39–006 

113TH CONGRESS REPORT " ! HOUSE OF REPRESENTATIVES 2d Session 113–469 

FUTURES CUSTOMER PROTECTION ACT 

JUNE 5, 2014.—Committed to the Committee of the Whole House on the State of 

the Union and ordered to be printed 

Mr. LUCAS, from the Committee on Agriculture, 

submitted the following 

R E P O R T 

[To accompany H.R. 4413] 

[Including cost estimate of the Congressional Budget Office] 

The Committee on Agriculture, to whom was referred the bill 

(H.R. 4413) to reauthorize the Commodity Futures Trading Commission, to better protect futures customers, to provide end users 

with market certainty, to make basic reforms to ensure transparency and accountability at the Commission, to help farmers, 

ranchers, and end users manage risks to help keep consumer costs 

low, and for other purposes, having considered the same, report favorably thereon without amendment and recommend that the bill 

do pass. 

BRIEF EXPLANATION

Title I—Customer Protections 

The Customer Protection and End-User Relief Act, H.R. 4413, 

will better protect farmers and ranchers who use the futures markets by cementing several new regulatory customer protections into 

law. Added protections include mandates to: • Require electronic confirmation of customer fund account balances held at depository institutions. No longer will the fraud that 

occurred at Peregrine Financial be allowed to occur due to forged 

paper documents. • Require firms that move more than a certain percentage of 

customer funds from one account to another to follow strict reporting and permission requirements before doing so. No longer will a 

firm be able to move funds from one account to another, as happened during the MF Global bankruptcy, without regulators knowing about it. 


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• Require firms who become undercapitalized to immediately notify regulators so they can assess the firm’s viability and act, if 

needed, to protect customer funds. 

• Require firms to file an annual report with regulators from the 

chief compliance officer containing an assessment of a futures commission merchant’s (FCM) internal compliance programs. 

• Ensures farmers, ranchers, and other futures customers have 

an additional day to get their needed margin to an FCM, which 

mitigates the effect of pre-funding accounts. 

• Provide legal clarity for futures customers that the assets of a 

bankrupt commodity broker would be used to help pay back any 

misappropriated or illegally transferred customer segregated funds. 

• Require firms to calculate and report customer account balances electronically to regulators on a regular basis. 

• Require the CFTC to complete a study on high frequency trading. 

Title II—Commodity Futures Trading Commission Reforms 

Since the enactment of the Dodd-Frank Wall Street Reform and 

Consumer Protection Act (P.L. 111–203) (the Dodd-Frank Act) in 

July of 2010, the U.S. Commodity Futures Trading Commission 

(CFTC) has finalized over 60 new rules to enforce the new law and 

has issued an unprecedented 170 ‘‘no-action’’ letters in that same 

span of time to delay, revise, or exempt application of these regulations upon various market participants. The rulemaking process 

has proven confusing given the lack of a comprehensive plan for 

setting a schedule for compliance. In addition, the prolific use of 

no-action letters by the Commission to revisit new Dodd-Frank Act 

regulations have been used in lieu of a more thorough rulemaking 

process. H.R. 4413 makes basic reforms to the CFTC to help make 

it more effective and ensures that all Commissioners’ voices are 

heard in the rulemaking process. These reforms include: 

• Modifying the Commodity Exchange Act’s (CEA’s) cost-benefit 

analysis requirements for proposed rules, to closely track President 

Obama’s Executive Order 13563 for the entire executive branch. 

• Making the Commission’s division directors answerable to the 

entire Commission, not just the Chairman’s office. 

• Creating a new Office of the Chief Economist, answerable to 

the entire Commission, to provide objective economic data and 

analysis. 

• Enhancing the CFTC staff procedures governing the issuance 

of ‘‘no-action’’ or interpretive letters to improve Commission oversight of the process and to prevent staff from being able to issue 

letters at the last moment in an attempt to regulate or deregulate 

markets outside of the official CFTC rulemaking process without 

the possibility of Commission review. 

• Requiring the Commission and the Office of the Chief Economist to develop comprehensive internal risk control mechanisms to 

safeguard and govern all market data storage, all market data 

sharing agreements, and all academic research using market data. 

• Creating a judicial review process similar to that of the SEC’s 

for rulemakings to ensure the two regulators charged with overseeing the derivatives markets have similar procedures in place to 

allow market participants to challenge Commission rules. 


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• Directing the Government Accountability Office (GAO) to conduct a study on the sufficiency of CFTC resources and examine 

prior expenditures of funds on market surveillance and market 

data collection, standardization, and harmonization. 

Title III—End-User Relief 

Title III of the Customer Protection and End-User Relief Act was 

developed in response to the CFTC’s implementation of the DoddFrank Act. Many of the CFTC’s new rules have negatively impacted end-users, such as our farmers, ranchers, manufacturers, 

and utilities, by making it more difficult and costly to manage risks 

associated with their businesses. Despite America’s end-users representing 94 percent of the job creators in the United States, they 

comprise only 10 percent of the swaps markets. Even though Congress intended to exempt end-users from some of the most costly 

new regulations associated with using derivatives during consideration of the Dodd-Frank Act, the CFTC has narrowly interpreted 

the law. As a result, the ability of producers to affordably protect 

against risks associated with farming and ranching has been 

threatened. Title III addresses the following concerns: 

• True commercial end-users should not be treated as financial 

entities. The bill amends the CEA to allow many end-users who are 

legitimate ‘‘commercial market participants’’ to avoid being inadvertently classified as financial entities. 

• Certain non-financial end-users should not be disadvantaged in 

the marketplace if they use contracts that trade infrequently. This 

issue has cost certain end-users millions of dollars in fuel hedging 

costs because their identifiable positions in thinly-traded markets 

are immediately reported to the marketplace. 

• The bill provides relief to grain elevators, farmers, agriculture 

counterparties, and commercial market participants from burdensome and unnecessarily costly recordkeeping rules that currently 

require the recording of all forms of communication that may possibly lead to a trade. Instead, the bill specifies that keeping searchable written records of the final material economic terms of an 

agreement will be sufficient. 

• The bill provides relief for end-users who use contracts that result in actual physical delivery of a commodity that has a standalone or embedded option to change the amount of a commodity delivered. This impacts utilities that use natural gas to produce electricity, in addition to millions of consumers who use natural gas to 

heat their homes. 

• The bill corrects an illogical and unworkable capital requirement imposed on non-bank swap dealers that would result in those 

entities holding much more capital than their bank counterparts, 

likely making the business too expensive, resulting in fewer participants in the marketplace. The CFTC now must consult with the 

other regulators in formulating workable capital requirement formulas and recognize formulas already approved by other regulators. 

• The bill amends the CEA to simply require a vote by the CFTC 

before the swap dealer de minimis level automatically changes 

from the current level of $8 billion established by the CFTC in regulations. 


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• The bill makes a conforming change to CFTC regulations to 

bring its rules in line with the Jumpstart Our Business Startups 

Act (JOBS Act) (P.L. 112–106). An oversight in the JOBS Act omitted funds that were also registered as Commodity Pools, and the 

bill allows those funds to also solicit certain potential new investors. • The bill allows for end-users to continue to hedge against anticipated business risks by providing a more workable definition of 

bona fide hedging related to position limits. • The bill also includes CEA portions of the following measures 

that passed the House Agriculture Committee and/or the U.S. 

House of Representatives with overwhelming bipartisan support: 

Æ H.R. 634, the Business Risk Mitigation and Price Stabilization Act that passed the House on June 6, 2013, by a vote 

of 441–12. 

Æ An amended bipartisan version of H.R. 677, the Inter-affiliate Swap Clarification Act, which originally was passed by 

House Agriculture Committee on March 20, 2013 by voice vote 

and by the Financial Services Committee on May 7, 2013, by 

a vote of 50–10. 

Æ H.R. 742, the Swap Date Repository and Clearinghouse Indemnification Act that passed the House on June 12, 2013, by 

a vote of 420–2. 

Æ H.R. 1038, the Public Power Risk Management Act that 

passed the House on June 12, 2013 by a vote of 423–0. 

Æ H.R. 1256, the Swap Jurisdiction Certainty Act that 

passed the House on June 12, 2013, by a vote of 301–124. 

PURPOSE AND NEED

Title I—Customer Protections 

When futures commission merchant (FCM) MF Global, Inc., 

failed in November of 2011 and Peregrine Financial Group, Inc. 

(PFGBest), followed suit in July of 2012, thousands of farmers, 

ranchers, and futures customers collectively lost more than a billion dollars in customer funds that were thought to be segregated 

by law apart from the funds of the FCMs. The bankruptcy of these 

two firms, caused by gross mismanagement or outright fraud, resulted in tremendous hardship for a large segment of the U.S. agricultural community and created serious public doubts about the 

safety of using the futures markets to manage risk. After both failures, the Committee held half a dozen hearings and heard from numerous witnesses over the course of the 112th and 113th Congresses to examine why these failures occurred and how public confidence could be restored in the futures markets. 

As a result of the Committee’s work, Title I of H.R. 4413 is designed to better protect futures customers and restore confidence in 

the marketplace while also providing regulators with enhanced 

tools to supervise FCMs. Importantly, sections 102, 103, and 104 

of H.R. 4413 would codify regulatory changes already implemented 

by both the National Futures Association (NFA) and the U.S. Commodity Futures Trading Commission (CFTC), therefore the Committee does not intend for any of these sections to require new 

rulemakings by the NFA or CFTC in order to implement the requirements of the legislation. Section 105, however, contains statuVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00004 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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tory changes that are in conflict with existing CFTC regulations, 

so the Committee would expect expedited action from the CFTC to 

conform its regulations to the legislation when enacted into law to 

provide for certainty in the marketplace. 

Sec. 102—Enhanced customer protections for customers 

After MF Global filed for bankruptcy, it was revealed that in the 

final days before the firm’s failure, customer segregated funds (cash 

deposits, securities, or other property of customers held by the firm 

to margin or guarantee futures trading) were used to fund the company’s liquidity needs related to aggressive and ultimately ill-advised investments in European sovereign debt securities. Section 

102 would provide the NFA and CFTC with the statutory authority 

to help supervise and prevent future mismanagement involving the 

illegal transfer of customer segregated funds. 

Accordingly, Section 102 would broadly codify regulatory changes 

proposed by the NFA, and approved by the CFTC in July 2012, 

(NFA Financial Requirements Section 16) requiring FCMs to 

strengthen their controls over the treatment and monitoring of 

funds held for customers trading in the U.S. (‘‘segregated’’) and foreign (‘‘Part 30 secured’’) futures and options markets. Notable 

changes contained in the new NFA rules that would meet the statutory requirements of Section 102 include: (1) FCMs must now hold 

sufficient funds in Part 30 secured accounts to meet their total obligations to customer trading; (2) FCMs must maintain written policies and procedures governing the maintenance of excess (i.e., proprietary or residual) funds in customer segregated and Part 30 secured trading accounts; (3) any withdrawals of more than 25% of 

the excess segregated or Part 30 secured funds that are not for the 

benefit of customers must be pre-approved in writing by the FCM’s 

senior management; and (4) FCMs must file notice with the NFA 

of any withdrawal of 25% or more of the excess segregated or Part 

30 secured amount funds that are not for the benefit of customers. 

On July 25, 2012, at a hearing entitled ‘‘Oversight of the Swaps 

and Futures Markets: Recent Events and Impending Regulatory 

Reforms,’’ the following testimony was provided by witnesses with 

respect to NFA provisions incorporated in Section 102: 

All of these rule changes promote greater transparency 

for both customers and regulators and should help prevent 

a recurrence of the type of problems we saw at MF Global. 

These rule changes, however, are only the beginning. The 

MF Global and Peregrine customer losses are a painful reminder that we must continuously improve our surveillance, audit and fraud detection techniques to keep pace 

with changing technology and an ever-more-complicated financial marketplace.—Mr. Daniel Roth, President, NFA 

In direct response to the MFG collapse, the ‘‘Corzine 

Rule’’ will be implemented on September 1st. The ‘‘Corzine 

Rule’’ requires the CEO or CFO of the FCM to pre-approve 

in writing any disbursement of customer segregated funds 

not made for the benefit of customers and that exceeds 

25% of the firm’s excess segregated funds. The CME (or 

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proval.—Mr. Terrance A. Duffy, Executive Chairman & 

President, CME Group Inc. 

We also recommended and supported rules adopted by 

the Chicago Mercantile Exchange and National Futures 

Association that subject all FCMs to enhanced recordkeeping and reporting obligations, including . . . requiring 

the chief financial officer or other appropriate senior officer 

to authorize in writing and promptly notify the FCM’s 

DSRO whenever an FCM seeks to withdraw more than 25 

percent of its excess funds from the customer segregated 

account in any day. These changes have now been approved by the Commission.—Hon. Walt Lukken, President 

& Chief Executive Officer, Futures Industry Association 

(FIA) 

On March 14, 2013, at a hearing entitled ‘‘Examining Legislative 

Improvements to Title VII of the Dodd-Frank Act,’’ the Hon. Gary 

Gensler, Chairman, U.S. Commodity Futures Trading Commission, 

provided the following testimony with respect to provisions that 

were ultimately included in Section 102: 

The Commission also worked closely with market participants on new customer protection rules adopted by the 

self-regulatory organization (SRO), the National Futures 

Association (NFA). These include requiring FCMs to hold 

sufficient funds for U.S. foreign futures and options customers trading on foreign contract markets (in Part 30 secured accounts). Starting last year, they must meet their 

total obligations to customers trading on foreign markets 

under the net liquidating equity method. In addition, withdrawals of 25 percent or more of excess segregated funds 

would necessitate pre-approval in writing by senior management and must be reported to the designated SRO and 

the CFTC. 

On May 21, 2013, testifying before the Committee at a hearing 

entitled ‘‘The Future of the CFTC: Market Perspectives,’’ Mr. Daniel Roth, President, NFA, provided the following testimony with respect to the provisions included in Section 102: 

All FCMs maintain excess segregated funds. These are 

funds deposited by the FCM into customer segregated accounts to act as a buffer in the event of customer defaults. 

Because these funds belong to the FCM, the FCM is free 

to withdraw the excess funds, but after MF Global, NFA 

and the CME adopted rules to ensure notice to regulators 

and accountability within the firm. Now all FCMs must 

provide regulators with immediate notification if they 

draw down their excess segregated funds by 25% in any 

given day. Such withdrawals must be approved by the 

CEO, CFO or a financial principal of the firm and the 

principal must certify that the firm remains in compliance 

with segregation requirements. This rule became effective 

on September 1, 2012. 

Sec. 103—Electronic confirmation of customer funds 

On Monday, July 9, 2012, the founder and Chairman of Peregrine Financial Group, Inc., Russell R. Wasendorf Sr., unsuccessVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00006 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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fully attempted suicide outside of the firm’s Cedar Falls, Iowa, 

headquarters. He left a note admitting to producing elaborate forgeries of bank documents submitted to regulators. In court filings 

the next day, the CFTC alleged that PFGBest and Wasendorf ‘‘committed fraud by misappropriating customer funds, violated customer fund segregation laws, and made false statements in financial statements filed with the [CFTC]’’ and that Wasendorf may 

have falsified certain bank records. According to press reports, Mr. 

Wasendorf’s suicide attempt which led to the discovery of the fraud 

occurred only days after the NFA first required PFGBest to electronically confirm customer balances directly through a third-party 

electronic auditing system with PFGBest’s banks. Prior to this requirement, self regulatory organizations such as the NFA and CME 

had relied on paper statements from an FCM’s bank. 

Section 103 would provide broad statutory authority to codify 

regulatory changes first proposed in 2012 by a special committee 

composed of futures industry SROs (including the CME Group, 

NFA, InterContinental Exchange, the Kansas City Board of Trade, 

and the Minneapolis Grain Exchange) to require: (1) confirmation 

of the balances of customer segregated bank accounts for all FCMs 

using a web-based electronic confirmation process; (2) all FCMs to 

provide their designated-SRO with direct online access to confirm 

segregated and secured funds balances at the banks which hold the 

FCM’s customer segregated and secured funds; and (3) any bank 

that fails to provide electronic online access will not be considered 

an acceptable depository for holding customer segregated and secured funds. 

Notably, in light of the PFGBest fraud, Section 103 would also 

provide the statutory authority for regulations that require FCMs 

to file segregation and Part 30 secured amount computations on a 

daily basis with the NFA. Additionally, FCMs must file with the 

NFA detailed information regarding the banks holding customer 

funds and the investments made with customer funds as of the 

15th and last business day of each month. 

On July 25, 2012, at a hearing entitled ‘‘Oversight of the Swaps 

and Futures Markets: Recent Events and Impending Regulatory 

Reforms,’’ the following testimony was provided by witnesses with 

respect to provisions the Committee decided to include in Section 

103: 

NFA intends to expand this approach, once it is implemented, to receive daily reports from all depositories for 

customer segregated accounts, including clearing FCMs. 

We will develop a program to compare these balances with 

those reported by the firms in their daily segregation reports. While there may be reconciling items due to pending 

additions and withdrawals, the system will generate an 

immediate alert for any material discrepancies. We have 

also agreed with the CME to perform an immediate confirmation of all customer segregated bank accounts for all 

of our FCM Members using the e-confirmation process I 

referred to earlier. The completion of this work within the 

next week or so should help ensure that another Peregrine 

is not lurking in the industry.—Mr. Daniel Roth, President, NFA 


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First, FIA strongly supports providing regulators with 

the independent ability to electronically review and confirm customer segregated balances across every FCM at 

any time. Second, FIA supports the creation of an automated confirmation process for segregated funds that will 

provide regulators with timely information that customer 

funds are secure. Technology solutions can help prevent 

this type of event from occurring again.—Hon. Walt 

Lukken, President and Chief Executive Officer, FIA 

On October 2, 2013, testifying before the Committee at a hearing 

entitled ‘‘The Future of the CFTC: Perspectives on Customer Protections,’’ Mr. Daniel Roth, President, NFA, provided the following 

testimony: 

For years, NFA and other SROs confirmed FCM reports 

regarding the customer segregated funds held by the FCM 

through traditional paper confirmations mailed to the 

banks holding those funds. These confirmations were done 

as part of the annual examination process. In early 2012 

NFA began confirming bank balances electronically 

through an e-confirm process. That change led to the discovery of the fraud at PFG, but e-confirms were still done 

as part of the annual examination. We had to find a better 

way and we did. We partnered with the CME and developed a process by which NFA and the CME confirm all 

balances in all customer segregated bank accounts on a 

daily basis. FCMs file daily reports with NFA and the 

CME, reflecting the amount of customer funds the FCM is 

holding. Through a third-party vendor, NFA and CME get 

daily reports from banks for the over 2,000 customer segregated bank accounts maintained by FCMs. We then perform an automated comparison of the reports from the 

FCMs and the reports from the banks to identify any suspicious discrepancies. In short, Mr. Chairman, the process 

by which we monitor FCMs for segregated fund compliance 

is now far ahead of where it was just one year ago. We 

have recently expanded this system to also obtain daily 

confirmations from clearing firms and will expand it again 

by the end of the year to include clearinghouses as well. 

