[Congressional Record Volume 160, Number 72 (Tuesday, May 13, 2014)]
[Senate]
[Pages S2955-S2957]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
By Mr. CHAMBLISS:
S. 2330. A bill to amend the Community Exchange Act to improve
futures and swaps trading, and for other purposes; to the Committee on
Agriculture, Nutrition, and Forestry.
Mr. CHAMBLISS. I rise to speak about a bill that I am introducing
today which is an amendment to the Commodity Exchange Act and it is
entitled the End-User Protection Act. During the debate on Dodd-Frank a
couple years ago, a constant concern for me and others in this Chamber
was how best to protect end users, the individuals and businesses that
use futures markets both to purchase commodities and use derivatives to
hedge their risk. The legislation that ultimately passed was not what I
had desired, but it did specify that end users should not be treated
the same as banks, and in many instances should not be subject to the
same registration and margin requirements as other market participants.
But that simply has not been the case as the CFTC has gone through the
rulemaking process.
I have seen many instances where the Commission in its zeal to
finalize rules has not given due consideration to those farmers,
ranchers, and other end users who depend on our futures markets to
hedge their risks. Time and again end users brought their concerns to
the Commission, and the end-user exemption I helped to author was not
honored. In other instances Dodd-Frank created unintended consequences
that must be fixed. It is for these reasons that I am introducing the
End-User Protection Act.
As commodities end users have struggled through an increasing burden
of reforms that were never designed for them, the effect has been an
increase in their cost of doing business and, for some, making the
already high risks associated with farming even higher.
The bill I am introducing clarifies that unlike banks, true
derivative end users are exempt from the margin requirements applied by
the Dodd-Frank Wall Street Reform and Consumer Protection Act to many
of the derivatives contracts that they enter into.
Let me highlight a few of the other reforms that are included in this
bill. One of the most egregious abuses by the Commodities Futures
Trading Commission has been with their cost-benefit analysis. While the
CEA instructed the Commission to weigh the cost and benefits of
regulations, it is only recently we have seen misgivings in this
process. Throughout the Dodd-Frank rulemaking process industry
participants have relayed concerns about the cost-benefit analyses
performed by the CFTC. Commissioners as well have vocalized concerns
that the model the CFTC has used is deficient in several areas. For
instance, in a letter to the Wall Street Journal in August of 2011,
Commissioner Scott O'Malia stated:
With respect to our proposed rule makings, our own
inspector general has called into question the quality of the
cost-benefit analysis. Nevertheless, during the course of our
final rule makings, I have continued to see indications that
the CFTC intends to persist with a one-size-fits-all,
qualitative approach. This approach contradicts two recent
executive orders from President Obama and justifiably renders
our rule makings vulnerable to legal challenge.
. . . We need to be more cognizant of the effects that our
rule makings may have on the food and energy costs of average
Americans. If the CFTC needs to re-propose a rule making,
then so be it. Given the stakes for Main Street and Wall
Street, it is more important to get a rule making right than
to finish it fast.
As Commissioner O'Malia notes, getting it right is the most important
part for the average American--but not, it seems, for the Commission.
Even the CFTC's Inspector General detailed insufficient cost-benefit
methodology in rulemakings. In some instances the Commission has even
released ``interpretive guidance'' in order to subvert the cost-benefit
process altogether.
President Obama has made clear that he expects a thorough analysis,
and the Commission should be held to the same standard as other
agencies. Therefore, my bill amends the Commodities Exchange Act to
require a real cost-benefit analysis be performed before rulemaking. I
am asking for the Commission as a rulemaking body to play fair, to do
the right thing, and ensure when they pass a rule they know how it will
affect market participants and the industry as a whole first.
We know some companies pass risk from their affiliates to one central
hedging unit in order to consolidate their combined market risk. Then
they hedge that risk with the market. Often the affiliate that houses
the central desk is deemed a ``financial entity'' and therefore not
able to utilize the end-user exception to mandatory clearing. Simply
put, when one company with multiple units trades with itself, it
shouldn't face the same regulatory burden as when it trades in the
market.
We have also seen instances where transparency has had unintended
consequences for some market participants. As their trading data was
made available, some savvy market participants have been able to track
their trades without even knowing the name of the company. It is
important these entities not face a disadvantage in the market,
resulting in millions of dollars in additional costs simply because
their positions can be identified. This bill fixes that issue and ends
that disadvantage.
