The House Agriculture Committee reported a CFTC reauthorization bill that contains a significant amendment regarding the affiliate swaps exception to the clearing requirement.
A manager’s amendment to the bipartisan CFTC reauthorization bill would make one significant substantive change and several technical changes to the discussion draft floated by the House Agriculture Committee late last week. The substantive change involves the affiliate exception to the swaps clearing requirement. The reauthorization bill would extend the CFTC’s operations until 2025 and would update the Commodity Exchange Act (CEA) with provisions on digital commodities, diversity and inclusion, and whistleblowers. The Agriculture Committee reported the amended reauthorization bill by voice vote.
Bipartisanship and praise from Chairman Tarbert. Reaction from the CFTC was swift and favorable. "The sound regulation of our derivatives markets, which see more than $4 trillion in notional activity each day, is critical to the health of the U.S. economy and the pocketbook of every American. These markets help inform the price of everything from food and gasoline to home mortgage interest," said CFTC Chairman Heath Tarbert "commend[ing]" the House Agriculture Committee. "Today’s bipartisan action highlights the importance of the work done at the CFTC and represents a significant first step in the legislative process."
Previously, Agriculture Committee Chairman Collin Peterson (D-Minn) and Ranking Member K. Michael Conaway (R-Texas) lauded the bipartisan character of the latest iteration of the CFTC’s reauthorization legislation. According to Chairman Peterson, some will get less than they expected but, overall, the bill "sends a strong message to the Senate," a message he reiterated in a later press release. Ranking Member Conaway told the committee that the bill included provisions on emerging technologies and diversity and inclusion while lamenting that still not enough has been done to address digital assets; he also noted in a press release several additional provisions on charitable organizations and commodity broker bankruptcies.
The leadership of the relevant subcommittee on Commodity Exchanges, Energy, and Credit likewise hailed the break-through bill. Subcommittee Chairman David Scott (D-Ga) said the bill would achieve market integrity, transparency, resiliency, and international cooperation while expanding the CFTC’s diversity and inclusion program to include an internship program. Ranking Member Austin Scott (R-Ga) explained that the bill was a true compromise" that included language from his separate bill on research and development.
Affiliate swaps exception. The manager’s amendment would clarify the affiliate exception to the clearing requirement contained in CEA Section 2(h). There are several specific requirements for affiliates to assert the exception and some affiliates cannot assert the exception at all. Additional limits apply to affiliates of affiliates. Finally, affiliates that do qualify for the exception must abide by two conditions.
With respect to this last point, current CEA Sections 2(h)(7)(D)(iv)(I) and (II) provide that: (1) an affiliate transaction must be done to hedge or mitigate commercial risk; and (2) neither the affiliate nor its affiliate that is not a financial entity may enter into a swap with any affiliate that is a financial entity, although an exception applies to an affiliate that qualifies for the clearing exception.
Under the amended reauthorization bill, the provisions contained in CEA Sections 2(h)(7)(D)(iv)(I) and (II) would be revised to clarify the two requirements for affiliate transactions. First, an affiliate transaction would have to be done to hedge or mitigate commercial risk, unless the affiliate can demonstrate to the Commission’s satisfaction that the affiliate is only invoking the exception to hedge or mitigate and the affiliate complies, as a financial entity, with the affiliate’s obligations regarding any swap for which the exception is not invoked. Second, neither an affiliate that qualifies for the exception nor any affiliate of the affiliate that is owned by the same parent company, and enters into swaps with the affiliate, may do so with or for any affiliate that is a financial entity (or assume, net, combine, or consolidate risk), except with an affiliate that qualifies for an exception.
Other items in the manager’s amendment. The manager’s amendment to the reauthorization bill would make several additional technical corrections, including:
- CEA Section 5h(a)(1) provides: "No person may operate a facility for the trading or processing of swaps unless the facility is registered as a swap execution facility or as a designated contract market under this section" (emphasis added). The discussion draft would have revised this provision to delete the phrase "or processing," but the manager’s amendment to the reauthorization bill eliminates this proposed revision.
- The discussion draft included language in the heading of proposed Section 112 clarifying the CEA’s extraterritorial reach. The original version included a reference to "disruptive trading" but the manager’s amendment drops that language and instead clarifies that the section heading applies to "fraud and manipulation."
- CEA Section 21 provides for the registration of swap data repositories (SDRs) and provides further in Section 21(c)(2) that an SDR must "confirm with both counterparties to the swap the accuracy of the data that was submitted." The discussion draft would revise this requirement to provide: "confirm with any counterparty to the swap, as determined by the Commission, the accuracy of the data that was submitted, and the counterparty shall comply with any request of a swap data repository to confirm the accuracy of the data" (emphasis added). The manager’s amendment clarifies that "any request" should refer instead to "the rules or procedures" of an SDR. The confirmation requirement was implemented in CFTC Regulation 49.11 and is the subject of a recent proposal to clarify this obligation.
MainStory: TopStory CFTCNews CommodityFutures Derivatives DoddFrankAct Enforcement FinancialIntermediaries FraudManipulation RiskManagement Swaps WhistleblowerNews
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