Section 104—Notice and certifications providing additional customer protections 

On October 22, 2012, the CFTC proposed additional rules to enhance several aspects of supervision in order to better protect customers of FCMs. Just over a year later, these new rules were finalized and adopted by the CFTC. In order to codify the CFTC’s authority to increase customer protections, Section 104 would require 

that FCMs notify both the CFTC and the appropriate self-regulatory organization when they become under-capitalized or undersegregated. By legally requiring that an FCM notify authorities as 

soon as the firm is faced with an undercapitalization scenario, regulators will have the power to step in and take preventative or corrective action to protect customer segregated funds. This would 

help prevent the same type of harm to customers that occurred 


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when MF Global illegally transferred hundreds of millions of dollars of customer segregated funds to cover its trading shortfalls. 

Similarly, Section 104 requires FCMs to file a report at the end 

of each fiscal year that details an assessment of an FCM’s internal 

compliance programs so the Commission can evaluate whether the 

controls are adequate or need to be improved or modified. 

On October 2, 2013, testifying before the Committee at a hearing 

entitled ‘‘The Future of the CFTC: Perspectives on Customer Protections,’’ Mr. Dan Roth, President, NFA, provided the following 

testimony with respect to the CFTC’s provisions included in Section 

104: 

The Commission also proposed its own changes to customer protection rules in a 107-page Federal Register release last year. Certain parts of the Commission’s proposals have provoked strong opposition both from the industry and from end-users of the markets, particularly in 

the agricultural sector. As described below, NFA shares 

many of the concerns raised by others, but we fully support many of the Commission’s proposals. For example, the 

Commission’s proposed rules would: 

• Require SROs to expand their testing of FCM internal 

controls and develop more sophisticated measures of the 

risks posed by each FCM; 

• Require that FCM certified annual financial reports 

and reports from the chief compliance officer be filed within 60 days of the firm’s fiscal year end; 

• Require that an FCM that is undercapitalized provide 

immediate notice to the Commission and its DSRO . . . 

Section 105—Futures Commission merchant compliance 

On October 22, 2012, the CFTC proposed additional rules to enhance several aspects of customer protections at FCMs. Among the 

proposals was a requirement to shorten the time period an FCM 

has to collect additional funds for a margin call from a customer 

to one business day. Another proposal would require an FCM to 

hold enough of its own capital (known as ‘‘residual interest’’) to 

cover the changing positions of all customers at all times of the 

day. As a result, many FCMs would have to use their own capital 

to satisfy these margin calls, and customers could also be required 

to hold more funds at an FCM. 

Unfortunately for many farmers and ranchers who use futures to 

hedge their operating risks, a part of the CFTC ‘‘customer protection’’ rule finalized in October of 2013 could result in significant 

harm to these core constituencies of the Committee. The new rule 

will require farmers and ranchers to pre-fund their margin accounts due to onerous new requirements that force FCMs to hold 

large amounts of cash in order to pay clearinghouses at the start 

of trading the next business day. The increased costs of pre-funding 

margin accounts will likely drive many small and medium-sized agricultural producers out of the marketplace. When the small players are forced out of the markets, the small and medium-sized 

FCMs will be forced to consolidate, giving customers fewer choices. 

On May 21, 2013, testifying before the Committee at a hearing 

entitled ‘‘The Future of the CFTC: Market Perspectives,’’ the folVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00009 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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lowing testimony was provided by witnesses with respect to problems with the CFTC’s proposed rule: 

However, this rulemaking also seeks to fundamentally 

change the way in which the futures marketplace operates. 

As we explained in our comment letter, if a proposed ‘‘protective’’ measure is so expensive or its impact on market 

structure is so severe that customers cannot effectively use 

futures markets to mitigate risk or discover prices, the 

reason to implement that measure needs to be re-examined. Among the proposed rules to reevaluate is the rule 

that would require at all times an FCM’s residual interest 

(its own funds) in segregated accounts to exceed the margin deficiencies of its customers. It does not appear that 

any system currently exists or could be construed in the 

near future will permit FCMs to accurately calculate customer margin deficiencies, continuously in real-time. Without access to this data, FCMs will be required to maintain 

substantial residual interest in segregated accounts or require customers to significantly over-collateralize their accounts. We believe this will be a significant and unnecessary drain on liquidity that will make trading significantly 

more expensive for customers to hedge. We believe this 

rule and others could have a very significant impact on 

certain sectors in the marketplace, particularly smaller 

FCMs that serve the agricultural community.—Mr. 

Terrance A. Duffy, Executive Chairman and President, 

CME Group Inc. 

In the end, this new interpretation will result in FCMs 

requiring customers to put up more money at all times, 

likely resulting in customers being asked to pre-fund their 

margin. In addition to requiring customer pre-funding, 

some have suggested that this rule will likely require an 

FCM to double a customers’ overall margin requirements: 

in essence requiring customers to fund their potential margin deficiencies. As such, the customer would be required 

to keep margin funds far in excess of exchange minimum 

margin requirements. Our mid-sized commercial customers 

rely upon their lending institutions, such as CoBank, a 

member of the Farm Credit System, to fund their commercial activities including their hedging activities. A potentially doubling of their funding needs to support their 

hedging activities would significantly impact the profitability of such customers. In addition to the negative customer impact, the rule will also put significant financial 

pressure on FCMs. If the sum of an FCM’s customer margin deficits is greater than the residual interest an FCM 

typically maintains in their customer accounts, then the 

FCM would have to increase the amount of residual interest it maintains in customer segregated accounts. On 

‘‘limit up’’ or ‘‘limit down’’ days in the agricultural exchange traded markets, our firm may be required to deposit up to $400 million to satisfy exchange demands for 

margin. In order to ensure that our residual interest would 

be in excess of the sum of all of our customers margin defiVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00010 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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ciencies in such a situation, we would need to require our 

customer pre-fund their potential margin deficiencies or in 

effect require us to pre-fund their potential margin requirements by maintaining our capital in customer segregated accounts. Requiring massive additional injections 

of our own capital to support the new residual interest requirements will, at some point, become unsustainable for 

us and others, again leading to the real and substantial 

risk of increased concentration in an already shrinking 

market.—Mr. William J. Dunaway, CFO, INTL FCSTONE, 

Inc. 

On July 24, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

End-User Perspectives,’’ the following witnesses also provided testimony with respect to problems with the CFTC’s proposed rule: 

Regulations that would accelerate a further consolidation in the FCM industry would have the adverse effect of 

leaving commodity hedgers with fewer options, while concentrating risk among fewer FCM entities . . . [a]nother 

provision would require that an FCM’s residual interest in 

the customer-segregated account must at all times be sufficient to exceed the sum of the margin deficits that the 

FCM’s customers have in their accounts. This requirement 

is counter to the historical interpretation, which requires 

an FCM to maintain residual interest to cover customersegregated accounts with negative net liquidating balances 

(debit equity). This gives an FCM time to collect customer 

funds prior to the time a payment must be made to the 

clearing house. In addition to increased costs for hedgers, 

this proposed rule would be more burdensome to firms like 

farmer cooperative-owned FCMs, which largely deal only 

with hedgers. Although the risk profile of the customer 

base is very low, customers are predominantly on one side 

of the market and therefore more susceptible to big swings 

in the market. To require all deficits to be covered immediately would be overly burdensome on these FCMs given 

the low-risk profile of their customers as hedgers.—Mr. 

Scott Cordes, President, CHS Hedging, Inc., on behalf of 

the National Council of Farmer Cooperatives (NCFC) 

Specifically, CMC strongly believes that the proposed requirement that FCMs maintain a residual amount sufficient to cover on a constant basis the aggregate of customer margin deficits could create considerable liquidity 

issues and increase costs for FCMs, producers, and endusers. Such a decrease in liquidity could be substantial 

and limit the number and type of transactions FCMs clear, 

the number of customers they service, and the amount of 

financing they provide. The proposal would require FCMs 

to fund accounts holding their customers’ collateral with 

proprietary assets in excess of the aggregated margin deficiencies of all its clients on a continuous basis. The proposal also appears to require executing FCMs to collect collateral for give-ups so that customer positions are fully 

margined in the event a clearing FCM rejects a trade. If 

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ized, FCMs may be forced to take steps such as over-margining clients, requiring clients to pre-fund their margin 

accounts, imposing punitive interest rate charges on margin deficit balances, and introducing intra-day margin 

calls. Such steps would dramatically increase the cost of 

using futures markets and may force many end-users to 

decrease or discontinue hedging and risk management 

practices, which is the reason these markets were created.—Mr. Lance Kotschwar, Senior Compliance Attorney, 

The Gavilon Group, LLC, on behalf of the Commodity Markets Council 

On October 2, 2013, testifying before the Committee at a hearing 

entitled ‘‘The Future of the CFTC: Perspectives on Customer Protections,’’ the following additional testimony was provided by witnesses with respect to their concerns about the CFTC’s proposed 

rule: 

We believe that the CFTC’s proposal respecting the required residual interest that must be maintained by FCMs 

in the customer segregated account will adversely impact 

customers and fundamentally change the way in which futures markets operate. If a proposed ‘‘protective’’ measure 

is so expensive or its impact on market structure is so severe that customers cannot effectively use futures markets 

to mitigate risk or discover prices, there is no justification 

for implementing that measure. The proposal on ‘‘residual 

interest’’ fails this test . . . [t]he residual interest rule is 

not necessary to protect customer funds. Its costs and negative consequences outweigh any added protection. This 

over-collateralization is unwarranted from a risk management standpoint. No regulatory risk model assumes that 

all customers with margin requirements will fail promptly 

to meet them. The proposed rule will unnecessarily drain 

liquidity and increase the cost of hedging financial and 

commercial risk especially for farmers and ranchers using 

our markets. Smaller and mid-sized firms that serve them 

will suffer the greatest impact of these increased costs, and 

may be driven out of business, leaving farmers and ranchers with fewer FCMs to facilitate their risk management 

goals. This will actually increase systemic risk by concentrating risk among fewer firms. Ironically, the proposal 

would force customers to place more collateral with their 

FCM—when they may be trying to actively avoid fellowcustomer risk or FCM misconduct. We understand the 

Commission is considering phasing in the rule, possibly to 

mitigate the consequences I just described. A phase-in does 

not cure the problem. Instead, CME supports the FIA alternative—that would permit an FCM to calculate its required residual interest as of 6:00 p.m. on the first business day after the trade date.—Mr. Terrance A. Duffy, Executive Chairman & President, CME Group Inc. 

Other provisions of the Commission’s proposals, however, raise serious concerns, particularly with regard to the 

so-called ‘‘residual interest’’ issue . . . [t]he Commission 

has now proposed that all FCMs must maintain at all 


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times a residual interest sufficient to exceed the sum of all 

margin deficits that the customers in each account class 

have. Essentially, FCMs would have to assume that every 

customer will default on every margin call and maintain 

capital in the segregated account to cover that possibility. 

Several points need to be made on this proposal. First, it 

has absolutely nothing to do with the problems encountered at either MF Global or PFG. Neither of those cases 

had anything to do with customers failing to meet margin 

calls. Second, this is the first time in the Commission’s 39- 

year history that it has ever taken the position that the 

Act requires FCMs to assume that all customers will default on all margin calls. Third, the underlying assumption 

that in this day and age no customers meet margin calls 

by writing checks is wrong. Agricultural hedgers frequently meet their margin calls with checks. Fourth, the 

impact of this proposal could be devastating for both agricultural end-users and the relative handful of FCMs that 

service those customers. Customers will have to post much 

more margin funds with their FCMs or the FCMs will 

have to maintain much more capital in their business. Either way, there will be fewer customers using futures markets to hedge and fewer FCMs handling their accounts. 

This proposal does not just fix something that is not broken, it threatens to do real harm to a longstanding system 

that has worked well for both customers and the markets.—Mr. Daniel Roth, President, NFA 

For many years, grain hedgers and the futures commission merchants (FCMs) with whom they work to manage 

their risk have relied on a consistent interpretation of the 

Commodity Exchange Act by the Commodity Futures 

Trading Commission (CFTC) with regard to posting margin funds to their hedge accounts. Unfortunately, in the 

name of customer protection, that interpretation recently 

has been thrown into question by a new proposal from the 

CFTC that we believe would dramatically increase customer risk. We understand that CFTC Commissioners currently are evaluating a final staff draft of this rule, with 

the goal of voting on a final rule later this month. The rule 

seeks to bolster futures customer protections—a laudable 

goal that the NGFA supports fully. However, two very 

troublesome provisions would have the perverse effect of 

significantly increasing financial risk to futures customers—and in the process, dramatically changing the 

way business has been conducted in futures markets for 

decades . . . [t]he second provision potentially is even 

more troublesome and more expensive to futures customers. It would change the timing of FCMs’ calculation of 

residual interest for futures accounts—in other words, it 

appears the proposal would require all customers to be 

fully margined at all times. While this may sound like 

common sense, it is a huge departure from the CFTC’s interpretation for decades that FCMs be allowed a certain 

period of time to ‘‘top up’’ hedge accounts while they wait 

for customers to make margin calls. This new proposal 


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would lead to one of two outcomes: either the FCM would 

have to move more of its own funds (i.e., residual interest) 

into customers’ hedge accounts; or FCMs would be forced 

to require pre-margining and, perhaps, intra-day margining, to ensure that each individual customer is fully 

margined at any moment. The practical end result would 

be that futures customers would be required to send much 

more money to their FCMs in advance in anticipation of 

futures market moves that might never happen. Some customers likely would exit futures markets in favor of lowercost risk management alternatives. We believe this potential exodus from futures markets would be most clearly 

seen among agricultural producers who utilize futures for 

risk management purposes and among smaller grain-hedging firms. Taken to its logical conclusion, we believe 

strongly that neither proposal accomplishes the Commission’s stated goal of enhancing customer protection. To the 

contrary, customers would be sending much larger 

amounts to their FCMs, leading to much greater volume of 

funds at risk if another MF Global situation occurs. If this 

rule had been in place when MF Global failed, perhaps 

twice as much customer money would have been missing 

and a correspondingly larger amount still would not be returned to customers.—Mr. Michael J. Anderson, Regional 

Sales Manager, The Andersons Inc., on behalf of the National Grain and Feed Association 

Requiring FCMs to increase risk management standards, increasing the requirements for residual interest in 

segregation, and the reduction in days to collect margin 

calls before they become capital charges are all aimed at 

protecting an FCM’s customer from losses incurred by 

other customers of the FCM. Most of these changes have 

significant costs associated with them . . . [t]he requirement to maintain residual interest in segregated funds 

greater than all margin calls at all times will not only be 

very difficult to track, but force us to choose between doubling or possibly tripling our capital, or greatly increasing 

the funds we require our customers to deposit to ensure 

they never have a margin call. For smaller customers, or 

those who can’t follow the markets on a minute to minute 

basis, meeting margin calls on a moment’s notice is a difficult thing to do. This is especially true of small hedge 

customers, who would then be faced with liquidation of 

hedges. For Frontier Futures as a firm, the option to increase our capital by that much may not be possible, and 

increasing margins may cause many of our customers to 

either leave us for other firms or cease trading altogether. 

The broader consequence of the residual interest rule may 

be to force a consolidation in the number of small to midsized FCMs. Currently, FCMs charge margins based on 

margin requirements set by the exchanges. The new rules 

will create a competitive imbalance favoring firms with access to large amounts of capital, such as the bank owned 

FCMs, as these firms will be able to fund margin calls by 

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cess will be forced to charge much higher margin rates to 

their customers, and may result in a migration of some 

customers out of these firms. With fewer customers available to some firms, there is bound to be consolidation. This 

will mostly affect small to mid-sized FCMs who clear small 

hedgers as well as guarantee Introducing Brokers.—Mr. 

Theodore Johnson, President, Frontier Futures, Inc. 

In order to address the significant concerns voiced by market 

participants, regulators, and other stakeholders, the Committee directs the CFTC, in carrying out the requirements of Section 105, 

to consider an FCM in compliance with any requirements to use its 

own proprietary funds, in the form of residual interest, to satisfy 

margin deficits of the FCM’s customers if such requirements are 

met at the end of the first business day following a trade date. This 

would obviate the need for pre-funded margin accounts. 

Section 106—Certainty for Futures customers and market participants 

Section 190.08(a)(1)(ii)(J) of the CFTC’s regulations (17 C.F.R. 

§ 190) defines customer property as including ‘‘cash, securities or 

other property of the debtor’s estate, including the debtor’s trading 

or operating accounts and commodities of the debtor held in inventory, but only to the extent that the property enumerated is insufficient to satisfy in full all claims of public customers.’’ The Committee’s plain reading of this CFTC regulation is that property of the 

debtor FCM, even though not held as customer property, becomes 

customer property to the extent necessary to satisfy net equity 

claims of ‘‘public customers,’’ who are defined in CFTC Regulations 

Section 190.01 as all customers other than certain control persons, 

affiliates, and related parties (i.e.: non-public customers). In effect, 

in order to protect the funds of customers held in segregation, 

CFTC Regulation 190.08 subordinates the claims of non-public customers and non-customer creditors, other than properly perfected 

liens on such property of the debtor, to the claims of public customers with respect to the property of the FCM that was not held 

(and not required to be held) as customer property. 