Another reform this bill makes is allowances for utilities'
volumetric optionality. Many utilities that are purchasers of natural
gas for both electricity and home heating often are unable to detail
exactly how much demand they will have during a particular timeframe.
Although they previously were able to utilize contracts that allowed
this ``optionality'' to determine when and how much electricity they
could purchase, these types of contracts are now effectively
prohibited. By barring these utilities from being able to employ market
strategies to keep costs low and ensure stability, the cost rises not
only for the end-user company but for the consumer as well. We should
make allowances for this volumetric optionality and the bill before us
does just that.
In summary, this bill clarifies the existing end-user exemption that
the Congress provided during the Dodd-Frank debate. Further, it ensures
that market participants who do not pose systemic risks and use our
futures markets to decrease their cost of business and increase their
efficiencies are able to continue those practices, ultimately to the
benefit of the consumer.
Mr. President, I ask unanimous consent that the text of the bill be
printed in the Record.
There being no objection, the text of the bill was ordered to be
printed in the Record, as follows:
S. 2330
Be it enacted by the Senate and House of Representatives of
the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ``End-User Protection Act of
2014''.
SEC. 2. DEFINITIONS.
(a) In General.--Section 1a of the Commodity Exchange Act
(7 U.S.C. 1a) is amended--
(1) by redesignating paragraphs (8) through (51) as
paragraphs (9) through (52), respectively;
(2) by inserting after paragraph (7) the following:
``(8) Commercial market participant.--The term `commercial
market participant' means any producer, processor, merchant,
or commercial user of an exempt or agricultural commodity, or
the products or by-products of an exempt or agricultural
commodity.'';
(3) in subparagraph (B) of paragraph (48) (as so
redesignated), by striking clause (ii) and inserting the
following:
``(ii) any purchase or sale of a nonfinancial commodity or
security for deferred shipment or delivery, so long as the
transaction is intended to be physically settled, including
any stand-alone or embedded option for which exercise would
result in a physical delivery obligation;''; and
(4) in paragraph (50) (as redesignated by paragraph (1)),
by striking subparagraph (D) and inserting the following:
``(D) De minimis exception.--
``(i) In general.--The Commission shall exempt from
designation as a swap dealer an entity that engages in a de
minimis quantity of swap dealing (which shall not be less
than $8,000,000,000) in connection with transactions with or
on behalf of its customers.
``(ii) Regulations.--The Commission shall promulgate
regulations to establish the factors to be used in a
determination under clause (i) to exempt, including any
monetary
[[Page S2956]]
or other levels established by the Commission, and those
levels shall only be amended or changed through an
affirmative action of the Commission undertaken by rule or
regulation.''.
(b) Financial Entity.--Section 2(h)(7)(C) of the Commodity
Exchange Act (7 U.S.C. 2(h)(7)(C)) is amended--
(1) in clause (iii)--
(A) by striking ``an entity whose'' and inserting the
following: ``an entity--
``(I) whose'';
(B) by striking the period at the end and inserting a
semicolon; and
(C) by adding at the end the following:
``(II) that is--
``(aa) a commercial market participant;
``(bb) included in clause (i)(VIII); and
``(cc) not supervised by a prudential regulator; or
``(III) that is included in clause (i)(VIII) because--
``(aa) the entity regularly enters into foreign exchange or
derivatives transactions on behalf of, or to hedge or
mitigate, whether directly or indirectly, the commercial risk
of 1 or more entities within the same commercial enterprise
as the entity; or
``(bb) of the making of loans to 1 or more entities within
the same commercial enterprise as the entity.''; and
(2) by adding at the end the following:
``(iv) Same commercial enterprise.--For purposes of clause
(iii)(III), an entity shall be considered to be within the
same commercial enterprise as another entity if--
``(I) 1 of the entities owns, directly or indirectly, at
least a majority ownership interest in the other entity and
reports its financial statements on a consolidated basis and
the consolidated financial statements include the financial
results of both entities; or
``(II) a third party owns at least a majority ownership
interest in both entities and reports its financial
statements on a consolidated basis and the financial
statements of the third party include the financial results
of both entities.
``(v) Predominantly engaged.--
``(I) In general.--Not later than 90 days after the date of
enactment of this clause, the Commission shall promulgate
regulations defining the term `predominantly engaged' for
purposes of clause (i)(VIII).
