Protections, Regulation at Play in CFTC Reauthorization

President Barack Obama, center, signs the Dodd Frank-Wall Street Reform and Consumer Protection Act in a ceremony in the Ronald Reagan Building in Washington, Wednesday, July 21, 2010.
National Journal
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Stacy Kaper
Sept. 18, 2013, 4:30 p.m.

Law­makers’ de­sire to re­spond to the fail­ures of MF Glob­al and Per­eg­rine Fin­an­cial Group, as well as linger­ing dis­putes over the Dodd-Frank law and oth­er fin­an­cial-reg­u­la­tion mat­ters, could soon find their way onto a vehicle for le­gis­lat­ive ac­tion in Con­gress.

The law au­thor­iz­ing the Com­mod­ity Fu­tures Trad­ing Com­mis­sion ex­pires at the end of the month, and as law­makers look to re­new that stat­ute, a host of re­lated fu­tures and fin­an­cial-mar­ket is­sues are ex­pec­ted to play heav­ily in the de­bate.

The CFTC falls un­der the House and Sen­ate Ag­ri­cul­ture com­mit­tees’ jur­is­dic­tion be­cause the fu­tures in­dustry was ag­ri­cul­tur­al and min­er­al in ori­gin. Al­though broad­er budget is­sues such as the debt ceil­ing and — par­tic­u­larly for the Ag­ri­cul­ture com­mit­tees — the farm bill are more press­ing, CFTC reau­thor­iz­a­tion is on the To Do list for both the Ag­ri­cul­ture com­mit­tee chairs.

Be­cause the agency does not have to be reau­thor­ized to stay up and run­ning (in­deed, it has had many lapses through the years), le­gis­la­tion might not be draf­ted un­til later this year. Still, its five-year reau­thor­iz­a­tions of­fer golden op­por­tun­it­ies for law­makers to put their stamp on the com­mis­sion’s pri­or­it­ies and to re­fo­cus its agenda.

The most likely is­sue to come up in both the Re­pub­lic­an-led House and the Demo­crat­ic-con­trolled Sen­ate is the bi­par­tis­an con­cern about the dy­nam­ics that led to the col­lapse of MF Glob­al and Per­eg­rine, which to­geth­er mis­placed a total of $1.8 bil­lion of their cus­tom­ers’ money.

The House Ag­ri­cul­ture Com­mit­tee plans to hold a hear­ing this fall on pro­pos­als for beef­ing up cus­tom­er pro­tec­tions.

The pan­el is wait­ing anxiously for the res­ults of a joint study from fu­tures-in­dustry groups about op­tions for cre­at­ing an in­sur­ance sys­tem for their in­dustry.

The com­mit­tee also plans to re­view a pack­age of rules the CFTC has in the works that aim to strengthen cus­tom­er pro­tec­tions and to tight­en over­sight of broker­age firms.

Commodity trading differences between 1980 and 2012. National Journal

The is­sue is also on the front burn­er in the Sen­ate. The Sen­ate Ag­ri­cul­ture Com­mit­tee held sev­er­al hear­ings on the fal­lout from MF Glob­al and Per­eg­rine, in­clud­ing one last month.

Ag­ri­cul­tur­al busi­nesses that rely on com­mod­ity-fu­tures con­tracts to man­age their risks — such as grain el­ev­at­ors, oil-seed pro­du­cers, and feed man­u­fac­tur­ers — are push­ing for Con­gress to con­sider changes in the bank­ruptcy code and oth­er pro­vi­sions to bet­ter en­sure the prop­er se­greg­a­tion of cus­tom­er funds. In the fi­nal days be­fore its 2011 bank­ruptcy, MF Glob­al dipped in­to cus­tom­ers’ ac­counts to try to pre­vent its col­lapse.

