[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

[[Page S2957]]

     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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