``(II) Minimum revenues.--The regulations shall provide
that an entity shall not be considered to be predominantly
engaged in activities that are in the business of banking or
financial in nature if the consolidated revenues of the
entity derived from the activities constitute less than a
percentage (as specified by the Commission in the
regulations) of the total consolidated revenues of the
entity.
``(III) Revenues from banking or financial activities.--In
determining the percentage of the revenues of an entity that
are derived from activities that are in the business of
banking or financial in nature, the regulations shall exclude
all revenues that are or result from foreign exchange or
derivatives transactions used to hedge or mitigate commercial
risk (as defined by the Commission in the regulations).''.
SEC. 3. REPORTING OF ILLIQUID SWAPS SO AS TO NOT DISADVANTAGE
CERTAIN NON-FINANCIAL END USERS.
Section 2(a)(13) of the Commodity Exchange Act (7 U.S.C.
2(a)(13)) is amended--
(1) in subparagraph (C), by striking ``The Commission'' and
inserting ``Except as provided in subparagraph (D), the
Commission'';
(2) by redesignating subparagraphs (D) through (G) as
subparagraphs (E) through (H), respectively; and
(3) by inserting after subparagraph (C) the following:
``(D) Requirements for swap transactions in illiquid
markets.--
``(i) Definition of illiquid markets.--In this
subparagraph, the term `illiquid markets' means any market in
which the volume and frequency of trading in swaps is at such
a level as to allow identification of individual market
participants.
``(ii) Requirements.--Notwithstanding subparagraph (C), the
Commission shall--
``(I) provide by rule for the public reporting of swap
transactions, including price and volume data, in illiquid
markets that are not cleared and entered into by a
nonfinancial entity that is hedging or mitigating commercial
risk in accordance with subsection (h)(7)(A); and
``(II) ensure that the swap transaction information
described in subclause (I) is available to the public not
sooner than 30 days after the swap transaction has been
executed or at such later date as the Commission determines
appropriate to protect the identity of participants and
positions in illiquid markets and to prevent the elimination
or reduction of market liquidity.''.
SEC. 4. TREATMENT OF AFFILIATES.
Section 2(h)(7)(D)(i) of the Commodity Exchange Act (7
U.S.C. 2(h)(7)(D)(i)) is amended--
(1) by striking ``An affiliate'' and inserting ``A person
that is a financial entity and is an affiliate'';
(2) by striking ``(including affiliate entities
predominantly engaged in providing financing for the purchase
of the merchandise or manufactured goods of the person)'';
and
(3) by striking ``and as an agent''.
SEC. 5. APPLICABILITY TO BONA FIDE HEDGE TRANSACTIONS OR
POSITIONS.
Section 4a(c) of the Commodity Exchange Act (7 U.S.C.
6a(c)) is amended--
(1) in the second sentence of paragraph (1), by striking
``into the future for which'' and inserting ``in the future,
to be determined by the Commission, for which either an
appropriate swap is available or''; and
(2) in paragraph (2)--
(A) in the matter preceding subparagraph (A), by striking
``subsection (a)(2)'' and all that follows through ``position
that--'' and inserting ``paragraphs (2) and (5) of subsection
(a) for swaps, contracts of sale for future delivery, or
options on the contracts or commodities, a bona fide hedging
transaction or position is a transaction or position that--
''; and
(B) in subparagraph (A)(ii), by striking ``of risks'' and
inserting ``or management of current or anticipated risks'';
and
(3) by adding at the end the following:
``(3) Commission definition.--The Commission may further
define, by rule or regulation, what constitutes a bona fide
hedging transaction or position so long as the rule or
regulation is consistent with the requirements of
subparagraphs (A) and (B) of paragraph (2).''.
SEC. 6. REPORTING AND RECORDKEEPING.
Section 4g(f) of the Commodity Exchange Act (7 U.S.C.
6g(f)) is amended--
(1) by striking ``(f) Nothing contained in this section''
and inserting the following:
``(f) Authority of Commission to Make Separate
Determinations Unimpaired.--
``(1) In general.--Except as provided in paragraph (2),
nothing in this section''; and
(2) by adding at the end the following:
``(2) Exception.--If the Commission imposes any requirement
under this section on any person that is not registered, or
required to be registered, with the Commission in any
capacity, that person shall satisfy the requirements of any
rule, order, or regulation under this section by maintaining
a written record of each cash or forward transaction related
to a reportable or hedging commodity interest transaction,
futures contract, option on a futures contract, or swap.
