The House Committee on Agriculture introduced bipartisan legislation titled the “Customer Protection and End User Relief Act” (H.R. 4413) to reauthorize and improve the operations of the CFTC and to address concerns relating to market certainty and customer protection.
If passed, the Act would, among other things, amend the CEA to allow many end users who are legitimate “commercial market participants” to avoid being treated as financial entities. It would provide relief for end users who use contracts that result in the actual physical delivery of a commodity that has an embedded option to change the amount of a commodity delivered. It would also require the CFTC to conduct a report on high-frequency trading.
Highlights of the Bill include:
- New procedural requirements for no-action letters and similar guidance;
- New requirements associated with the use of the CFTC’s subpoena power;
- Recordkeeping relief for certain end users;
- Clarification for certain contracts with embedded volumetric optionality;
- The lock-in of an $8 billion de minimis threshold;
- Definition of bona fide hedging;
- Relief for utility special entities; and
- Cross-border rulemaking requirement with automatic exemptions absent agency action.
Lofchie Comment: This bipartisan measure, which seems consistent with the views and actions of Commissioner O’Malia and acting Chairman Wetjen, is a repudiation of the most egregious substantive and procedural regulatory excesses over the past five years. The new CFTC Chairman will greatly benefit from the passage of this legislation, as it will give him something of a fresh start in adopting reasonable swap regulation (within the limits of rationality afforded by Dodd-Frank).
One can readily imagine further improvements to the bill as well. For example, it is unclear why the “relief for municipal entities” should not be extended to other types of entities that are effectively precluded from entering into swaps with any person that is not a registered swap dealer. The definition of a non-financial entity in Section 351 of the bill is too narrow (it tracks the too-narrow definition in Dodd-Frank) and should be expanded (the 90% test just does not work).