CFTC Reauthorization (Apr. 12)  

Mike & Co. —

The WSJ reported this afternoon that federal regulators are preparing to inform at least half of the nation’s eight systemically important banks that their living wills, the documents that dictate their bankruptcy plans, are not adequate.

For these firms, such an announcement would have many effects, from requiring that they go back to drawing board on living wills to or faceBsanctions — being required to hold higher levels of capital, which restricts borrowing, stock purchases, dividends, and protects against losses — that can eat into profitability.  If they fail to submit credible strategies repeatedly, regulators could force them to divest certain assets.  The shoe is expected to drop later this week when regulators release their findings.

Meanwhile, in other financial regulation news this week, Senate Agriculture is planning a CFTC reauthorization markup this Thursday, in a bid to move the commission off year-to-year funding for the first time since 2013.  More below.




The Senate Agriculture Committee will conduct a markup hearing this Thursday on a reauthorization bill for the Commodity Futures Trading Commission which will be introduced by Chairman Roberts.  In the meantime a draft of the legislation has been made available.

Since 2013, the CFTC has relied on year-to-year funding for its operations, reflecting a Congressional inability to reach compromise for more permanent funding.  President Obama’s FY17 budget increases the CFTC budget to $330 million, up $80 million from 2016’s enacted $250 million amount.

The Commodity End-User Relief Act would fund the CFTC through 2019, assuming it can pass the Senate.

Provisions of the Reauthorization

Within the bill are a number of reform measures aimed at providing farmers, utilities, and other “end users” greater flexibility in hedging through the use of derivatives contracts, as well as new privacy protection for derivatives users.

  •   allows farmers, ranchers, and energy providers (end-users) to hedge against operational risks through derivatives
  • requires electronic confirmation of customer account balances and require that firms notify regulators when moving account balances
  • requires the commission to review and take action on the London Metal Exchange’s application as a foreign board of trade
  • strengthens protection of proprietary or sensitive information provided to the commission through disclosure requirements
  •  provides judicial oversight of the commission’s rulemaking by allowing CFTC-regulated firms to bring suit through federal appeals courts
  • requires the CFTC to maintain an $8 billion threshold for companies to be considered registered swap dealers as it keeps studying whether or not that level is appropriate

House vs. Senate

A House Reauthorization bill, passed last June along party lines, included a number of “nonstarter” provisions that are absent from the Senate measure, including a cost-benefit analysis requirement.  It drew a veto threat by President Obama.

Ranking Committee Member Sen. Debbie Stabenow:  “I don’t believe that we should be tinkering with active rulemaking decisions at the Commission.  If we are serious about offering end-user relief, then one part of that goal should be empowering the experts at the Commission to put in place the right rules for end-users and the market as a whole. As it stands, I do not believe this bill will receive the broad, bipartisan support necessary to pass the Senate.”

Reauthorization vs. Annual Funding

Reauthorization is technically part of how Congress funds the CFTC, but the agency can keep operating without it.  In practice, reauthorization gives the agriculture committees a vehicle to try to impose changes on the agency.  The most recent CFTC reauthorization was approved in 2008 and expired in September 2013.

If a compromise can be reached on the bill then the CFTC stands to benefit from a firm Congressional endorsement, which will lend some stability to their operation and help reduce uncertainty in the derivatives markets.

Visions of Regulators’ Futures

Roberts’ package of CFTC reforms is particularly topical in the wake of the MetLife v FSOC ruling, which has raised questions regarding the advisability of a federal judge ruling on the merits of a regulators’ actions.  This is something to watch closely as debate moves forward – after the MetLife victory opponents of financial regulation will be sure to want to expand the ability of financial entities to press court challenges against their regulators.

End-Users — Who Are They?

Pension funds, farmers and other downstream users of derivatives would get a “bona fide” exemption from certain hedging rules imposed by the CFTC under Senate Republican legislation released today.

The legislation is aimed at helping what are called “end-users” of derivatives, meaning the individuals who hold and execute a derivative contract.  End-users are distinct from dealers and investors in the sense that they use derivatives specifically to mitigate their operational risks.

Many end-users also happen to be the producers of commodities which form the basis of derivatives contracts, and rely on futures contracts for some financial safety due to their vulnerability in the face of commodities price changes.

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