However, in 2000, doubts as to the validity of CFTC Regulation 

Part 190.08(a)(1)(ii)(J) arose after a federal bankruptcy court (In re 

Griffin Trading Co., 245 B.R. 291 (Bankr. N.D. Ill. 2000)) rejected 

an attempt by the trustee to use a bankrupt commodity broker’s estate to pay shortfalls in the customer accounts. Among the issues 

in the case, which was later settled and the court’s holding vacated 

therefore resulting in no binding judicial precedent, was whether 

the CFTC’s broad definition of ‘‘customer property’’ in section 

190.08 of the CFTC regulations would determine which assets 

could be used to repay customers. The court found that the CFTC 

exceeded its statutory authority in enacting section 190.08 with a 

definition of customer property more expansive than that used in 

the U.S. bankruptcy code. Further, the court found that, ‘‘any 

shortfall in the customer property as defined in [the bankruptcy 

code] must be treated as a general unsecured claim.’’ This vacated 

court decision has left uncertainty about whether, in the event that 

customer assets are insufficient to cover all customer claims, customers can have first priority to an FCM’s general estate assets 

until all customer claims are paid in full. 


emcdonald on DSK4SPTVN1PROD with HEARING
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On October 2, 2013, testifying before the Committee at a hearing 

entitled ‘‘The Future of the CFTC: Perspectives on Customer Protections,’’ Mr. Daniel Roth, President, NFA, provided the following 

testimony with respect to the need for the provisions included in 

Section 106: 

NFA believes, however, that Congress should consider a 

statutory change to strengthen customer protections and 

priorities in the event of a future FCM bankruptcy. Over 

30 years ago the CFTC adopted rules regarding FCM 

bankruptcies. Among other things, those rules provided 

that if there was a shortfall in customer segregated funds, 

the term ‘‘customer funds’’ would include all assets of the 

FCM until customers had been made whole. Several years 

ago, a district court decision cast doubt on the validity of 

the CFTC’s rule. That decision was subsequently vacated 

but a cloud of doubt lingers. Congress can and should remove that doubt about the priority customers should received if there is a shortfall in segregated funds and can 

do so by amending Section 20 of the Act. Section 20 gives 

the CFTC authority to adopt regulations regarding commodity brokers that are debtors under Chapter 7 of Title 

11 of the United States Code. We would suggest an 

amendment to clarify the CFTC’s authority to adopt the 

rule that it did. 

In order to provide clarity for the marketplace and make clear 

that the CFTC did not exceed its authority to promulgate Rule 

190.08 under Section 20(a) of the Commodity Exchange Act, the 

Committee intends for Section 106 to provide for the broad use of 

the assets of a commodity broker’s estate, other than secured property (such as property held at a clearinghouse, including offset or 

netting rights of creditors with respect to such type of property), to 

satisfy shortfalls in customer property beyond what was held in 

customer segregated accounts at the time of a firm’s failure. 

Section 107—Study on high frequency trading 

The Committee recognizes growing public concern and multiple 

questions arising from the practice in derivative markets commonly 

known as ‘‘automated’’ or ‘‘high frequency’’ trading. During hearings in the 112th and 113th Congresses, one CFTC Commissioner 

and two end-user groups testified as to their apprehension about 

this practice and its implications for derivative markets. Before 

taking any action, it is prudent for the Committee to learn more 

about high frequency trading. To that end, the Commission is 

charged with providing the Committee with a report examining the 

impact this practice has upon markets under its jurisdiction. It 

should be noted that the Committee recognizes that on September 

9, 2013, the CFTC approved a ‘‘concept release’’ on ‘‘Risk Controls 

and System Safeguards for Automated Trading Environments’’ that 

examines marketplace conditions and explores possible regulatory 

changes with respect to high frequency trading. To speed compilation of the results, the Committee would view that the Commission 

has completed the requirements of Section 107 if the study results 

are incorporated as part of further action on its concept release. 


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Title 2—Commodity Futures Trading Commission Reforms 

Section 202—Extension of operations 

The most recent reauthorization for CFTC budgetary appropriations was approved in 2008 as a part of the Food, Conservation and 

Energy Act (P.L. 110–246), prior to the financial crisis of 2008 and 

the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act (P.L. 111–203) (The Dodd-Frank Act). That 

statutory authorization expired September 30, 2013. Although the 

CFTC relied on unauthorized appropriations between 2005 and 

2008, successful legislative reauthorizations occurred in 1978, 1983, 

1986, 1992, 1995, and 2000. These have ranged from basic legislative reauthorizations, such as the CFTC Reauthorization Act of 

1995, to significant changes in the law, such as the Commodity Futures Modernization Act of 2000. Section 202 would reauthorize the 

Commission to receive budgetary appropriations through 2018. 

Section 203—Consideration by the Commodity Futures Trading 

Commission of the costs and benefits of its regulations and orders 

Section 15(a) of the Commodity Exchange Act sets forth requirements for the CFTC to consider the costs and benefits of the Commission’s actions. In each proposed rule, however, the CFTC identifies the limitations of Section 15(a) in requiring cost-benefit analysis, stating ‘‘[b]y its terms, Section 15(a) does not require the 

Commission to quantify the costs and benefits of an order to determine whether the benefits of the order outweigh its costs; rather, 

it requires that the Commission ‘consider’ the costs and benefits of 

its actions.’’ 

Consequently, the CFTC’s Office of Inspector General (OIG) 

issued an investigative report in April of 2011 that examined the 

cost-benefit analysis performed by the Commission in connection 

with Dodd-Frank rulemakings. In that report, the OIG stated ‘‘. . . 

it is clear that the Commission staff viewed section 15(a) compliance to constitute a legal issue more than an economic one, and the 

views of the Office of General Counsel therefore trumped those expressed by the Office of the Chief Economist . . . [w]e do not believe this approach enhanced the economic analysis performed. . . .’’ 

On January 18, 2011, President Obama issued Executive Order 

No. 13563, which requires non-independent executive branch agencies to conduct cost-benefit analyses to ensure that both the quantitative and qualitative costs and benefits of proposed rulemakings 

are taken into account. The Executive Order also requires that regulations be accessible, consistent, written in plain language, and 

easy to understand. Because the CFTC is an independent agency, 

it was not required to abide by the order for any of its Dodd-Frank 

Act rulemakings. 

As the CFTC continues to advance new rules that govern a large 

sector of the derivatives marketplace for the first time, this section 

raises the legal standard for cost-benefit analysis and evaluation. 

Further, the legislation is intended to operate consistently with Executive Order 13563. However, so as to not disrupt the regulatory 

process, this legislation is not retroactive in nature and would not 


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impact previously proposed or finalized rules promulgated by the 

CFTC. 

On March, 14, 2013, at a hearing entitled ‘‘Examining Legislative 

Improvements to Title VII of the Dodd-Frank Act,’’ the following 

testimony was provided with respect to provisions included in Section 203: 

. . . SIFMA has encouraged regulators to conduct comprehensive cost-benefit analysis for all Dodd-Frank Rules. 

This is consistent with the Obama Administration’s efforts 

to promote better cost benefit analysis for Federal agencies 

through Executive Order 13563, which requires all agencies proposing or adopting regulations to include cost-benefit analyses in an attempt to minimize burdens, maximize 

net benefits and specify performance objectives. The President also stated that regulations should be subject to 

meaningful public comment, be harmonized across agencies, ensure objectivity and be subject to periodic review. 

In 2012, in testimony before the House Committee on Government Reform, SEC Chairman Schapiro stated ‘‘I continue to be committed to ensuring that the Commission engages in sound, robust economic analysis in its rulemaking, in furtherance of the Commission’s statutory mission, and will continue to work to enhance both the process 

and substance of that analysis.’’ Congressman Conaway 

has introduced legislation (H.R. 1003) that would require 

the CFTC’s cost-benefit analysis to be both quantitative 

and qualitative and specifies in greater detail the costs 

and benefits that the CFTC must take into account as part 

of their cost-benefit analyses.—Hon. Kenneth E. Bentsen, 

Acting President and CEO, the Securities Industry and Financial Markets Association (SIFMA) 

Finally, because of our experience with the $25 million 

sub-threshold, we are intrigued by another bipartisan bill 

recently introduced in the House. The legislation, H.R. 

1003, would require the CFTC to quantify the costs and 

benefits of future regulations and orders. Sadly, the legislation is prospective, but we believe that had such an analysis been made, it could have prevented the turmoil currently being caused by the $25 million special entity subthreshold.—Mr. Terrance P. Naulty, General Manager and 

CEO, Owensboro Municipal Utilities (Owensboro, KY) 

On May 21, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

Market Perspectives,’’ Mr. Stephen O’Connor, Chairman, International Swaps and Derivatives Association, Inc. (ISDA), provided 

the following testimony with respect to provisions included in Section 203: 

An appropriate cost-benefit analysis was both required 

and desirable prior to finalization of rules; however in a 

number of instances the CFTC’s analysis did not comply 

with the regulatory standard. As the Jun. 2012 report by 

the CFTC Inspector General stated: ‘‘. . . Generally speaking, it appears CFTC employees did not consider quantifying costs when conducting cost-benefit analyses for the 

definitions rule. As indicated in the rule’s preamble, the 


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costs and benefits associated with coverage under the various definitions (in light of the various regulatory burdens 

that could eventually be associated with coverage) were 

not addressed . . .’’ The lack of an appropriate cost-benefit 

analysis makes it especially important that the application 

and implementation of the final rules be phased in a flexible manner. Doing so would help ensure that rules achieve 

the purposes for which they are intended and do not impose burdensome costs on the financial system. It would 

also help regulators to identify and avoid unintended consequences of their actions. And it would encourage regulators to properly allocate limited resources. 

Section 204—Division Directors 

In order to ensure Division Directors are responsive to the entire 

Commission, this section requires that the heads of each of the 

units of the Commission serve at the pleasure of the Commission, 

perform functions as the Commission may prescribe and report directly to the Commission. Given this language is modeled after 

identical language currently in the CEA applicable to the General 

Counsel and Executive Director, the Committee expects this section 

to be implemented in a similar manner to those two positions. 

Section 205—Office of the Chief Economist 

In order to enhance the legitimacy of economic analysis of rules 

promulgated by the Commission, this section establishes an Office 

of the Chief Economist (OCE) with structure and power mirroring 

that of the Office of the General Counsel. Again, to prevent the 

Chief Economist from serving solely at the pleasure of the Chairman, this section establishes that the Chief Economist will be appointed by the Commission, report directly to the Commission, and 

perform functions at the request of the Commission in a manner 

similar with the General Counsel and Executive Director. 

Section 206—Procedures governing actions taken without a commission vote 

With respect to Title VII of the Dodd-Frank Act alone, the Commission has finalized 43 rules, with 15 additional rules proposed, 

while CFTC staff has issued over 170 non-binding staff ‘‘no-action 

relief’’ letters since July 2012 alone. At least 24 of these no-action 

letters are self-described as permanent. At times, ‘‘no-action’’ letters provide market participants with guidance on how the Enforcement Division staff of the CFTC would act in the event of market emergencies or would interpret recently proposed rules, at least 

in the short term. However, it appears that over the past year, 

staff ‘‘no-action’’ letters have become commonplace to revise the implementation of key regulations of Dodd-Frank, and as such do not 

require a vote of the Commission. Additionally, regardless of a designation as permanent, ‘‘no-action’’ letters are still non-binding in 

the legal sense that CFTC staff could decide to withdraw the letter 

at anytime or the Commission could take a different position and 

overrule the letter. 

On July 23, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

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vided the following testimony with respect to problems with this 

approach: 

. . . [i]nstead of undertaking Commission action to 

amend problematic rules, CFTC staff has issued an unprecedented number of no-action letters, some of which are 

indefinite and have no expiration. So far, CTFC staff has 

issued over 100 no-action letters granting relief from its 

new regulations under Dodd-Frank, and I won’t be surprised if this number continues to grow. No-action letters 

are not voted on by the Commission and are not published 

in the Federal Register. They do not include comment periods and many impose conditions on affected parties. This 

process is at odds with basic principles of the APA, like 

public participation and the opportunity to be heard. It 

also goes against President Obama’s Executive Orders 

Nos. 13563 and 13579, mandating that administrative 

agencies ‘‘create an unprecedented level of openness in 

Government’’ and ‘‘establish a system of transparency, 

public participation, and collaboration.’’ 

In order to bring policy making back to a more open and transparent manner, Section 206 requires that the Commission be provided 7 days notice before any division or office of the Commission 

issues a response to a formal, written petition for an exemptive, noaction or interpretive letter. The Committee would view any attempt to needlessly delay providing notice to the Commission until 

a regulatory deadline or need for no-action relief is imminent (so 

as to avoid the statutorily required 7 day review period) as a violation of the requirements contained in Section 206. 

After receiving notice, any member of the Commission may request a meeting of the Commission to further consider the staffproposed action, and if the Commission decides to hold the meeting 

by majority vote, the matter may not be issued until the meeting 

has concluded. The 7 day notice requirement can be waived by a 

majority vote of the Commission, but only if the Commission determines that requiring such notice would be impracticable, unnecessary, or contrary to the public interest. 

Section 207—Strategic technology plan 

On July 23, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

Commission Perspectives,’’ Commissioner Scott O’Malia provided 

the following testimony with respect to the need for provisions the 

Committee included in Section 207: 

A critically important component to any solution for the 

Commission’s approach to its greatly expanded mission is 

the use of technology in order to accept, sort, aggregate, 

and analyze the new sources of market information provided for under the Dodd-Frank Act. I’d like to highlight 

two major challenges in data and technology: (1) problems 

faced by market participants in the swap data reporting 

rules and (2) problems faced by the Commission in understanding the massive data flows as a result of our enhanced oversight of the swaps and futures markets . . . 

[g]iven the Commission’s expanded regulatory responsibilities, it is imperative for the Commission to develop a techVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00020 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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nology plan that can assist the Commission with meeting 

its regulatory objective. I believe the Commission must develop a five-year strategic plan that is focused on technology, with annual milestones and budgets. To keep up to 

speed with the challenges of enhanced regulatory oversight, this technology plan would require each CFTC division to develop a technology budget that reflects the regulatory needs and responsibilities of that particular division. 

In order to solve the problems enumerated by Commissioner 

O’Malia, Section 207 requires the Commission to develop and file 

a strategic technology plan every 5 years with the House and Senate Agriculture Committees. The plan shall include a detailed technology strategy focused on market surveillance and risk detection, 

market data collection, aggregation, interpretation, normalization, 

standardization, harmonization, streamlining, and internal management and protection of data collected by the Commission. The 

report must also include a detailed accounting of how appropriated 

funds provided for technology will be used, and set annual goals to 

be accomplished along with the annual budgets necessary to accomplish those goals. 

Section 208—Internal risk controls 

On December 14, 2012, it was widely reported that the CME 

Group, Inc., wrote a letter to the CFTC expressing concern that 

confidential and sensitive market data had been shared with nonCFTC employees who then used the data to write academic papers. 

CME attorneys claimed that the use of the data for the preparation 

of non-Commission sponsored publications was a violation of federal law meant to protect trade secrets. At least two academic papers written on the subject of high-frequency trading were either 

co-written or advised by Andrei Kirilenko during his time as the 

CFTC Chief Economist. Upon leaving the CFTC in late 2012, 

Kirilenko took a position at MIT. As a result of the CME letter and 

corresponding internal investigation, the CFTC halted the research 

program which allowed outside academic researchers and economists almost unlimited access to proprietary trading information 

across various markets and the CFTC OIG launched an internal investigation. 

On July 23, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

Commission Perspectives,’’ Commissioner Scott O’Malia provided 

the following testimony: 

Currently the Commission’s Inspector General is investigating whether or not market data was properly controlled by the Office of the Chief Economist when visiting 

scholars/contractors were assisting the Office of the Chief 

Economist in research efforts. While I support collaborative study programs that bring in new and innovative 

thinking, it is vital that the Commission has policies and 

procedures in place to protect against the illegal release of 

market data. 

On March 21, 2014, a heavily redacted version of the CFTC’s 

OIG report was released to the public. In this report, the OIG 

found that: 


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The administrative review revealed that there had been 

poor recordkeeping with regard to the so-called ‘‘on-boarding’’ process for OCE economists. The deficiencies included 

inadequate documentation of security clearances, issues regarding nondisclosure agreements, and non-submission of 

employment data to the National Finance Center, as well 

as incomplete personnel forms, one contract lacking the 

contractor’s signature, and other administrative errors. 

There were no indications of fraud by OCE economists, or 

that OCE economists were not actually appointed by the 

Chief Economist, just a number of administrative errors 

pertaining to the Agency’s so-called on-boarding process. 

The review also uncovered information security concerns. 

Specifically, personally owned external hard drives and 

thumb drives were found in close vicinity to the computers 

that served the OCE economists. In addition, badges for 

former CFTC OCE economists were located in the Chief 

Economist’s desk. 

With respect to the potentially harmful data breaches that occurred at the CFTC and the need to correct them to ensure integrity of the marketplace, the OIG’s report concluded that: 

We agree that the physical and information technology 

concerns exist; however, they are Agency-wide, and are 

currently being addressed at least in part in connection 

with an OIG audit of CFTC’s Fiscal Year 2013 implementation of the Federal Information Security Management 

Act. The absence of controls is significant: lacking a reliable way to determine whether confidential information 

was improperly taken from the CFTC, we will not jump to 

the conclusion that misconduct did or did not occur based 

on contradictory opinions of Agency employees. We can 

make no finding. 

To guard against these sorts of leaks, this section requires the 

Commission, led by the Chief Economist, to develop internal risk 

control mechanisms to safeguard the storage and privacy of market 

data by the Commission. Special attention should be given to market data sharing agreements and academic research performed at 

the Commission using market data. The Commission shall report 

to the authorizing congressional committees on progress made in 

implementing the internal risk controls 60 days after enactment, 

and again 120 days after enactment of the Act. 

Section 209—Subpoena duration and renewal 

On July 23, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

Commission Perspectives,’’ Commissioner Scott O’Malia provided 

the following testimony with respect to his concerns on the operation of the Commission’s subpoena power: 

CFTC regulations ensure that the Commission is made 

accountable for all enforcement matters by requiring a 

Commission order to initiate investigations by the Division 

of Enforcement. Just recently, I dissented on an enforcement matter that involved a radical procedural shift in the 

authorization of investigations for potential violations of 


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the CEA. What I found troubling is that the Division of 

Enforcement sought to circumvent the powers of the Commission by proposing to bring investigations on a summary 

basis through the use of an ‘‘absent objection’’ process. I 

was surprised to be advised by the Commission’s Office of 

General Counsel that the Commission cannot block a staffinitiated absent objection circulation because this process 

is not a Commission ‘‘vote.’’ To ensure fairness in terms of 

true separation of functions, Congress gave power to the 

members of the Commission to reconsider CFTC staff recommendations by independently assessing facts and legal 

justifications for initiating various actions. In other words, 

Congress intended that any decision to bring an investigation by the CFTC is reflective of a shared opinion of the 

majority of the Commissioners, rather than a unilateral 

assessment by the Division of Enforcement’s staff. The 

new absent objection process described by the Office of 

General Counsel is a clear abrogation of the Commission’s 

powers and a violation of Commission rules relating to investigations. 

In order to ensure continuing investigations by the Commission’s 

Division of Enforcement are warranted and properly reviewed by 

the Commission, Section 209 would ensure that the Commission 

complies with controlling Supreme Court precedent on the issuance 

and duration of subpoenas. As such, a subpoena authorized to be 

issued by the Commission shall state in good faith the purpose of 

the investigation, shall require only information reasonably relevant to the purpose of the investigation and shall be for a finite 

period. Renewal of a subpoena may only occur by Commission vote. 