``(3) Sufficiency.--A written record described in paragraph
(2) shall be sufficient if the written record--
``(A) memorializes the final agreement between the parties,
including the material economic terms of the transaction; and
``(B) is identifiable and searchable by transaction.''.
SEC. 7. MARGIN REQUIREMENTS.
(a) Commodity Exchange Act Amendment.--Section 4s(e) of the
Commodity Exchange Act (7 U.S.C. 6s(e)) is amended by adding
at the end the following:
``(4) Applicability with respect to counterparties.--The
requirements of paragraphs (2)(A)(ii) and (2)(B)(ii),
including the initial and variation margin requirements
imposed by rules adopted pursuant to paragraphs (2)(A)(ii)
and (2)(B)(ii), shall not apply to a swap in which a
counterparty qualifies for an exception under section
2(h)(7)(A) or 2(h)(7)(D), or an exemption issued under
section 4(c)(1) from the requirements of section 2(h)(1)(A)
for cooperative entities as defined in that exemption.''.
(b) Securities Exchange Act Amendment.--Section 15F(e) of
the Securities Exchange Act of 1934 (15 U.S.C. 78o-10(e)) is
amended by adding at the end the following:
``(4) Applicability with respect to counterparties.--The
requirements of paragraphs (2)(A)(ii) and (2)(B)(ii) shall
not apply to a security-based swap in which a counterparty
qualifies for an exception under section 3C(g)(1) or
satisfies the criteria in section 3C(g)(4).''.
(c) Implementation.--The amendments made by this section to
the Commodity Exchange Act (7 U.S.C. 1 et seq.) shall be
implemented--
(1) without regard to--
(A) chapter 35 of title 44, United States Code; and
(B) the notice and comment provisions of section 553 of
title 5, United States Code;
(2) through the promulgation of an interim final rule,
pursuant to which public comment is sought before a final
rule is issued; and
(3) such that paragraph (1) shall apply solely to changes
to rules and regulations, or proposed rules and regulations,
that are limited to and directly a consequence of the
amendments.
SEC. 8. ANALYSIS BY THE COMMODITY FUTURES TRADING COMMISSION
OF THE COSTS AND BENEFITS OF REGULATIONS AND
ORDERS.
Section 15(a) of the Commodity Exchange Act (7 U.S.C.
19(a)) is amended by striking paragraphs (1) and (2) and
inserting the following:
``(1) In general.--Before promulgating a regulation under
this Act or issuing an order (except as provided in paragraph
(3)), the Commission, acting through the Office of the Chief
Economist, shall--
``(A) state a justification for the regulation or order;
``(B) state the baseline for the cost-benefit analysis and
explain how the regulation or order measures costs against
the baseline;
``(C) assess the costs and benefits, both qualitative and
quantitative, of the intended regulation or order;
``(D) measure, and seek to improve, the actual results of
regulatory requirements; and
``(E) propose or adopt a regulation or order only on a
reasoned determination that the benefits of the intended
regulation or order justify the costs of the intended
regulation or order (recognizing that some benefits and costs
are difficult to quantify).
``(2) Considerations.--In making a reasoned determination
of costs and benefits
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under paragraph (1), the Commission shall consider--
``(A) the protection of market participants and the public;
``(B) the efficiency, competitiveness, and financial
integrity of futures and swaps markets;
``(C) the impact on market liquidity in the futures and
swaps markets;
``(D) price discovery;
``(E) sound risk management practices;
``(F) the cost of available alternatives to direct
regulation;
``(G) the degree and nature of the risks posed by various
activities within the scope of the jurisdiction of the
Commission;
``(H) whether, consistent with obtaining regulatory
objectives, the regulation or order is tailored to impose the
least burden on society, including market participants,
individuals, businesses of differing sizes, and other
entities (including small communities and governmental
entities), taking into account, to the extent practicable,
the cumulative costs of regulations and orders;
``(I) whether the regulation or order is inconsistent,
incompatible, or duplicative of other Federal regulations and
orders; and
``(J) whether, in choosing among alternative regulatory
approaches, those approaches maximize net benefits (including
potential economic, environmental, and other benefits,
distributive impacts, and equity).''.
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