we must ensure that U.S. banks are not importing unregulated derivatives risk back to the United States via any changes to the guarantee relationship with their foreign affiliates.”

The other main objection from opponents of H.R. 4413 is the inclusion of a provision that would create an Office of the Chief Economist and task it with conducting a cost-benefit analysis of each proposed rule. Related language would open the door to legal challenges regarding that aspect of the rule-making process. House Republicans have voted in favor of other bills during the 113th Congress that would require additional cost-benefit analyses at other rule-making agencies.

Supporters of H.R. 4413 include industry trade groups ranging from the Business Roundtable and the U.S. Chamber of Commerce to the National Grain and Feed Association and the American Public Power Association.

While the Senate has not introduced a companion measure, House passage of the bill would put pressure on Sen. Debbie Stabenow (D-Mich.), head of the Senate Agriculture Committee, to introduce her own reauthorization bill. Her panel is still in the midst of CFTC reauthorization hearings, with the most recent one held last month. Waiting until after the House vote will allow Stabenow and fellow party members on the committee to gauge what kind of Democratic support H.R. 4413 gets in the House and whether any substantive amendments are adopted, in addition to a statement of administration policy from the White House.

The bipartisan comity surrounding the House measure was dealt a blow last week when the House rejected, 194-227, an amendment offered by Rep. Rosa DeLauro (D-Conn.) that would have reduced information technology funding at the CFTC by $17.6 million in order to reallocate that money for regulatory efforts as part of the annual agriculture spending bill.

Rep. Robert Aderholt (R-Ala.), chairman of the House Appropriations Subcommittee on Agriculture, said on the House floor that the amendment “would only accomplish one objective: to grow the size of our government bureaucracy by hiring more personnel to write rules and regulations.”

Those disagreements can be chalked up as expected issues that arise when Congress funds any agency, big or small. What message they ultimately send to lawmakers considering reauthorization of the CFTC will likely be seen before the August congressional recess.