“Cus­tom­er-pro­tec­tion is­sues re­lated to MF Glob­al and Per­eg­rine is a ma­jor is­sue for us. We have a num­ber of mem­ber com­pan­ies that were af­fected,” said Todd Kemp, a vice pres­id­ent with the Na­tion­al Grain and Feed As­so­ci­ation. “We think pretty strongly that there needs to be some changes to strengthen the rights of fu­tures cus­tom­ers in the event of an in­solv­ency.”

An­oth­er ever-per­col­at­ing CFTC is­sue that re­mains a big pri­or­ity for Re­pub­lic­ans in par­tic­u­lar are the fin­an­cial-mar­ket re­forms from the Dodd-Frank Act that seek to rein in the $630 tril­lion swaps mar­ket.

The House has passed a spate of bills to ease or loosen de­riv­at­ives re­forms from the massive 2010 fin­an­cial re­form, but they have stalled in the Sen­ate.

Lob­by­ists for some of the na­tion’s biggest fin­an­cial firms say CFTC reau­thor­iz­a­tion is a prime tar­get for con­tinu­ing their battle to re­write Dodd-Frank and could be com­bined.

“The $64,000 ques­tion is of the bi­par­tis­an pro­pos­als … pro­pos­ing changes to [Dodd-Frank] — do any of them catch a ride on CFTC reau­thor­iz­a­tion?” asked a lob­by­ist for a large bank­ing com­pany, who was not au­thor­ized to speak on the re­cord. “That is the threshold ques­tion.”

A House Ag­ri­cul­ture Com­mit­tee aide said no de­cisions have been made but noted that some bills tweak­ing Dodd-Frank have passed the House with more than 400 votes, and could be swept in­to CFTC reau­thor­iz­a­tion.

But any at­tempt to loosen Dodd-Frank is more likely to hap­pen in the House, giv­en the Sen­ate Demo­crats’ re­luct­ance to re­open the law.

Re­tired Rep. Barney Frank, D-Mass., who was a key au­thor of the re­form law, ar­gued that Re­pub­lic­an at­tempts to weak­en fin­an­cial reg­u­la­tions could play in­to Demo­crats’ hands.

“If they want to help us take back the House, get some Re­pub­lic­an mem­bers in vari­ous parts of the coun­try to vote to pro­tect over­seas de­riv­at­ives,” he said in an in­ter­view. “It is a total mis­read­ing of Amer­ica.”

An­oth­er Dodd-Frank re­lated pro­vi­sion that could come up in either cham­ber’s reau­thor­iz­a­tion le­gis­la­tion, but in dif­fer­ent ways, is on the ques­tion of wheth­er the CFTC has the power to curb spec­u­la­tion in the fu­tures mar­ket by pla­cing lim­its on the num­ber of po­s­i­tions that traders can hold on com­mod­it­ies like oil. Last year, a Dis­trict Court threw out the CFTC rules on po­s­i­tion lim­its, ar­guing among oth­er things that the Dodd-Frank law did not give the com­mis­sion a man­date to set such lim­its. The CFTC is ap­peal­ing the ver­dict and is to re­is­sue new rules on po­s­i­tion lim­its soon.

Law­makers, who are di­vided on the is­sue, could wait to see what the courts and the CFTC do. Any at­tempt by either cham­ber to nudge the courts’ fi­nal ver­dict or prompt spe­cif­ic CFTC ac­tion is likely to be blocked by the oth­er, ar­gue ag­ri­cul­ture aides and lob­by­ists track­ing the is­sue.

Fi­nally, there are a host of pet is­sues for Demo­crats, such as bet­ter guar­an­tee­ing the com­mis­sion’s fund­ing stream through user fees — a struc­ture that oth­er fin­an­cial reg­u­lat­ors en­joy.

Re­pub­lic­ans have sought to slash CFTC fund­ing since the pas­sage of Dodd-Frank as a way to pre­vent fin­an­cial reg­u­la­tions from go­ing in­to ef­fect, and they are ex­pec­ted to pre­vent any user fee from gain­ing trac­tion.


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