Wednesday, July 3, 2013
Rena S. Miller
Analyst in Financial Economics
The 113th Congress is interested in an array of issues faced by the Commodity Futures Trading Commission (CFTC). The congressional committees with oversight of the agency, the House and Senate Agriculture Committees, have begun to hold hearings related to various policy issues faced by the agency, as part of the CFTC reauthorization process. This process occurs roughly every five years and is currently underway, as the last authorization of appropriations for the agency expires September 30, 2013.
The CFTC witnessed a major expansion of its role in overseeing derivatives markets following passage of the Dodd-Frank Act in 2010. This act brought previously unregulated over-the-counter (OTC) derivatives, called swaps, under the oversight of the CFTC. The new role of the CFTC as a regulator of the swaps markets comes in addition to its preexisting role overseeing the futures and options markets, which include commodities and financial market instruments such as interest rate futures. Under the Dodd-Frank Act, much discretion on a range of key issues related to the new regulation of swaps was left to the CFTC (and to the Securities and Exchange Commission for swaps based on securities).
As the agency seeks to use its rulemaking powers to implement Dodd-Frank, several issues are proving challenging or contentious. These include the CFTC’s and other financial regulators’ implementation of the Volcker rule under Section 619 of Dodd-Frank, which prohibits proprietary trading and hedge fund activities by banks. Other Dodd-Frank implementation issues have prompted legislation in the 113th Congress. H.R. 677 addresses the scope of an exemption from clearing requirements for swaps between affiliates within an umbrella organization. A related issue is determining the scope of any exemption from the Dodd-Frank Act requirements on swaps for overseas branches or affiliates of U.S. organizations and for foreign organizations trading with U.S. persons—an issue that H.R. 1256 seeks to address. H.R. 1256 passed the House on June 12, 2013, in a roll call vote of 301-124. Another bill, H.R. 634, which also passed the House on June 12 in a roll call vote of 411-12, would prevent regulators from imposing margin requirements on swaps for both counterparties in which one counterparty is a non-financial firm, known as an “end user” of derivatives. H.R. 1003 would mandate additional cost-benefit analyses by the CFTC when it conducts future rulemakings.
In addition, changing technologies have created novel challenges for the agency’s oversight in such matters as monitoring high frequency trading in the derivatives markets. Furthermore, certain failures, such as the collapse of the futures trading firms MF Global and of Peregrine Financial, and enforcement issues, such as the manipulation of LIBOR, have flagged policy issues for the CFTC on the enforcement and policy fronts. Commodity price volatility, such as in the 2008 and 2011 runups in oil prices, has also sparked congressional interest in the CFTC’s proposed position limits rule, which some hope would constrain volatility in these markets. The CFTC’s position limits rule was vacated and remanded by a federal court in 2012—a decision that the CFTC has appealed.
This report provides summaries and abbreviated analyses of selected issues faced by the CFTC that may be relevant to the 113th Congress. It is not an exhaustive list of issues facing the agency. The appendix offers detailed background information on derivatives markets and related policy issues addressed in the Dodd-Frank Act. This report will be updated as events warrant.
Date of Report: June 24, 2013
Number of Pages: 23
Order Number: R43117
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