Section 210—Implementation plan for commission rulemakings 

In order to increase market certainty through the rulemaking 

process, Section 210 would require that all proposed rules include 

a plan for when and how long a comment period will be open, and 

when compliance with the final rule will be required. As Commissioner O’Malia stated when he testified before the Committee on 

July 23, 2013, ‘‘it is virtually impossible to achieve good policy outcomes without establishing a sound process for reaching those outcomes. Unfortunately, the Commission has failed to do so in our 

implementation of the Dodd-Frank Act.’’ The Committee does not 

intend for these requirements to become duplicative of requirements already demanded under the Administrative Procedure Act 

(APA). 

Section 211—Applicability of notice and comment requirements of 

the Administrative Procedure Act to guidance voted on by the 

Commission 

As the Committee learned from numerous witnesses through testimony and saw firsthand through press reports and letters from 

foreign financial regulators, the Commission voted on guidance to 

interpret key provisions of the cross-border provisions of the DoddFrank Act instead of conducting rulemaking under the APA, which 

requires notice and comment. The Commission now has a set of 

guidelines to govern the cross-border application of the Dodd-Frank 

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ance and the SEC’s proposed cross border rule that followed all requirements of the law and allowed for extensive public comment. 

Concerns about ‘‘guidance’’ that has the practical effect of an official rulemaking was described in testimony before the Committee 

on March 14, 2013, by the Hon. Kenneth E. Bentsen, Acting President and CEO, SIFMA, when he stated that: 

[E]qually significant, the CFTC has issued its proposed 

cross-border release as ‘‘guidance’’ rather than as formal 

rulemaking process subject to the Administrative Procedure Act. By doing so, the CFTC avoids the need to conduct a cost-benefit analysis, which is critical for ensuring 

that the CFTC appropriately weighs any costs imposed on 

market participants as a result of implementing an overly 

broad and complex U.S. person definition against perceived benefits. 

On July 23, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

Commission Perspectives,’’ Commissioner Scott O’Malia voiced additional concerns in testimony about the approach taken by the 

Commission: 

I believe that putting the label of ‘‘guidance’’ on this document did not change its content or consequences. The 

courts have held that when agency action has the practical 

effect of binding parties within its scope, it has the force 

and effect of law, regardless of the name it is given. Legally binding regulations that impose new obligations on 

affected parties—‘‘legislative rules’’—must conform to the 

APA. As a threshold matter, the cross-border swaps guidance rests on thin statutory authority, because Congress 

limited the extraterritorial application of U.S. swap regulations, and therefore the CFTC’s jurisdiction, to foreign activities that have a ‘‘direct and significant’’ impact on the 

U.S. economy. Despite the statutory limitation, the crossborder swaps guidance sets out standards that it applies 

to virtually all cross-border activities in the swaps markets, in a broad manner similar to the application of the 

swap dealer definition to market participants. For practical reasons, market participants cannot afford to ignore 

detailed regulations imposed upon their activities that may 

result in enforcement or other penalizing action. Accordingly, I believe that the cross-border swaps guidance has 

a practical binding effect on market participants and it 

should have been promulgated as a legislative rule under 

the APA. Similarly, I cannot support any future interpretive guidance that would be more properly issued as a notice-and-comment rulemaking. 

In an attempt to address concerns highlighted above, Section 211 

applies the notice and comment provisions of the APA to any future 

guidance voted on and issued by the Commission. Importantly, to 

ensure responsiveness to the regulated marketplace, the Committee intends that Section 211 only apply to guidance voted on by 

the CFTC Commissioners (and therefore officially issued by the 

CFTC) but not to any guidance provided by the Commission staff 

in response to inquiries from the public. 


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Section 212—Judicial review of Commission rules 

In order to address concerns from stakeholders to fairly and efficiently challenge CFTC final rules in court, Section 212 aligns the 

CFTC judicial review process with that of the U.S. Securities and 

Exchange Commission (SEC) set forth in section 25(b) of the Securities Exchange Act of 1934. As such, the Committee intends for 

Section 212 to allow review of a CFTC final rule may be obtained 

directly with the United States Court of Appeals for the District of 

Columbia Circuit or the U.S. Court of Appeals for the circuit where 

the adversely affected party resides or situates its principal place 

of business. 

On July 24, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

End-User Perspectives,’’ Mr. Andrew Soto, Senior Managing Counsel, Regulatory Affairs, American Gas Association (AGA), provided 

the following testimony with respect to the need for provisions included in Section 212: 

First, AGA recommends that Congress amend the Commodity Exchange Act (CEA) to provide clear and defined 

procedures for challenging CFTC rules and orders in court. 

Although the CEA currently contains provisions allowing 

for judicial review by a U.S. Court of Appeals of certain 

agency actions, the provisions are very limited and provide 

no defined avenue for challenging CFTC rules and orders 

generally. A broad judicial review provision allowing for 

the direct challenge of CFTC rules and orders would have 

both a rehabilitative effect on the current process and a 

prophylactic effect on future agency action. Specific judicial 

review provisions would allow interested parties to challenge particular agency actions that are unreasonable and 

hold the CFTC accountable for its decisions. In addition, 

judicial review would have an important prophylactic effect by requiring the agency to think through its decisions 

before they are made to ensure that they are sustainable 

in court, thus enabling the agency to be a more conscientious and prudent regulator. In the absence of specific judicial review provisions, the general review provisions of the 

Administrative Procedure Act (APA) would apply, requiring parties seeking to challenge CFTC rules to file a claim 

before a U.S. District Court, move for summary judgment 

(as a hearing would likely be unnecessary), obtain a ruling 

and then, if necessary, seek further judicial review before 

a U.S. Court of Appeals. In the recent litigation over the 

CFTC’s position limits rule, which followed the review provisions of the APA, the CFTC’s General Counsel acknowledged the efficiency and desirability of direct review by the 

U.S. Court of Appeals of agency rules, and stated that the 

agency would have no objection to such direct review assuming Congress were to authorize it. Accordingly, provisions allowing for direct review by a U.S. Court of Appeals 

of rules and orders of the CFTC would enable both the industry and the agency to benefit from the administrative 

economy, procedural efficiency and certainty of having a 

dedicated forum in which agency decisions are reviewed. 


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Section 213—GAO study on adequacy of CFTC resources 

In each of the five full and subcommittee hearings held this Congress related to the CFTC, some witnesses have spoken out for additional resources for the Commission. Whether it is from the Commission itself, end-user groups, or regulated market participants, 

varying levels of concern have been voiced that the CFTC lacks sufficient funds to do the job that Congress has asked. To obtain an 

impartial view on whether more resources are necessary, the Committee charges the Government Accountability Office (GAO) to conduct a study to look into this question. 

The Committee would expect the GAO, as part of its study, to 

also closely examine and report on whether the CFTC has efficiently used its resources related to hiring and firing practices 

within the Commission, especially related to positions that are duplicative, outdated in their purpose, or underutilized. The efficient 

expenditure of funds related to computer programs, technology upgrades, consultants, and other noteworthy usages of Commission 

funds should also be closely examined. 

Title 3—End-User Relief 

SUBTITLE A—END-USER EXEMPTION FROM MARGIN REQUIREMENTS

Section 311—End-user margin requirements 

Section 311 amends Section 4s(e) of the Commodity Exchange 

Act (CEA) as added by Section 731 of the Dodd-Frank Act to provide an explicit exemption from margin requirements for swap 

transactions involving end-users that qualify for the clearing exception under 2(h)(7)(A). 

‘‘End-users’’ are thousands of companies across the United States 

who utilize derivatives to hedge risks associated with their day-today operations, such as fluctuations in the prices of raw materials. 

Because these businesses do not pose systemic risk, Congress intended that the Dodd-Frank Act provide certain exemptions for 

end-users to ensure they were not unduly burdened by new margin 

and capital requirements associated with their derivatives trades 

that would hamper their ability to expand and create jobs. 

Indeed, Title VII of the Dodd-Frank Act includes an exemption 

for non-financial end-users from centrally clearing their derivatives 

trades. This exemption permits end-users to continue trading directly with a counterparty, (also known as trading ‘‘bilaterally,’’ or 

over-the-counter (OTC)) which means their swaps are negotiated 

privately between two parties and they are not executed and 

cleared using an exchange or clearinghouse. Generally, it is common for non-financial end-users, such as manufacturers, to avoid 

posting cash margin for their OTC derivative trades. End-users 

generally will not post margin because they are able to negotiate 

such terms with their counterparties due to the strength of their 

own balance sheet or by posting non-cash collateral, such as physical property. End-users typically seek to preserve their cash and 

liquid assets for reinvestment in their businesses. In recognition of 

this common practice, the Dodd-Frank Act included an exemption 

from margin requirements for end-users for OTC trades. 

Section 731 of the Dodd-Frank Act (and Section 764 with respect 

to security-based swaps) requires margin requirements be applied 


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to swap dealers and major swap participants for swaps that are not 

centrally cleared. For swap dealers and major swap participants 

that are banks, the prudential banking regulators (such as the Federal Reserve or Federal Deposit Insurance Corporation) are required to set the margin requirements. For swap dealers and major 

swap participants that are not banks, the CFTC is required to set 

the margin requirements. Both the CFTC and the banking regulators have issued their own rule proposals establishing margin requirements pursuant to Section 731. 

Following the enactment of the Dodd-Frank Act in July of 2010, 

uncertainty arose regarding whether this provision permitted the 

regulators to impose margin requirements on swap dealers when 

they trade with end-users, which could then result in either a direct or indirect margin requirement on end-users. Subsequently, 

Senators Blanche Lincoln and Chris Dodd sent a letter to thenChairmen Barney Frank and Collin Peterson on June 30, 2010, to 

set forth and clarify congressional intent, stating: 

The legislation does not authorize the regulators to impose margin on end-users, those exempt entities that use 

swaps to hedge or mitigate commercial risk. If regulators 

raise the costs of end-user transactions, they may create 

more risk. It is imperative that the regulators do not unnecessarily divert working capital from our economy into 

margin accounts, in a way that would discourage hedging 

by end-users or impair economic growth. 

In addition, statements in the legislative history of section 731 

(and Section 764) suggests that Congress did not intend, in enacting this section, to impose margin requirements on nonfinancial 

end-users engaged in hedging activities, even in cases where they 

entered into swaps with swap entities. 

In the CFTC’s proposed rule on margin, it does not require margin for un-cleared swaps when non-bank swap dealers transact 

with non-financial end-users. However, the prudential banking regulators proposed rules would require margin be posted by non-financial end-users above certain established thresholds when they 

trade with swap dealers that are banks. Many of end-users’ transactions occur with swap dealers that are banks, so the banking regulators’ proposed rule is most relevant, and therefore of most concern, to end-users. 

By the prudential banking regulators’ own terms, their proposal 

to require margin stems directly from what they view to be a legal 

obligation under Title VII. The plain language of section 731 provides that the Agencies adopt rules for covered swap entities imposing margin requirements on all non-cleared swaps. Despite clear 

congressional intent, those sections do not, by their terms, exclude 

a swap with a counterparty that is a commercial end-user. By providing an explicit exemption under Title VII through enactment of 

this provision, the prudential regulators will no longer have a perceived legal obligation, and the congressional intent they acknowledge in their proposed rule will be implemented. 

The Committee notes that in September of 2013, the International Organization of Securities Commissions (IOSCO) and the 

Bank of International Settlements published their final recommendations for margin requirements for uncleared derivatives. 


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Representatives from a number of U.S. regulators, including the 

CFTC and the Board of Governors of the Federal Reserve participated in the development of those margin requirements, which are 

intended to set baseline international standards for margin requirements. It is the intent of the Committee that any margin requirements promulgated under the authority provided in Section 4s 

of the Commodity Exchange Act should be generally consistent 

with the international margin standards established by IOSCO. 

On March 14, 2013, at a hearing entitled ‘‘Examining Legislative 

Improvements to Title VII of the Dodd-Frank Act,’’ the following 

testimony was provided to the Committee with respect to provisions included in Section 311: 

In approving the Dodd-Frank Act, Congress made clear 

that end-users were not to be subject to margin requirements. Nonetheless, regulations proposed by the Prudential Banking Regulators could require end-users to post 

margin. This stems directly from what they view to be a 

legal obligation under Title VII. While the regulations proposed by the CFTC are preferable, they do not provide 

end-users with the certainty that legislation offers. According to a Coalition for Derivatives End-Users survey, a 3% 

initial margin requirement could reduce capital spending 

by as much as $5.1 to $6.7 billion among S&P 500 companies alone and cost 100,000 to 130,000 jobs. To shed some 

light on Honeywell’s potential exposure to margin requirements, we had approximately $2 billion of hedging contracts outstanding at year-end that would be defined as a 

swap under Dodd-Frank. Applying 3% initial margin and 

10% variation margin implies a potential margin requirement of $260 million. Cash deposited in a margin account 

cannot be productively deployed in our businesses and 

therefore detracts from Honeywell’s financial performance 

and ability to promote economic growth and protect American jobs.—Mr. James E. Colby, Assistant Treasurer, Honeywell International Inc. 

On May 21, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

Market Perspectives,’’ Mr. Stephen O’Connor, Chairman, ISDA, 

provided the following testimony with respect to provisions included in Section 311: 

Perhaps most importantly, we do not believe that initial 

margin will contribute to the shared goal of reducing systemic risk and increasing systemic resilience. When robust 

variation margin practices are employed, the additional 

step of imposing initial margin imposes an extremely high 

cost on both market participants and on systemic resilience with very little countervailing benefit. The Lehman 

and AIG situations highlight the importance of variation 

margin. AIG did not follow sound variation margin practices, which resulted in dangerous levels of credit risk 

building up, ultimately leading to its bailout. Lehman, on 

the other hand, posted daily variation margin, and while 

its failure caused shocks in many markets, the variation 

margin prevented outsized losses in the OTC derivatives 

markets. While industry and regulators agree on a robust 


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variation margin regime including all appropriate products 

and counterparties, the further step of moving to mandatory IM [initial margin] does not stand up to any rigorous 

cost-benefit analysis. 

Based on the extensive background that accompanies the statutory change provided explicitly in Section 311, the Committee intends that initial and variation margin requirements cannot be imposed on uncleared swaps entered into by cooperative entities if 

they similarly qualify for the CFTC’s cooperative exemption with 

respect to cleared swaps. Cooperative entities did not cause the financial crisis and should not be required to incur substantial new 

costs associated with posting initial and variation margin to 

counterparties. In the end, these costs will be borne by their members in the form of higher prices and more limited access to credit, 

especially in underserved markets, such as in rural America. 

Therefore, the Committee’s clear intent when drafting Section 311 

was to prohibit the CFTC and prudential regulators, including the 

Farm Credit Administration, from imposing margin requirements 

on cooperative entities. 

SUBTITLE B—INTER-AFFILIATE SWAPS

Sec. 321—Treatment of affiliate transactions 

‘‘Inter-affiliate’’ swaps are contracts executed between entities 

under common corporate ownership. Section 321 would amend the 

Commodity Exchange Act to provide an exemption for inter-affiliate swaps from the clearing and execution requirements of the 

Dodd-Frank Act so long as the swap transaction hedges or mitigates the commercial risk of an entity that is not a financial entity. 

The section also requires that an ‘‘appropriate credit support measure or other mechanism’’ be utilized between the entity seeking to 

hedge against commercial risk if it transacts with a swap dealer or 

major swap participant, but this credit support measure requirement is effective prospectively from the date H.R. 4413 is enacted 

into law. 

Importantly, with respect to Section 321’s use of the phrase 

‘‘credit support measure or other mechanism,’’ the Committee unequivocally does not intend for the CFTC to interpret this statutory 

language as a mandate to require initial or variation margin for 

swap transactions. The Committee intends for the CFTC to recognize that credit support measures and other mechanisms have been 

in use between counterparties and affiliates engaged in swap transactions for many years in different formats, and therefore, there is 

no need to engage in a rulemaking to define such broad terminology. 

Section 321 originated from the need to provide relief for a parent company that has multiple affiliates within a single corporate 

group. Individually, these affiliates may seek to offset their business risks through swaps. However, rather than having each affiliate separately go to the market to engage in a swap with a dealer 

counterparty, many companies will employ a business model in 

which only a single or limited number of entities, such as a treasury hedging center, face swap dealers. These designated external 

facing entities will then allocate the transaction and its risk mitiVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00029 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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gating benefits to the affiliate seeking to mitigate its underlying 

risk. 

Companies that use this business model argue that it reduces 

the overall credit risk a corporate group poses to the market because they can net their positions across affiliates, reducing the 

number of external facing transactions overall. In addition, it permits a company to enhance its efficiency by centralizing its risk 

management expertise in a single or limited number of affiliates. 

Should these inter-affiliate transactions be treated as all other 

swaps, they could be subject to clearing, execution and margin requirements. Companies that use inter-affiliate swaps are concerned 

that this could substantially increase their costs, without any real 

reduction in risk in light of the fact that these swaps are purely 

for internal use. For example, these swaps could be ‘‘double-margined’’—when the centralized entity faces an external swap dealer, 

and then again when the same transaction is allocated internally 

to the affiliate that sought to hedge the risk. 

The uncertainty that exists regarding the treatment of inter-affiliate swaps spans multiple rulemakings that have been proposed or 

that will be proposed pursuant to the Dodd-Frank Act. Section 321 

provides certainty and clarity as to what inter-affiliate transactions 

are and how they are not to be regulated as swaps when the parties to the transaction are under common control. 

On March, 14, 2013, at a hearing entitled ‘‘Examining Legislative 

Improvements to Title VII of the Dodd-Frank Act,’’ the following 

testimony was provided with respect to efforts to address the problem with inter-affiliate swaps: 

[I]nter-affiliate swaps provide important benefits to corporate groups by enabling centralized management of market, liquidity, capital and other risks inherent in their 

businesses and allowing these groups to realize hedging efficiencies. Since the swaps are between affiliates, rather 

than with external counterparties, they pose no systemic 

risk and therefore there are no significant gains to be 

achieved by requiring them to be cleared or subjecting 

them to margin posting requirements. In addition, these 

swaps are not market transactions and, as a result, requiring market participants to report them or trade them on 

an exchange or swap execution facility provides no transparency benefits to the market—if anything, it would introduce useless noise that would make Dodd-Frank’s 

transparency rules less helpful.—Hon. Kenneth E. Bentsen, Acting President and CEO, SIFMA 

This legislation would ensure that inter-affiliate derivatives trades, which take place between affiliated entities 

within a corporate group, do not face the same demanding 

regulatory requirements as market-facing swaps. The legislation would also ensure that end-users are not penalized 

for using central hedging centers to manage their commercial risk. There are two serious problems facing end-users 

that need addressing. First, under the CFTC’s proposed 

inter-affiliate swap rule, financial end-users would have to 

clear purely internal trades between affiliates unless they 

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cific requirements for an exception [i]f these end-users 

have to post variation margin, there is little point to exempting inter-affiliate trades from clearing requirements, 

as the costs could be similar. And let’s not forget the larger 

point—internal end-user trades do not create systemic risk 

and, hence, should not be regulated the same as those 

trades that do. Second, many end-users—approximately 

one-quarter of those we surveyed—execute swaps through 

an affiliate. This of course makes sense, as many companies find it more efficient to manage their risk centrally, 

to have one affiliate trading in the open market, instead 

of dozens or hundreds of affiliates making trades in an uncoordinated fashion. Using this type of hedging unit centralizes expertise, allows companies to reduce the number 

of trades with the street and improves pricing. These advantages led me to centralize the treasury function at 

Westinghouse while I was there. However, the regulators’ 

interpretation of the Dodd-Frank Act confronts nonfinancial end-users with a choice: either dismantle their 

central hedging centers and find a new way to manage 

risk, or clear all of their trades. Stated another way, this 

problem threatens to deny the end-user clearing exception 

to those end-users who have chosen to hedge their risk in 

an efficient, highly-effective and risk-reducing way. It is 

difficult to believe that this is the result Congress hoped 

to achieve.—Ms. Marie N. Hollein, C.T.P., President and 

CEO, Financial Executives International, on behalf of the 

Coalition for Derivatives End-Users 

SUBTITLE C—INDEMNIFICATION REQUIREMENTS RELATED TO SWAP

DATA REPOSITORIES

Section 331—Indemnification requirements 

Section 331 strikes the indemnification requirements found in 

Sections 725 and 728 of the Dodd-Frank Act related to swap data 

gathered by swap data repositories (SDRs) and derivatives clearing 

organizations (DCOs). The section does maintain, however, that before an SDR, DCO, or the CFTC shares information with domestic 

or international regulators, they have to receive a written agreement stating that the regulator will abide by certain confidentiality 

agreements. 

Swap data repositories serve as electronic warehouses for data 

and information regarding swap transactions. Historically, SDRs 

have regularly shared information with foreign regulators as a 

means to cooperate, exchange views and share information related 

to OTC derivatives CCPs and trade repositories. Prior to DoddFrank, international guidelines required regulators to maintain the 

confidentiality of information obtained from SDRs, which facilitated 

global information sharing that is critical to international regulators’ ability to monitor for systemic risk. 

Under Sections 725 and 728 of the Dodd-Frank Act, when a foreign regulator requests information from a U.S registered SDR or 

DCO, the SDR or DCO is required to receive a written agreement 

from the foreign regulator stating that it will abide by certain confidentiality requirements and will ‘‘indemnify’’ the Commissions for 


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any expenses arising from litigation relating to the request for information. In short, the concept of ‘‘indemnification’’—requiring a 

party to contractually agree to pay for another party’s possible litigation expenses—is only well established in U.S. tort law, and does 

not exist in practice or in legal concept in foreign jurisdictions. 

These indemnification provisions—which were not included in 

the financial reform bill passed by the House of Representatives in 

December 2009—threaten to make data sharing arrangements with 

foreign regulators unworkable. Foreign regulators will most likely 

refuse to indemnify U.S. regulators for litigation expenses in exchange for access to data. As a result, foreign regulators may establish their own data repositories and clearing organizations to ensure they have access to data they need to perform their supervisory duties. This would lead to the creation of multiple databases, 

needlessly duplicative data collection efforts, and the possibility of 

inconsistent or incomplete data being collected and maintained 

across multiple jurisdictions. 

In testimony before the House Committee on Financial Services 

in March of 2012, the then-Director of International Affairs for the 

SEC, Mr. Ethiopis Tafara, endorsed a legislative solution to the 

problem, stating that: 

The SEC recommends that Congress consider removing 

the indemnification requirement added by the Dodd-Frank 

Act . . . the indemnification requirement interferes with 

access to essential information, including information 

about the cross-border OTC derivatives markets. In removing the indemnification requirement, Congress would assist the SEC, as well as other U.S. regulators, in securing 

the access it needs to data held in global trade repositories. Removing the indemnification requirement would 

address a significant issue of contention with our foreign 

counterparts . . . 

At the same hearing, the then-General Counsel for the CFTC, 

Mr. Dan Berkovitz, acknowledged that they too have received growing concerns from foreign regulators, but that they intend to issue 

interpretive guidance, stating that ‘‘access to swap data reported to 

a trade repository that is registered with the CFTC will not be subject to the indemnification provisions of the Commodity Exchange 

Act if such trade repository is regulated pursuant to foreign law 

and the applicable requested data is reported to the trade repository pursuant to foreign law.’’ 

To provide clarity to the marketplace and remove any legal barriers to swap data being easily shared with various domestic and 

foreign regulatory agencies, this section would remove the indemnification requirements found in Sections 725 and 728 of the DoddFrank Act related to swap data gathered by SDRs and DCOs. 

On March, 14, 2013, at a hearing entitled ‘‘Examining Legislative 

Improvements to Title VII of the Dodd-Frank Act,’’ Mr. Larry 

Thompson, Managing Director and General Counsel, the Depository Trust and Clearing Corporation, provided the following testimony with respect to provisions of H.R. 742, which were included 

in Section 331: 

The Swap Data Repository and Clearinghouse Indemnification Correction Act of 2013 would make U.S. law conVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00032 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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sistent with existing international standards by removing 

the indemnification provisions from sections 728 and 763 

of Dodd-Frank. DTCC strongly supports this legislation, 

which we believe represents the only viable solution to the 

unintended consequences of indemnification. H.R. 742 is 

necessary because the statutory language in Dodd-Frank 

leaves little room for regulators to act without U.S. Congressional intervention. This point was reinforced in the 

CFTC/SEC January 2012 Joint Report on International 

Swap Regulation, which noted that the Commissions ‘‘are 

working to develop solutions that provide access to foreign 

regulators in a manner consistent with the DFA and to ensure access to foreign-based information.’’ It indicates legislation is needed, saying that ‘‘Congress may determine 

that a legislative amendment to the indemnification provision is appropriate.’’ H.R. 742 would send a clear message 

to the international community that the United States is 

strongly committed to global data sharing and determined 

to avoid fragmenting the current global data set for overthe-counter (OTC) derivatives. By amending and passing 

this legislation to ensure that technical corrections to indemnification are addressed, Congress will help create the 

proper environment for the development of a global trade 

repository system to support systemic risk management 

and oversight. 

SUBTITLE D—RELIEF FOR MUNICIPAL UTILITIES

Sections 341, 342, 343—Transactions with the utility special entities; utility special entity defined; utility operations-related 

swap 

Sections 341, 342, and 343 of H.R. 4413 would preserve the ability of government-owned utilities, classified in the bill as ‘‘utility 

special entities,’’ to have uninterrupted and cost-effective access to 

the customized, non-financial commodity swaps that utility special 

entities have used for years. In effect, the counterparties of utility 

special entities would now be subject to the much higher $8 billion 

de minimis swap dealer registration threshold. Importantly, the 

legislation does not include an exemption for interest rate, credit, 

equities, currency asset classes, or agriculture commodities, other 

than commodities used for electric energy or natural gas production 

or generation. Instead, H.R. 4413 creates a new category of swap 

known as the ‘‘utility operations-related swap’’ and provides relief 

to counterparties of utility special entities only when those specific 

types of swaps are used. To ensure transparency, the bill still requires all special entity swap transactions to be reported to the 

CFTC. 

On May 23, 2012, the CFTC published a rule further defining 

who is considered a ‘‘swap dealer’’ under the Dodd-Frank Act, 

which directly impacted many swap counterparties of governmentowned non-profit utilities. The rule became effective on July 23, 

2012, with registration as a swap dealer not being required until 

on or after October 12, 2012. The CFTC’s swap dealer rule includes 

an exception for entities from having to register as a swap dealer 


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if their outstanding annual gross notional swap positions do not exceed either of the two following thresholds: 

1. $3 billion (subject to an initial three year phase-in level 

of $8 billion), referred to as the ‘‘general de minimis threshold’’; 

and 

2. $25 million with regard to swaps where an entity’s 

counterparty is a ‘‘special entity’’ as defined in Section 731 of 

the Dodd-Frank Act, referred to as the ‘‘special entity de minimis threshold.’’ 

On October 12, 2012, after several public power groups petitioned 

the CFTC to relieve their counterparties from compliance with the 

much lower registration threshold, CFTC staff issued a non-binding 

‘‘no-action relief’’ letter instead, which increased the ‘‘special entity 

sub-threshold’’ to $800 million from $25 million. 

As mentioned above, a ‘‘special entity’’ is broadly defined in Section 731 of the Dodd-Frank Act to include any government-owned 

enterprise, such as public school boards, state governments, and 

any publicly-owned producer or supplier of electricity or natural 

gas. Casting such a broad net in defining ‘‘special entity’’ was a policy decision made by the drafters of the Dodd-Frank Act which 

sought to protect taxpayers from the use of complex financial 

swaps by their municipality. For example, the use of fixed-for-floating interest rate swaps tied to municipal bonds issued by Jefferson 

County, Alabama, contributed to the county’s multi-billion dollar 

debt that rapidly expanded during the 2008 financial crisis, later 

resulting in what was at the time the largest municipal bankruptcy 

filing in U.S. history. 

Prior to enactment of the Dodd-Frank Act, however, many publicly-owned utilities relied on their non-financial counterparties, 

such as natural gas producers, independent power generators, and 

investor-owned utility companies to enter into swaps in order to 

hedge against operational risks. Many of these utilities have heard 

from numerous counterparties who are evaluating their future 

business plans in light of the final CFTC rules. These counterparties are strictly limiting their business, or completely cutting all 

ties with utility special entities given the special entity sub-threshold and uncertainty surrounding the new regulatory regime for the 

swaps marketplace. 

Unless counterparties can determine with certainty that their 

swap activities with special entities will not result in them being 

classified as a ‘‘swap dealer’’ under the Dodd-Frank Act, it appears 

that numerous counterparties may avoid doing business with them 

altogether. This ultimately limits competition and forces special entities to do business with financial institutions or large swap dealers, which concentrates risk and may raise costs for many utility 

special entities eventually leading to increased costs for ratepayers. 

The Committee recognizes that on March 21, 2014, the Commission 

staff provided a ‘‘no-action letter’’ to utility special entities so they 

are not subjected to the $25 million de minimis threshold. However, permanent statutory relief that would be provided in Sections 

341, 342, and 343 is still needed due to the questionable legal certainty contained in this—and all—CFTC no-action letters, which 

state that ‘‘[a]s with all no-action letters, the Division retains the 

authority, in its discretion, to further condition, modify, suspend, 


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terminate or otherwise restrict the terms of the no-action relief provided herein.’’ 

On May 22, 2014, the CFTC released a proposed rulemaking to 

permanently correct the missteps that would be corrected by Sections 341, 342, and 343. While a regulatory change is welcomed by 

the Committee, statutory certainty can provide millions of consumers across the country with greater certainty that their utility 

rates will not increase due to the Dodd-Frank Act. 

On March, 14, 2013, at a hearing entitled ‘‘Examining Legislative 

Improvements to Title VII of the Dodd-Frank Act,’’ Mr. Terrance P. 

Naulty, General Manager and CEO, Owensboro Municipal Utilities, provided the following testimony with respect to the provisions 

included in Sections 341, 342, and 343: 

Government-owned utilities depend on nonfinancial commodity transactions, trade options, and ‘‘swaps,’’ as well as 

the futures markets, to hedge commercial risks that arise 

from their utility facilities, operations, and public service 

obligations. Together, nonfinancial commodity markets 

play a central role in the ability of government-owned utilities to secure electric energy, fuel for generation, and natural gas supplies for delivery to consumers at reasonable 

and stable prices . . . [t]he CFTC has said that it retained 

the $25 million threshold in light of the special protections 

that the Dodd-Frank Act affords to special entities. However, the statute does not require—even mention—special 

protections for special entities in regard to the swap dealer 

definition. As noted above, the law imposes requirements 

on swap dealers and major swap participants advising or 

entering into swaps with special entities. Nowhere does 

the law mention deeming a participant to be a swap dealer 

solely based on its volume of swaps with governmentowned entities. Government-owned utilities understand 

the operations-related swap transactions they use to manage their commercial risks and do not need the special protections provided by the $25 million sub-threshold. In fact, 

and ironically, these ‘‘protections’’ are likely to limit the 

ability of these utilities to hedge operational and price 

risks rather than to protect these utilities and their customers from risk. On July 12, 2012, APPA, the Large Public Power Council (LPPC), the American Public Gas Association (APGA), the Transmission Access Policy Study 

Group (TAPS), and the Bonneville Power Administration 

(BPA), filed with the CFTC a ‘‘Petition for Rulemaking to 

Amend CFTC Regulation 1.3(ggg)(4).’’ . . . [t]he legislation 

[H.R. 1038] largely mirrors the intent and effect of the 

NFP EEU petition to the CFTC, providing narrowly targeted relief for operations-related swaps for governmentowned utilities. Specifically, the legislation would provide 

that the CFTC, in making a determination to exempt a 

swap dealer under the de minimis exception, shall treat a 

utility operations-related swap with a utility special entity 

the same as a utility operations-related swaps with any 

entity that is not a special entity. . . . [t]he legislation 

carefully defines which entities would qualify as a ‘‘utility 

special entity.’’ It also specifically defines the types of 


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swaps that could and could not be considered a ‘‘utility operations-related swap.’’ For example, the legislation specifically prohibits interest, credit, equity, and currency swaps 

from being considered as a utility operations-related swap. 

Likewise, except in relation to their use as a fuel, commodity swaps in metal, agricultural, crude oil, or gasoline 

would not qualify either. Finally, the legislation also confirms that utility operations-related swaps are fully subject 

to swap reporting requirements. When implemented, this 

legislation should provide the certainty to nonfinancial entities that they can enter into swap transactions with government-owned utilities without fear of being deemed a 

swap dealer. It truly levels the playing field. And, it does 

nothing to otherwise alter the CFTC’s implementation of 

the Dodd-Frank Act. 

SUBTITLE E—END-USER REGULATORY RELIEF

Section 351—End-users not treated as financial entities 

Section 351 is intended to remove non-financial end-users that 

were unintentionally captured in the definition of ‘‘financial entity’’ 

in Section 2(h)(7)(C) of the Commodity Exchange Act due to a 

cross-reference to Section 4(k) of the Bank Holding Company Act 

of 1956. By defining ‘‘commercial market participants’’ using longstanding CFTC terminology found in the Joint CFTC–SEC Rule 

Defining Swap (CFTC Reference: 77 FR 48207) and current CFTC 

Regulations governing Trade Options (CFTC Regulations Part 

32.3(a)(1)(ii)), the Committee seeks to provide narrow relief to these 

entities who are not traditional financial institutions that may incidentally be swept in to the Dodd-Frank regime simply because they 

engage in futures contracts, forward contracts, or commodity options which call for physical delivery of a commodity. 

On July 24, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

End-User Perspectives,’’ Mr. Richard F. McMahon, Jr., Vice President, Edison Electric Institute (EEI), provided the following testimony with respect to the need for the provisions included in Section 351: 

The Dodd-Frank Act defines the term ‘‘financial entity’’, 

in part, as an entity that is ‘‘predominantly engaged in activities that are in the business of banking, or in activities 

that are financial in nature, as defined in section 4(k) of 

the Bank Holding Company Act of 1956.’’ Incorporating 

banking concepts into a definition that also applies to commercial commodity market participants has had unintended consequences. Unlike our members, banks and 

bank holding companies generally cannot take or make delivery of physical commodities. However, banks and bank 

holding companies can invest and trade in certain commodity derivatives. As a result, the definition of ‘‘financial 

in nature’’ includes investing and trading in futures and 

swaps as well as other physical transactions that are settled by instantaneous transfer of title of the physical commodity. An entity that falls under the definition of a ‘‘financial entity’’ is generally not entitled to the end-user exemption—an exemption that Congress included to benefit 


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commercial commodity market participants—and can 

therefore be subject to many of the requirements placed 

upon swap dealers and major swap participants. In addition, the CFTC has used financial entity as a material 

term in numerous rules, no-action relief, and guidance, including, most recently, its cross-border guidance. The 

Dodd-Frank Act allows affiliates or subsidiaries of an enduser to rely on the end-user exception when entering into 

the swap on behalf of the end-user. However, swaps entered into by end-user hedging affiliates who fall under the 

definition of ‘‘financial entity’’ cannot take advantage of 

the end-user exemption, despite the fact that the transactions are entered into on behalf of the end-user. Many 

energy companies structure their businesses so that a single legal entity within the corporate family acts as a central hedging, trading and marketing entity—allowing companies to centralize functions such as credit and risk management. However, when the banking law definitions are 

applied in this context, these types of central entities may 

be viewed as engaging in activity that is ‘‘financial in nature,’’ even with respect to physical transactions. Hence, 

some energy companies may be precluded from electing 

the end-user clearing exception for swaps used to hedge 

their commercial risks and be subject to additional regulations applicable to financial entities. Importantly, two 

similar energy companies may be treated differently if, for 

example, one entity uses a central affiliate to conduct 

these activities and another conducts the same activity in 

an entity that also owns physical assets or that has subsidiaries that own physical assets. Accordingly, Congress 

should amend the definition of ‘‘financial entity’’ to ensure 

that commercial end-users are not inadvertently regulated 

as ‘‘financial entities.’’ 

Section 352—Reporting of illiquid swaps so as not to disadvantage 

certain non-financial end-users 

Real-time public reporting of swap transactions as required by 

the CFTC may ultimately lead to more efficient prices for commercial end-users. However, based on the fact that liquidity diminishes 

for longer-dated contracts further out in time, there is a point 

where the benefits derived from public reporting do not outweigh 

the detriment to those who are trading in illiquid markets. While 

transparency is helpful in establishing a price between buyers and 

sellers, if market participants become easier to identify in certain 

sparsely traded swaps, other market participants will be able to 

take advantage of their positions and increase their cost of doing 

business for future trades. These sparsely traded swaps are used 

by a handful of companies with excellent credit ratings to provide 

long-term protection against price fluctuations for commodities 

such as oil and jet fuel. 

While the goal of increasing market transparency was well intended, the CFTC’s final rule on reporting requirements does not 

differentiate between the appropriate times needed for reporting 

between different types of swaps contracts. Instead, this rule has 

led to a change in market behavior that affects long-established 


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business models which traditionally allowed companies to protect 

against commodity price increases. Effective risk management 

helped these companies keep prices low for consumers. Southwest 

Airlines offers a prime example of how this new CFTC regulation 

has impacted its business and its customers. Because their exact 

market positions became known by competitors due to near instantaneous reporting of market positions, Southwest Airlines has been 

forced to pay more in order to protect against the rising cost of fuel. 

There is precedent in CFTC policy in recognizing the sensitivity 

around transaction counterparty identities in public data reporting. 

The Commission has for years issued publicly a weekly ‘‘Commitment of Traders Report’’ (COT). In describing the issuance of this 

report, the Commission states: ‘‘The [COT] reports provide a breakdown of each Tuesday’s open interest for markets in which 20 or 

more traders hold positions equal to or above the reporting levels 

established by the CFTC.’’ In other words, when the number of 

market participants in a reportable contract drops below a certain 

level, the Commission has recognized there can be damage to 

counterparty anonymity when there are a limited number of participants in a given market, and therefore does not issue a report 

for that contract. Because the Committee believes that the number 

of participants and transactions in a given market diminishes for 

longer-dated contracts, the Commission shall create a standard for 

reporting all swap asset classes based off of when liquidity in a 

contract lowers to the level of being able to easily identify market 

participants. 

As such, Section 352 would correct the unintended consequences 

of the new CFTC reporting regime while still maintaining the goal 

of increasing market transparency. This section preserves the realtime reporting of these sparsely traded swaps directly to the CFTC 

to ensure that government regulators have the information they 

need to police the markets. By simply making a technical change 

to the timeframe in which end-users are required to release their 

trading information to the general public, Section 352 achieves 

market transparency in a manner that does not harm long-standing business models and that helps keep costs low for millions of 

Americans. 

On July 24, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

End-User Perspectives,’’ Mr. Chris Monroe, Treasurer, Southwest 

Airlines, Co., provided the following testimony with respect to the 

need for provisions included in Section 352: 

One key to our unparalleled success has been our ability 

to hedge fuel through legitimate end-user derivatives purchased in the futures markets. Hedging at Southwest is 

enterprise risk management—essential in our view given 

our $6 billion annual fuel bill. To hedge, we commonly 

enter into transactions many months or years in advance 

of needing the physical product. Trading in these illiquid 

markets allows us to manage our fuel costs, which in turn 

helps us to keep fares low and maintain large jet (Boeing 

737) flights in the communities we serve. I am here today 

to highlight a few issues that have begun to impact these 

important markets that companies such as Southwest 

relay on to manage risk. One area where we are seeing a 

negative commercial impact is the Commodity Futures 


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Trading Commission’s (‘‘CFTC’s’’) Real-Time Public Reporting of Swap Transaction Data Rule (‘‘Real-Time Reporting 

Rule’’) . . . [i]mportantly, trades between a legitimate commercial end-user and a dealer must be reported within the 

dealer’s shorter time limit. Given that the vast majority of 

bilateral trades entered into by commercial end-users are 

transacted with a dealer, this means nearly all commercial 

end-user trades are reported on the accelerated time limit. 

The dealer time delays may be sufficient for liquid markets, but the timeframes are not sufficient for illiquid markets, which, as I said before, is where Southwest commonly trades. Only a few market participants trade that 

far out the curve, which makes the contracts highly illiquid, even in contracts that may be liquid in the front 

months such as crude oil. Additionally, Southwest has a 

particularly identifiable trading strategy, a hedging ‘‘DNA’’ 

if you will, which makes us quite visible in a market with 

few participants. This is particularly harmful. When a 

dealer has to report illiquid trades to the market quickly, 

the dealer is less likely to be able to lay off the risk of that 

trade in the prescribed time. If the dealer is still holding 

a large amount of the risk when the trade is shown to the 

public, the dealer can be front-run and, as a result, take 

a loss on the trade. That increased risk to the dealer will 

either curtail trades or materially increase the costs of the 

trade to the end-users.) If an end-user like Southwest can 

no longer access the markets to hedge fuel it would be contrary to the purposes of the legislation and in our view 

hostile to Congressional intent. 

Section 353—Relief for grain elevator operators, farmers, agricultural counterparties, and commercial market participants 

As a service to their customers, farmer-owned cooperative FCMs 

have a network of branch operations embedded in locations such as 

grain elevators, whose primary business is handling the cash grain 

volume of their farmer customers. As a branch office of a cooperatively-owned FCM, these commercial grain elevators have chosen to 

provide brokerage services as a means of providing access to risk 

management tools for their farmer customers who want to hedge 

their production volume through futures and/or options. 

In response to the Dodd-Frank Act, the CFTC greatly expanded 

record keeping requirements by making it necessary for brokers to 

retain all forms of written and oral communication that might 

‘‘lead to the execution of a transaction in a commodity interest’’. 

Given the infrequent and low volume of futures/options transactions handled by ‘‘branches’’ associated with those FCMs, complying with the recording requirements under this vague regulation 

would not be economically feasible. The necessary investment to 

put in place and maintain a system to record every form of communication that might ‘‘lead to the execution of a transaction’’ would 

exceed not only any profits, but in many cases the total revenues 

of those FCM branches. Local branches could no longer provide brokerage services resulting in reduced risk management options, and 

their use, by farmers and ranchers. 


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Section 353 does not eliminate a grain elevator’s record keeping 

responsibilities, but merely relieves them from purchasing and 

maintaining costly technology to record and save all incoming communication that may lead to a transaction in a commodity interest. 

Grain elevators and other end-users will still be required to maintain a written record of such transactions that include all of the 

transactions’ material economic terms. Without Section 353, the 

vague, sweeping language of the CFTC’s current regulation will result in significant time and financial costs to commercial grain elevators attempting to comply with the rule. Rather than facilitating 

the collection of useful transaction records, the rule is likely to result in grain elevators’ no longer providing useful brokerage services to their customers. As a result, countless farmers and ranchers 

will lose access to valuable risk management tools that allow them 

to hedge their production volume. 

On July 24, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

End-User Perspectives,’’ the following witnesses provided testimony 

with respect to provisions included in Section 353: 

A significant and concerning expansion of current data 

requirements beyond the scope of Dodd-Frank is related to 

record-keeping requirements in Part 1 of Commission regulations. In accordance with Dodd-Frank, the CFTC expanded the futures record-keeping requirements that existed for certain markets participants to swaps. However, 

they also significantly expanded the written requirements, 

as well as created a new requirement to record oral conversations. Compliance costs have already been incredibly 

substantial now that compliance with the written requirements is mandatory and will only increase once compliance 

with the oral recording requirement comes into effect later 

this year. Again, the market is searching for a reason for 

and measurable benefit of all of this new information that 

must be maintained and archived in a particular way. In 

addition, the rule is vague as to which communications 

must be retained, so in an abundance of caution, market 

participants are effectively saving every e-mail, news article, or any other piece of information that might ‘‘lead to 

the execution of a transaction’’ and soon will have to begin 

recording every phone call that might ‘‘lead to the execution of a transaction.’’ This vague ‘‘lead to . . .’’ language 

appears nowhere in any prior iteration of Rule 1.35 or in 

any prior CFTC Advisory relating to the rule, and operates 

to expand substantially the scope and burdens of the rule. 

Also, the application of the requirements to members of an 

exchange seems to have no regulatory rationale and only 

serves as a disincentive to be an exchange member. Finally, the cost figures contained in the cost-benefit analysis in the final rule are not justified. Compliance costs are 

exponentially higher than they estimate, and in some 

cases the technology is not even available to market participants. Requests for clarification have not yet been answered, and CMC will be submitting a written request 

soon in a continued effort to clarify and hopefully narrow 

the scope of what must be retained and, therefore, reduce 

what we view as unnecessary compliance costs.—Mr. 


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Lance Kotschwar, Senior Compliance Attorney, The 

Gavilon Group, LLC, on behalf of the Commodity Markets 

Council 

Given the infrequent and low volume of futures/options 

transactions handled by ‘‘branches’’ associated with those 

FCMs, complying with the oral recording requirements (recording of all phone calls) under this regulation would not 

be economically feasible. The necessary investment to put 

in place and maintain a system to comply with the regulations would exceed not only any profits, but in many cases 

the total revenues of those FCM branches—to the point 

that those local branches could no longer provide brokerage services. The effect would be reduced risk management 

options, and their use, by farmers and ranchers.—Mr. 

Scott Cordes, President, CHS Hedging, Inc., on behalf of 

the NCFC 

Section 354—Relief for end-users who use physical contracts with 

volumetric optionality 

Forward contracts that result in the physical delivery of commodities are expressly exempted from the definition of a ‘‘swap’’ under 

the Commodity Exchange Act. Section 354 would clarify the application of this exemption in order to prevent unnecessary and costly 

regulations on companies that enter into transactions to ensure the 

efficient physical delivery of commodities necessary to conduct their 

core business operations. Without clarification, the CFTC could impose costly regulations on risk management transactions, which increases companies’ operating costs and ultimately results in increased costs to consumers across the nation. 

Risk management contracts that allow for an adjustment of the 

quantity of a commodity delivered do not pose a threat to the stability of financial markets and should not be regulated the same as 

financial derivatives. These contracts do provide companies with an 

efficient and cost effective means of acquiring the commodities they 

need to conduct their daily business, such as providing affordable 

sources of energy to millions of American households. The misguided regulation of these harmless transactions will actually have 

the effect of increasing companies’ costs of doing business, will consolidate risk in the marketplace because some businesses will be 

forced out of the market, and will ultimately raise costs for everyday American consumers. Such costly and unnecessary regulation 

defies the intent of Congress and needlessly subjects a large segment of the energy marketplace to burdensome regulation under 

the Dodd-Frank Act. 

The Dodd-Frank Act, passed to reform the U.S. financial system, 

should not result in increased utility rates for consumers of natural 

gas, electricity, and other forms of energy used to heat homes, run 

factories, and power the American economy. Without relief, many 

utilities and energy companies will not be able to effectively manage risk—which will only increase their costs and possibly lead to 

higher energy rates for millions of Americans—an unacceptable result during a period of tremendous economic uncertainty. 

As such, Section 354 would exempt forward contracts between 

end-users that allow for deferred delivery or shipment of a non-financial commodity, so long as the contract results in an actual 


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physical settlement obligation, is between commercial market participants, and the option to receive more or less of a commodity 

cannot be sold separately for financial gain. The Committee notes 

that optionality includes both allowing a counterparty to reduce the 

amount of commodity delivered and allowing a counterparty to increase the amount of commodity delivered. 

On July 24, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

End-User Perspectives,’’ the following witnesses provided testimony 

with respect to provisions included in Section 354: 

Because gas consumption to residential and commercial 

customers is largely weather driven (consumption increases as the weather gets colder) and predicting the 

weather is not an exact science, gas supply contracts with 

delivery flexibility help AGA members make sure gas supplies are, or can be made, available when the customers 

actually need the gas without having to pay excessively 

higher prices at the actual time of need and/or other fees 

associated with pipeline imbalance penalties. There remain disagreements and confusion within the natural gas 

industry as to which types of gas supply transactions, if 

any, will be subject to CFTC regulation. These transactions are normal commercial merchandising transactions 

that parties use to buy and sell natural gas for ultimate 

delivery to end-use customers. They would not normally be 

considered speculative, financial transactions as the parties contemplate physical delivery of the commodity. Nevertheless, transactions that contain some option or choice 

for one or the other counterparty, raise questions for some 

as to whether they would be considered commodity options 

regulated as swaps, meet a three part test and a sevenpart test to be excluded as options embedded in forward 

contracts, be viewed as trade options subject to a lessened 

reporting burden, or be considered facility use agreements 

that meet a three-part test and then a five-part test and 

not subject to regulation at all.—Andrew K. Soto, Senior 

Managing Counsel, Regulatory Affairs, AGA 

Recently, however, in light of the CFTC’s seven-part interpretation in the rule, some NCFC members have raised 

concerns over the appropriate treatment of forward contracts commonly used in physical supply arrangements 

that contain volumetric optionality. If the CFTC were to 

take a narrow view of the seven-part interpretation, it may 

view as options many other routine physical supply contracts in which the predominant feature is delivery. Such 

an interpretation would require those common commercial 

forward contracts to come under the regulations intended 

for swaps such as reporting and position limits. The uncertainty of the CFTC interpretation of these types of contracts, all previously covered under the forward contracting exclusion, will require NCFC members to expend 

significant labor and costs to review hundreds of sales 

transactions to determine if they continue to meet the forward contract exclusion. Again, this is an unnecessary resource and cost burden on end-users that should be avoidVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00042 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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ed. We hope CFTC will interpret this exclusion consistently with its historical understanding and prior guidance.—Mr. Scott Cordes, President, CHS Hedging, Inc., on 

behalf of the NCFC 

Section 355—Commission vote required before automatic change of 

swap Dealer de minimis level 

Section 355 would simply require the CFTC Commissioners to vote before changing the current $8 billion swap dealer de minimis 

exemption from registering as a swap dealer. Without Section 355, 

a CFTC rule will automatically set the de minimis exemption at $3 

billion, potentially requiring dozens of end-users to register with 

the Commission in the coming years as ‘‘swap dealers’’ and imposing costly new regulations on public utilities, energy companies, 

and other end-users that played no part in the financial crisis. 

As the regulations currently stand, if a company does more than $8 billion worth of swap business per year (known as the de minimis level of swap dealing), it must register with the CFTC as a 

‘‘swap dealer.’’ The CFTC’s regulations will arbitrarily lower the 

registration threshold to $3 billion starting five years from October 

of 2012 (and possibly sooner) with no Commission vote, despite 

rules requiring a Commission ‘‘study’’ to determine if the swap 

dealer registration threshold is appropriately set at $8 billion. 

An arbitrary 60% decline in the swap dealer registration thresh- old from $8 billion to $3 billion creates significant uncertainty for 

non-financial companies that engage in relatively small levels of 

swap dealing to manage business risk for themselves and their customers. Lowering the swap dealer registration threshold below its 

current level of $8 billion could drive many non-financial companies out of the business of offering their customers risk management products, which will limit risk management options for endusers, and ultimately consolidate marketplace risk in only a few 

large swap dealers. This consolidation runs counter to the goals of 

the Dodd-Frank Act to reduce systemic risk in the marketplace. 

CFTC regulations should not arbitrarily change the swap dealer 

registration de minimis level without a formal rulemaking process. 

The regulations themselves require a formal study by the Commission to determine if the current $8 billion level is appropriate. 

However, the study is completely irrelevant because the de minimis 

level is moved to $3 billion in five years regardless of the study’s 

findings. Because provisions embedded deep within CFTC regulations failed to mandate that the Commission must vote to determine what policy is best for future market conditions, our markets 

could be forced to adhere to outdated policies for years to come. 

Further, as demonstrated in the context of utility special entities, 

a de minimis exception threshold that is too low can significantly 

disrupt markets, hinder competition, and leave non-financial businesses with limited ways to manage their economic and operational 

risks. Section 355 would result in a Commission review of whether 

lowering the de minimis exception threshold would drive participants out of the swap market, limit competition and potentially 

harm end-users. In particular, pursuant to Section 355, the Committee expects that the Commission would periodically review the 

de minimis exception threshold to consider whether, in light of 

changes in prices and market structure, the de minimis exception 


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threshold should also be increased to greater than $8 billion to ensure non-financial end-users are able to obtain risk management 

solutions from a broad range of counterparties. 

On July 24, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

End-User Perspectives,’’ the following witnesses provided testimony 

with respect to the need for the provisions included in Section 355: 

Current regulations have arbitrarily established a de 

minimis level, the breach of which requires registration as 

a swap dealer, at $8 billion with a drop to $3 billion following an unpredictable CFTC decision making process. 

The only certainty in the process is that a lack of action 

will result in the de minimis level declining in 5 years. 

This $3 billion level is also arbitrary and would significantly affect the number of firms defined and regulated as 

swap dealers. Changes should not be made through such 

a long and ill-defined process, which includes several unpredictable and difficult to follow steps for market participants. We need a more predictable process.—Mr. Lance 

Kotschwar, Senior Compliance Attorney, The Gavilon 

Group, LLC, on behalf of the Commodity Markets Council 

A new category of market participants, swap dealers, 

was created by the Dodd-Frank Act. These swap dealers 

must register with the CFTC and are subject to extensive 

record-keeping, reporting, business conduct standards, 

clearing, and—in the future—regulatory capital and margin requirements. However, the Act directed the CFTC to 

exempt from designation as a swap dealer entities that engage in a de minimis quantity of swap dealing. The CFTC 

issued a proposed rule on the de minimis threshold for 

comment in early 2011. After review of hundreds of comments, a series of Congressional hearings and after dozens 

of meetings with market participants, the CFTC set this 

de minimis threshold at $8 billion. However, it will then 

be reduced automatically to $3 billion in 2018 absent 

CFTC action. We oppose such a dramatic reduction in the 

de minimis threshold without deliberate CFTC action. Inaction is always easier than action, and inaction should 

not be the default justification for such a major regulatory 

action. In addition, we believe the CFTC should not have 

the authority to change the de minimis level without a formal rulemaking process that allows stakeholders to provide input on what the appropriate threshold should be. 

Absent these procedural changes, we are concerned a deep 

reduction in the de minimis level could result in commercial end-users being misclassified as swap dealers, hindering end-users’ ability to hedge market risk while imposing unnecessary costs that eventually will be borne by consumers.—Mr. Richard F. McMahon, Jr., Vice President, 

EEI 

Section 356—Capital requirements for bon-bank swap dealers 

Under currently-proposed CFTC regulations for capital and margin, non-bank swap dealers would be forced by the CFTC to adhere 

to an inflexible capital requirement standard (based partially on 


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the capital requirements based on the soon-to-be outdated Basel II 

Accords first proposed in 2004, which have since been eclipsed by 

the Basel III Accords proposed in 2011). According to testimony received from Mr. William J. Dunaway, CFO, INTL FCSTONE, Inc., 

before the Committee on May 21, 2013, under the CFTC’s proposal, 

a firm could be assessed a capital charge beyond their net position 

in a contract, especially in relation to commodity swaps. Furthermore, the CFTC’s capital requirements stand in stark contrast to 

the SEC’s capital requirements for security-based swap dealing due 

to the SEC’s allowance for dealers to utilize pre-approved internal 

capital models. As a result, the Committee learned that, under a 

worst case scenario, ‘‘the same derivatives portfolio that would require a bank-affiliated Swap Dealer to hold $10 Million in regulatory capital using standard internal models would require us to 

set aside up to $1 Billion in capital’’. At the same hearing on May 

21, 2013, entitled ‘‘The Future of the CFTC: Market Perspectives,’’ 

Mr. Dunaway provided more insight on how to correct such a potentially harmful result for the marketplace: 

The Commodity Exchange Act requires the CFTC, the 

prudential regulators, and the SEC to establish and maintain ‘‘comparable’’ minimum capital requirements for all 

Swap Dealers. However, the proposed Capital Rules clearly are not ‘‘comparable.’’ Pursuant to its mandate under 

the CEA, we believe that the CFTC should revise its proposed capital rules to ensure that the capital and margin 

requirements applicable to non-bank Swap Dealers are 

comparable to those applicable to bank-affiliated Swap 

Dealers. This can be accomplished by altering the rules to 

permit the following: [i]nternal Models—The CFTC could 

permit all Swap Dealers, including Commodity Swap Dealers, to request approval of, and rely upon, internal models 

to measure market risk. To the extent that the CFTC currently lacks the resources to review and approve such internal models, it should permit Swap Dealers to certify to 

the CFTC or the NFA that their models produce reasonable measures of risk, subject to verification by the CFTC 

when its resources enable it to do so.—Mr. William J. 

Dunaway, CFO, INTL FCSTONE, Inc. 

Because this potential disparity in capital charges for non-bank 

versus bank affiliated swap dealers could harm more than one 

market participant, Section 356 would require that the CFTC 

amend its proposed rule so as to closely consult with the SEC and 

prudential financial regulators and to allow the use of comparable 

capital requirements that will be utilized by swap dealers regulated by the SEC and prudential regulators. 

Section 357—Harmonization with the Jumpstart Our Business 

Startups Act 

In letters to the CFTC, stakeholders representing a wide variety 

of market participants, such as SIFMA, the Managed Funds Association (MFA), and the Financial Services Roundtable requested 

that the Commission harmonize its ‘‘private offering’’ requirements 

in CFTC Rules 4.7 and 4.13(a)(3) with the broadened scope of solicitation permitted by the SEC after it proposed amendments to Rule 


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506 of Regulation D and Rule 144A under the Securities Act of 

1933. The SEC’s proposed changes to the solicitation rules for securities offerings came about after the Jumpstart Our Business 

Startups Act (JOBS Act) (P.L. 112–106) was signed into law in 

April of 2012 which allows for solicitation of accredited investors 

for private securities offerings in order to raise needed capital for 

companies to expand and create jobs. 

While the JOBS Act mandates consistent treatment of Regulation D, Rule 506 offerings across the federal securities laws, unintentionally omitted harmonizing changes to the CFTC’s regulations, which creates an inconsistency between the SEC’s rules and 

the CFTC’s rules governing solicitation. Accordingly, because the 

relief is needed quickly as to not impede use of the JOBS Act by 

the marketplace, Section 357 would directly amend CFTC regulations (which would obviate the need for a Commission rulemaking) 

to provide an exemption for any registered commodity pool operator 

to engage in the general solicitation for the sale of commodity pools 

parallel to the exemption provided for general solicitation of securities under the JOBS Act. 

Section 358—Bona fide hedge defined to protect end-user risk management 

In 2010, the Dodd-Frank Act instructed the CFTC on how to define what constitutes a bona fide hedging transaction (i.e.: nonspeculative trading) or position so those trades would not count towards any positions limits. The statutory definition states that the 

reduction of risk inherent to a commercial enterprise is a component in determining what qualifies as a bona fide hedging transaction. However, in a change from prior practice, the CFTC’s approach in both the originally proposed 2011 position limits rule 

(which was overturned by a federal district court for the District 

of Columbia in September 2012) and the position limits rule proposed in November of 2013 was to limit the availability of the bona 

fide hedge exemption to a limited set of transactions, unless the 

CFTC gave specific approval to a particular form of transaction. 

In the most-recently proposed position limits rule, instead of providing a clear bona fide exemption from position limits to allow 

end-users of physical commodities to properly hedge their commercial risk was not included, many risk-reducing practices commonly 

used in the futures markets today were excluded from the list of 

bona fide hedging transactions prescribed in CFTC Rule 

151.5(a)(2). This concern was confirmed by Mr. Jeffrey Sprecher, 

CEO of Intercontinental Exchange, Inc., in testimony before the 

Committee on May 21, 2013, when he stated that ‘‘[t]he narrow 

definition of bona fide hedge will likely hurt commercial end-users 

that these markets are intended to serve, and thus support the 

bona fide hedge exemption relied upon historically would bring 

greater certainty to end-users in executing their risk management 

operations.’’ 

The CFTC’s limitation of bona fide hedges to only a handful of 

transaction types places significant limitations on many end-users’ 

ability to hedge risk efficiently. As such, the Committee formulated 

Section 358 to provide for a workable hedge exemption process. The 

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tain relief from position limits therefore give end-users with the 

flexibility necessary to hedge their legitimate anticipated business 

risks. 

One of the main purposes of Section 358 is to make clear that 

the statutory requirements with respect to what constitutes a bona 

fide hedge transaction must be reflected in the CFTC’s further definition of that term. Specifically, changing ‘‘may’’ to ‘‘shall’’ in Section 4a(c)(1) reflects the intent of the Committee that the CFTC is 

not authorized to promulgate a further definition of ‘‘bona fide 

hedge transaction’’ that is narrower or more restrictive than what 

is described in the CEA. In addition, Section 358 intended to clarify 

that the CFTC’s further definition of ‘‘bona fide hedge transaction’’ 

must include hedges of legitimate anticipated business needs. 

Section 358 is also intended to provide more flexibility to market 

participants as hedging practices evolve. It is Congress’ intent that 

the CFTC provide bona fide hedge status to all legitimate risk 

management practices now and in the future. A narrow definition 

of what constitutes bona fide hedging that is limited to an enumerated list of transactions will place significant limitations on many 

end-users’ ability to hedge risk properly and efficiently. In further 

defining what constitutes a bona fide hedging transaction, the 

CFTC should provide flexibility such that changes and advances in 

hedging practices so they can easily be incorporated into the bona 

fide hedging regime in an efficient and timely manner, without further Commission rulemakings that would add uncertainty to the 

marketplace. 

On July 24, 2013, at a hearing entitled ‘‘The Future of the CFTC: 

End-User Perspectives,’’ the following witnesses provided testimony 

with respect to the need for provisions included in Section 358: 

Congress provided a definition of a bona fide hedge within Dodd-Frank that the CFTC has unnecessarily narrowed, 

including related to anticipatory hedging, and has created 

at least five different definitions in various rules of what 

constitutes a bona fide hedge. This is nonsensical and creates unnecessary confusion, while disrupting legitimate 

risk mitigation practices. We are committed to working 

with Congress to set clearer direction on bona fide hedges 

so that transactions that limit economic risks are viewed 

as bona fide hedges by the CFTC.—Mr. Lance Kotschwar, 

Senior Compliance Attorney, The Gavilon Group, LLC, on 

behalf of the Commodity Markets Council 

On September 28, 2012, the U.S. District Court for the 

District of Columbia vacated final CFTC rules regarding 

position limits. These vacated rules defined the term bona 

fide hedging. As written in the CFTC’s rule that was vacated, the definition was unnecessarily narrow and would 

have discouraged a significant amount of important and 

beneficial risk management activity. Specifically, the rule 

narrowed the existing definition considerably by providing 

that a transaction or position that would otherwise qualify 

as a bona fide hedge also must fall within one of eight categories of enumerated hedging transactions, a definitional 

change neither supported in nor required by the DoddFrank Act. This restrictive definition of bona fide hedging 


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transactions could disrupt the commodity markets, make 

hedging more difficult and costly, and may increase systemic risk by encouraging end-users to leave a relatively 

large portion of their portfolios un-hedged.—Mr. Richard 

F. McMahon, Jr., Vice President, EEI 

Section 359—Cross-border regulation of derivatives transactions. 

As the global financial system has evolved, U.S. institutions have 

expanded their derivatives operations overseas to provide services 

to both U.S. and non-U.S. customers. At the same time, foreign institutions have established subsidiaries and branches in the U.S. to 

offer derivatives directly to U.S. customers. The growth of this 

cross-border activity makes questions regarding the application of 

the Dodd-Frank Act to activities that occur outside the U.S. (known 

as ‘‘extraterritorial’’) complex and critical. 

Section 722(d) of Title VII sets forth that provisions of the DoddFrank Act shall not apply to activities outside the United States 

unless those activities: (1) have a direct and significant connection 

with activities in, or effect on, commerce of the United States, or 

(2) contravene such rules or regulations as the CFTC prescribes are 

necessary to prevent evasion of the Dodd-Frank Act. This is consistent with historical practice by both the CFTC and the prudential regulators in their treatment of foreign entities with operations 

in the U.S., or of U.S. entities with regard to their operations in 

foreign jurisdictions. Generally, the regulatory agencies have deferred to foreign regulatory authorities for the supervision of entities located abroad if the agencies found that those entities were 

subject to a regulatory regime comparable to that imposed by the 

U.S. 

However, in April of 2012, the prudential regulators proposed a 

rule for the application of margin requirements as required by Title 

VII for Major Swap Participants and Swap Dealers. Under the prudential regulators’ proposal, margin requirements would apply to 

all transactions of U.S. financial institutions—whether they involve 

their U.S. or non-U.S. customers. For example, a foreign subsidiary 

of a U.S. bank in Europe would be subject to the Dodd-Frank Act’s 

margin rules even when dealing with European customers. 

On June 29, 2012, the CFTC issued proposed ‘‘interpretive guidance’’ for the cross-border application of Title VII of the DoddFrank Act. The release of this guidance, approved by all five commissioners, was done so without the concurrent release of similar 

guidance from the SEC for security-based swaps and, as it was not 

in the form of a proposed rule, did not include a cost-benefit analysis. When the guidance was released, then-CFTC Commissioner 

Jill Sommers stated that ‘‘[CFTC] staff had been guided by what 

could only be called the ‘Intergalactic Commerce Clause’ of the 

United States Constitution, in that every single swap a U.S. person 

enters into, no matter what the swap or where it was transacted, 

was stated to have a direct and significant connection with activities in, or effect on, commerce of the United States. This statutory 

and constitutional analysis of the extraterritorial application of 

U.S. law was, in my view, nothing short of extra-statutory and 

extra-constitutional.’’ 

On December 13, 2012, the Committee on Agriculture Subcommittee on General Farm Commodities and Risk Management 


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held a hearing where Commissioners Sommers and Chilton testified alongside top regulators from Japan and the European Commission. Combined, the three regulatory jurisdictions testifying at 

the hearing represented an overwhelming majority of the global derivatives marketplace. Based on testimony the subcommittee received, there appeared to be a serious lack of coordination between 

both foreign and domestic regulators. 

For example, Mr. Masamichi Kono with the Financial Services 

Agency of Japan (who at the time was Chairman of IOSCO) testified during the hearing that ‘‘much needs to be done’’ by the CFTC 

and that ‘‘it is important that the details of the applicable laws and 

regulations are made clear as much as possible before their implementation in order to minimize regulatory uncertainty.’’ Further, 

with respect to minimizing risk in the marketplace—a goal central 

to the creation of the Dodd-Frank Act—Mr. Kono testified that: 

[S]uch risks need not be addressed by extraterritorial 

application of the U.S. laws and regulations; rather, the 

U.S. authorities could rely on foreign regulators upon establishing of course that the foreign regulators have the 

required authority and competence to exercise appropriate 

regulation and oversight over those entities and activities. 

This is what we consider as the most efficient and effective 

approach, in line with the principles of international comity between sovereign jurisdictions. 

At the same hearing, Mr. Patrick Pearson with the European 

Commission also testified before the Committee about regulatory 

conflicts between the United States and 27 member nations of the 

European Union. With respect to the risk posed to global markets 

if international regulators do not properly coordinate the regulation 

of the markets, he stated that: 

[T]rades will not be able to be cleared. If they can’t be 

cleared, they won’t take place. This means that firms and 

users will not hedge their risks, or firms will hedge their 

risks but they will only take place within one jurisdiction, 

which means that risk will be concentrated in one jurisdiction on the planet. That could be the United States. If your 

firms can’t hedge their risks outside of the United States, 

they’ll have to hedge them here. The consequences of that 

is obviously a fragmented market and a significant concentration of financial risk in the U.S. system, and this is 

exactly what we tried to prevent with our global regulatory 

reform. 

In the 113th Congress, on March 14, 2013, at a Committee hearing entitled ‘‘Examining Legislative Improvements to Title VII of 

the Dodd-Frank Act,’’ the Hon. Kenneth E. Bentsen, Acting President and CEO, SIFMA, provided the following testimony that informed the drafting of Section 359: 

Though Title VII was signed into law 21⁄2 years ago, we 

still do not know which swaps activities will be subject to 

U.S. regulation and which will be subject to foreign regulation. Section 722 of the Dodd-Frank Act limits the CFTC’s 

jurisdiction over swap transactions outside of the United 

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tion with activities in, or effect on, commerce of the U.S.’’ 

or are meant to evade Dodd-Frank. Section 772 limits the 

SEC’s jurisdiction over security based swap transactions 

outside of the United States to those meant to evade DoddFrank. However, the CFTC and SEC have not yet finalized 

(or, in the SEC’s case, proposed) rules clarifying their interpretation of these statutory provisions. The result has 

been significant uncertainty in the international marketplace and, due to the aggressive position being taken by 

the CFTC as described below, a reluctance of foreign market participants to trade with U.S. financial institutions 

until that uncertainty is resolved. While the CFTC has 

proposed guidance on the cross-border impact of their 

swaps rules, that guidance inappropriately recasts the restriction that Congress placed on CFTC jurisdiction over 

swap transactions outside the United States into a grant 

of authority to regulate cross-border trades. The CFTC primarily does so with a very broad definition of ‘‘U.S. Person,’’ which it applies to persons with even a minimal jurisdictional nexus to the United States. In addition, the 

CFTC has released several differing interim and proposed 

definitions of ‘‘U.S. Person’’ for varying purposes, resulting 

in a great deal of ambiguity and confusion for market participants. SIFMA supports a final definition of U.S. Person 

that focuses on real, rather than nominal, connections to 

the United States and that is simple, objective and determinable so a person can determine its status and the status of its counterparties. 

On April 18, 2013, the finance ministers of the European Commission, France, Germany, United Kingdom, Japan, Switzerland, 

Russia, South Africa and Brazil wrote to Treasury Secretary Jacob 

Lew stating that ‘‘[w]e are already starting to see evidence of fragmentation in this vitally important financial market as a result of 

lack of regulatory coordination’’ and ‘‘[w]e are concerned that, without clear direction from global policymakers and regulators, derivatives markets will recede into localised and less efficient structures, 

impairing the ability of business across the globe to manage risk.’’ 

On May 21, 2013, testifying before the Committee at a hearing 

entitled ‘‘The Future of the CFTC: Market Perspectives,’’ the following testimony was provided by witnesses with respect to provisions included in Section 359: 

If regulators fail to harmonize, the effects of uncertainty 

and the prospect for regulatory arbitrage will be damaging. Because markets are global and capital flows across 

borders, no single country or regulatory regime oversees 

the derivatives market. In order to make long-term business decisions, market participants require certainty that 

their transactions will not be judged on conflicting standards. The derivatives markets are international: the majority of companies that operate globally use derivatives to 

manage price risks, and they conduct these transactions 

with both U.S. and non-U.S. counterparties. The likely outcome will be that regulators deem other countries’ financial regulatory systems as ‘‘nonequivalent’’, which would 


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lead to those countries erecting barriers to its financial 

markets. It is crucial to understand that if countries erect 

these barriers, WE markets and market participants will 

be damaged. Currently, the U.S. derivatives markets are 

home to vital global benchmark contracts in agriculture, 

energy, financial asset classes. These have become benchmark contracts because Asian and European market participants have direct access to U.S. markets. Importantly, 

the long-standing global nature of the derivatives markets 

and the resulting international competition has lead to advances in transparency, risk management, and historically, 

regulatory cooperation. Over the past year, ICE has been 

delivering this message to domestic and international regulators, yet regulations continue to diverge, particularly in 

the U.S. and Europe. We ask the Committee, in its oversight role, to impress upon the Commodity Futures Trading Commission the importance of working with European 

and Asian counterparts to harmonize regulation and avoid 

creating unintended, unpredictable impacts on financial 

markets and their users. The time for agreement is closing.—Mr. Jeffrey C. Sprecher, Founder, Chairman, and 

CEO of IntercontinentalExchange, Inc. 

ISDA and our members believe that a globally harmonized approach to cross-border regulation is of paramount importance. What they face now is considerable uncertainty. Uncertainty is never a good thing in financial 

markets, as there are typically only two things to do in 

face of that uncertainty. One response is to pull back and 

wait until such time as greater certainty is provided. On 

a firm level, that means missed opportunity. On a market 

level, that translates to less efficient, less liquid and more 

volatile markets, material harm to financing and investing 

activities and a drag on the economy in general. To 

achieve the goal of a globally harmonized framework, the 

CFTC and SEC should work together to achieve consensus 

with global regulators. H.R. 1256 would help the U.S. regulators to provide a unified front when addressing the 

extraterritorial application of U.S. rules and when dealing 

with non-U.S. regulators. Harmonization of regulatory approaches, particularly on issues with systemic risk implications, and a concerted program of mutual recognition of 

regulatory regimes by global regulators are essential parts 

of the solution to ET.—Mr. Stephen O’Conner, Chairman, 

ISDA 

As of the writing of this Report, global regulators have yet to 

harmonize their approach to global derivatives regulation. In order 

to address the serious concerns voiced by both international and 

domestic regulators, Section 359 would require the CFTC to propose and finalize a rule, not ‘‘guidance’’ to which the APA does not 

apply, on cross-border swaps regulation. The bill would also require 

that the CFTC grant the top 9 global jurisdictions for swaps transactions by volume substituted compliance to regulate institutions 

operating within their borders unless the CFTC makes a deterVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00051 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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mination that a jurisdiction’s rules are not equivalent to the regulations of the United States. 

SECTION-BY-SECTION

Sec. 1 is the short title of the bill. 

Sec. 2 is the table of contents. 

Title I—Customer Protections 

Sec. 101 is the short title of title I. 

Sec. 102 amends section 17 of the Commodity Exchange Act 

(CEA) to require that each member of a registered futures association (NFA) maintain written policies concerning the residual interest in segregated accounts, cleared swaps collateral accounts, and 

secured amount funds in foreign futures and options customer accounts. The member must also establish rules to govern the withdrawal, transfer or disbursement by a futures commission merchant (FCM) of the same funds. 

Sec. 103 amends section 17 of the CEA to require an FCM to use 

an electronic system to report financial and operational information 

to the NFA in accordance with such terms and conditions that the 

NFA establishes. A registered FCM must require any depository institution that holds segregated accounts and the customer secured 

amount funds to report balances to the NFA. If the depository institution will not report the fund balances, the registered member 

cannot use the depository institution to hold customer segregated 

funds or secured amount funds. 

Sec. 104 amends section 17 of the CEA to require an FCM to immediately report to the CFTC and the NFA when the funds in a 

customer’s account, segregated account or secured amount account 

are less than required by regulation. It also requires the chief compliance officer of the FCM to file with the Commission a yearly assessment of the FCM’s internal compliance programs. 

Sec. 105 amends section 4d of the CEA to allow an FCM one 

business day after a trade to comply with the amounts of money, 

securities and property required to be held in a customer account 

by section 4d(a)(2) of the CEA. 

Sec. 106 amends section 20(a) of the CEA to allow the use of the 

cash, securities or other property of a bankrupt commodity broker 

to satisfy any deficient public customer account. 

Sec. 107 requires the CFTC to report to the authorizing committees on high-frequency trading on markets under its jurisdiction. 

The report shall examine the technology, personnel and other resources the Commission may require to monitor high-frequency 

trading; the role the trading plays in providing market liquidity; 

whether the technology creates discrepancies in the marketplace; 

and whether the Commission’s existing authority protects the market and fosters transparency. 

Title II 

Sec. 201 is the short title of title II. 

Sec. 202 amends section 12(d) of the CEA to reauthorize the 

CFTC through FY 2018. 

Sec. 203 amends section 15(a) of the CEA to harmonize the cost 

benefit requirements of the CFTC with those of executive order 


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13563. The section also requires that the cost benefit analysis be 

performed by the Chief Economist and published within the proposed rule along with the rule’s statutory justification. 

Sec. 204 amends section 2(a) of the CEA to require that each division of the CFTC have a Director that is hired by the Commission, and performs functions as the Commission may prescribe. 

Sec. 205 amends section 2(a) of the CEA to establish the Office 

of the Chief Economist. The structure and powers of the Office of 

the Chief Economist mirrors the structure and powers of the General Counsel. 

Sec. 206 amends section 2(a)(12) of the CEA to require 7 days notice to the Commission before any division or office of the Commission issues an interpretive rule of general applicability, a statement 

of general policy, response to a petition for guidance, or an exemptive, a no-action, or an interpretive letter. After receiving notice, 

any member of the Commission may request a meeting of the Commission to further consider the staff-proposed action, and if the 

Commission decides to hold the meeting by majority vote, the matter may not be issued until the meeting has concluded. The 7 day 

notice requirement can be waived by a majority vote of the Commission if the Commission determines that requiring such notice 

would be impracticable, unnecessary, or contrary to the public interest. 

Sec. 207 amends section 2(a) of the CEA to require the Commission to file with the authorizing committees a strategic technology 

plan every 5 years. The plan shall include a detailed technology 

strategy focused on market surveillance and risk detection, and 

must include a detailed accounting of how the funds provided for 

technology will be used. 

Sec. 208 amends section 2(a)(12) of the CEA to require the Commission staff, led by the Chief Economist, to develop internal risk 

control mechanisms to safeguard the storage and privacy of market 

data by the Commission. Special attention should be given to market data sharing agreements and academic research performed at 

the Commission using market data. The Commission shall report 

to the authorizing committees on progress made in implementing 

the internal risk controls 60 days after enactment, and again 120 

days after enactment of the Act. 

Sec. 209 amends section 6(c)(5) of the CEA to require that subpoenas issued by the Commission comply with the common law 

standards set forth by the United States Supreme Court. A subpoena authorized to be issued by the Commission shall state in 

good faith the purpose of the investigation, shall require only information reasonably relevant to the purpose of the investigation and 

shall be for a finite period. A subpoena may be renewed only by 

Commission vote. 

Sec. 210 amends section 2(a)(12) of the CEA to require that all 

proposed rules include a plan for when and for how long a comment period will be open, and when compliance with the final rule 

will be required. 

Sec. 211 amends section 2(a)(12) to apply the notice and comment provisions of the Administrative Procedure Act to guidance 

that is issued and voted on by the Commission. 

Sec. 212 amends the CEA by adding a new section (section 24) 

committing the original jurisdiction of the review of a CFTC issued 


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final rule to the United States Court of Appeals for the District of 

Columbia Circuit or the U.S. Court of Appeals for the circuit where 

the party resides. This is similar to the judicial review process for 

rules and orders of the Securities and Exchange Commission set 

forth in section 25(b) of the Securities Exchange Act of 1934. 

Sec. 213 requires the GAO to conduct a study of the Commission’s resources and assess whether the resources are sufficient to 

enable the Commission to effectively carry out its duties. The study 

shall also examine the prior expenditures of the Commission on 

hardware, software and analytical processes designed to protect 

customers in the areas of market surveillance and data collection. 

Title III 

Sec. 301 is the short title for title III. 

SUBTITLE A—END-USER EXEMPTION FROM MARGIN REQUIREMENTS

Sec. 311 amends section 4s(e) of the CEA to clarify that initial 

and variation margin requirements shall not apply to a swap in 

which one of the counterparties to the swap is not a financial entity 

and qualifies for the end-user clearing exception in Section 

2(h)(7)(A). 

Sec. 312 excludes the amendments made by this subtitle from 

the requirements of the Paperwork Reduction Act and from notice 

and comment requirements of the Administrative Procedure Act. 

SUBTITLE B—INTER-AFFILIATE SWAPS

Sec. 321(a) amends 2(h)(7)(D)(i) of the CEA to clarify that transactions between affiliates need not be cleared provided that a credit 

support measure is utilized with a swap entered into with a swap 

dealer or major swap participant. 

Subsection (b) clarifies that the credit support measure requirement contained in (a) shall only be effective in a prospective manner starting on the date of enactment of the act. 

SUBTITLE C—INDEMNIFICATION REQUIREMENTS RELATED TO SWAP

DATA REPOSITORIES

Sec. 331 amends section 5b(k)(5) of the CEA by striking the confidentiality and indemnification agreement paragraph of the derivatives clearing organization reporting requirements and inserting a new confidentiality agreement paragraph, eliminating the 

need to indemnify the Commission for any expense arising from 

litigation related to information provided under section 8. An identical amendment is made to section 21(d) of the CEA eliminating 

the indemnification requirement for swap data repositories. 

SUBTITLE D—RELIEF FOR MUNICIPAL UTILITIES

Sec. 341 amends section 1a(49) of the CEA by creating within the 

definition of swap dealer, a new category of transactions in utility 

operations-related swaps, which shall be reported according to the 

reporting requirements of uncleared swaps and exempted from inclusion in an entity’s general de minimis calculation established in 

(D). 

Sec. 342 amends section 4s(h)(2) of the CEA to add the definition 

of a ‘‘utility special entity’’: an entity established by a state, or poVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00054 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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litical subdivision thereof, which owns or operates an electric or 

natural gas facility; supplies natural gas or electric energy to another utility special entity; has public service obligation under federal, state or local law or regulation to deliver electric energy or 

natural gas service to customers; or is a Federal power marketing 

agency. 

Sec. 343 amends section 1a(47) of the CEA to add to the definition of swap a list of ‘‘commonly known’’ transactions to further describe a utility operations-related swap. It further amends section 

1a to define a ‘‘utility operations related swap’’ as a swap that is 

entered into to hedge or mitigate risk, is not based on an interest 

rate, credit, equity, or currency asset class nor a metal, agriculture 

commodity, or crude oil or gasoline commodity for any grade except 

as used as fuel for electric energy generation, and is associated 

with the generation, production or sale of natural gas or electric 

energy. 

SUBTITLE E—END-USER REGULATORY RELIEF

Sec. 351(a) amends section 2(h)(7)(C)(iii) of the CEA to exclude 

from the definition of a financial entity those entities not supervised by a prudential regulator and that are commercial market 

participants, but considered financial entities because they predominantly engage in physical delivery contracts or enter into 

swaps, futures and other derivatives on behalf of, or to hedge the 

commercial risk of, non-financial affiliates. 

Subsection (b) amends section 1a of the CEA to define a commercial market participant as a producer, processor, merchant, or commercial user of an exempt or agricultural commodity, or the products or byproducts of such commodity. 

Sec. 352 amends section 2(a)(13) of the CEA to require the Commission to promulgate a rule that would delay the public reporting 

of a non-cleared swap traded in an illiquid market and entered into 

by a non-financial entity to no sooner than 30 days after the transaction has been executed. An illiquid market is defined as 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. 

Sec. 353 amends the CEA by adding a new section, 4u, which 

clarifies the record keeping requirements of non-registered members of a designated contract market (DCM) or swap execution facility (SEF). All recordkeeping requirements, and rules promulgated pursuant to the CEA, shall be satisfied if such entities maintain written records of each transaction in a contract for future delivery, option on a future, swap, swaption, trade option, or related 

cash or forward transaction. Such records must be searchable by 

transaction and include the final agreement between the parties as 

well as the material economic terms of the transaction. 

Sec. 354 amends section 1a(47)(B)(ii) of the CEA to clarify that 

the exclusion from the definition of the term swap includes contracts that are intended to be physically settled that include any 

stand-alone or embedded option which, if exercised, results in a 

physical delivery obligation. 

Sec. 355 amends section 1a(49)(D) of the CEA to require the 

Commission to take an affirmative action by rule or regulation to 


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reduce the $8 billion de minimis exception from the swap dealer 

definition. 

Sec. 356 amends section 4s(e) of the CEA to require the Commission to permit swap dealers and major swap participants that are 

not banks to use financial models that calculate minimum capital 

requirements and minimum initial and variation margin requirements that have been approved for use by banks by prudential regulators or the SEC. 

Sec. 357 requires the CFTC to change the regulation regarding 

the advertisement of participation in commodity pools. The changes 

will allow any registered commodity pool that also qualifies for an 

exemption from the registration requirements of the Securities Act 

to be sold pursuant to the changes made to section 4 of the Securities Act under the Jumpstart our Business Startups Act (P.L. 112– 

106). 

Sec. 358 amends section 4a(c) of the CEA to require the Commission to recognize anticipatory hedging transactions as part of the 

exemption from trading limits. 

Sec. 359(a) requires the CFTC to issue rules setting forth the application of the U.S. swaps requirements relating to swaps transacted between U.S. and non-U.S. persons. The rules shall address 

the nature of connections to the U.S. which would require a nonU.S. person to register as a swap dealer or major swap participant; 

which of the U.S. swap requirements shall apply to the activities 

of non-U.S. persons, U.S. persons, and their branches, agencies, 

subsidiaries and affiliates outside the U.S.; and the circumstances 

under which a non-U.S. person shall be exempt from U.S. swap requirements. 

Subsection (b) prohibits the issuance of guidance, memorandum 

of understanding or any such other agreement in place of the Commission’s requirement to issue a rule in accordance with the APA. 

Subsection (c) requires the Commission to exempt from U.S. 

swaps requirements non-U.S. persons that are in compliance with 

the swaps regulatory requirements of a country or administrative 

region that has 1 of the world’s 9 largest swap markets by notional 

amount in the preceding calendar year, or other foreign jurisdictions as determined by the Commission, unless the Commission determines that the regulatory requirements are not broadly equivalent to the United States swap requirements. 

Exemptions for the 5 largest swap markets by notional amount 

shall go into effect on the date the final rule is issued. The remaining market exemptions will occur one year after the date the final 

rule is issued. 

Once the final rules are issued, the Commission shall assess the 

regulatory requirements of the countries or administrative regions 

described in this subsection to determine if the regulatory requirements of a foreign jurisdiction are not broadly equivalent to U.S. 

swaps requirements. 

Subsection (d) requires the Commission to report to Congress any 

determination that a foreign jurisdiction is not broadly equivalent 

to the U.S. swaps requirements within 30 days of that determination. 

Subsection (e) defines the terms ‘‘U.S. person’’ and ‘‘United 

States swaps requirements.’’ 

Subsection (f) is a conforming amendment. 


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SUBTITLE F—EFFECTIVE DATE

Sec. 371 sets the effective date for this title as July 21, 2010. 

COMMITTEE CONSIDERATION 

I. HEARINGS

The Committee on Agriculture held five hearings during the 

113th Congress in anticipation of legislation to extend and reform 

the operations of the Commodity Futures Trading Commission. 

On March 14, 2013, the Full Committee on Agriculture held a 

hearing entitled, ‘‘Examining Legislative Improvements to Title VII 

of the Dodd-Frank Act’’ where the following witnesses testified on 

several measures that where included in H.R. 4413: 

• The Honorable Gary Gensler, Chairman, U.S. Commodity Futures Trading Commission, Washington, D.C. 

• The Honorable Kenneth E. Bentsen, Jr., Acting President and 

CEO, Securities Industry and Financial Markets Association 

(SIFMA), Washington, D.C. 

• Mr. Jim Colby, Assistant Treasurer, Honeywell International 

Inc., Morristown, New Jersey; on behalf of the Coalition for Derivatives End-Users 

• Mr. Terrance Naulty, General Manager & CEO, Owensboro 

Municipal Utilities, Owensboro, Kentucky; on behalf of the American Public Power Association 

• Mr. Larry Thompson, General Counsel, Depository Trust and 

Clearing Corporation (DTCC), New York, New York 

• Ms. Marie Hollein, President and CEO, Financial Executives 

International (FEI) and Financial Executives Research Foundation, 

Washington, D.C.; on behalf of the Coalition for Derivatives EndUsers 

• Mr. Wallace C. Turbeville, Senior Fellow, Demos, New York, 

New York; on behalf of Americans for Financial Reform 

On May 21, 2013, the Full Committee on Agriculture held a 

hearing entitled, ‘‘The Future of the CFTC: Market Perspectives’’ 

where the following witnesses testified on matters included in H.R. 

4413: 

• Mr. Terrence A. Duffy, Executive Chairman and President, 

CME Group, Inc., Chicago, Illinois 

• Mr. Jeffrey C. Sprecher, Chairman and CEO, 

IntercontinentalExchange, Inc., Atlanta, Georgia 

• Mr. Daniel J. Roth, President and CEO, National Futures Association, Chicago, Illinois 

• The Honorable Walter L. Lukken, President and CEO, Futures 

Industry Association, Washington, D.C. • Mr. Stephen O’Connor, Chairman, International Swaps and 

Derivatives Association, Inc., New York, New York • Mr. William Dunaway, Chief Financial Officer, INTL FCStone, 

Inc., Kansas City, Missouri 

On July 23, 2013, the Full Committee on Agriculture held a 

hearing entitled, ‘‘The Future of the CFTC: Commission Perspectives’’ where the following witnesses testified on matters included 

in H.R. 4413: • The Honorable Scott D. O’Malia, Commissioner, U.S. Commodity Futures Trading Commission, Washington, D.C. 


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• The Honorable Mark P. Wetjen, Commissioner, U.S. Commodity Futures Trading Commission, Washington, D.C. 

On July 24, 2013, the Full Committee on Agriculture held a 

hearing entitled, ‘‘The Future of the CFTC: End-User Perspectives’’ 

where the following witnesses testified on matters included in H.R. 

4413: 

• Mr. Scott Cordes, President, CHS Hedging, Inc., St. Paul, Minnesota, on behalf of the National Council of Farmer Cooperatives 

• Mr. Lance Kotschwar, Senior Compliance Attorney, The 

Gavilon Group, LLC, Omaha, Nebraska, on behalf of the Commodity Markets Council 

• Mr. Richard F. McMahon, Jr., Vice President, Edison Electric 

Institute, Washington, D.C. 

• Mr. Chris Monroe, Treasurer, Southwest Airlines, Dallas, 

Texas 

• Mr. Andrew K. Soto, Senior Managing Counsel, Regulatory Affairs, American Gas Association, Washington, DC 

• Mr. Gene A. Guilford, National & Regional Policy Counsel, 

Connecticut Energy Marketers Association, Cromwell, Connecticut, 

on behalf of the Commodity Markets Oversight Coalition 

On October 2, 2013, the Full Committee on Agriculture held a 

hearing entitled, ‘‘The Future of the CFTC: Perspectives on Customer Protections’’ where the following witnesses testified on matters included in H.R. 4413: 

• Mr. Terrence A. Duffy, Executive Chairman and President, 

CME Group, Inc., Chicago, Illinois 

• Mr. Daniel J. Roth, President and CEO, National Futures Association, Chicago, Illinois 

• Dr. Christopher L. Culp, Senior Advisor, Compass Lexecon, 

Chicago, Illinois 

• Mr. Michael J. Anderson, Regional Sales Manager, The Andersons Inc., Union City, Tennessee, on behalf of the National Grain 

and Feed Association 

• Mr. James L. Koutoulas, Esq., President and Co-Founder, 

Commodity Customer Coalition, Inc., Chicago, Illinois 

• Mr. Theodore L. Johnson, President, Frontier Futures, Inc., 

Cedar Rapids, Iowa 

II. FULL COMMITTEE

The Committee on Agriculture met, pursuant to notice, with a 

quorum present, on April 9, 2014, to consider H.R. 4413. Chairman 

Lucas called the meeting to order to consider the Customer Protection and End User Relief Act. Chairman Lucas gave a statement 

as did Mr. Peterson, Mr. Conaway, and Mr. David Scott. 

Without objection the Customer Protection and End User Relief 

Act was brought before the Committee, the first reading of the text 

was waived, and it was open for amendment at any point. 

Mr. Conaway offered an amendment to sunset all new CFTC 

rules or regulations promulgated after the enactment of this act, 

unless the CFTC reissues the rule or regulation, in a manner consistent with the Administrative Procedure Act and by a majority 

vote of the Commission, and determines it to have force or effect. 

Mr. Conaway then withdrew his amendment. 


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Mr. Goodlatte offered an amendment to require the CFTC to report on actions taken to ensure a stable aluminum market. Mr. 

Goodlatte then withdrew his amendment. 

Mr. Peterson offered a motion that the Committee favorably report the Customer Protection and End User Relief Act to the House 

with the recommendation that it do pass. By voice vote, the motion 

was adopted. 

At the conclusion of the meeting, Chairman Lucas advised Members that pursuant to the rules of the House of Representatives 

Members had 2 calendar days to file any supplemental or minority 

views with the Committee. 

Without objection, staff was given permission to make any necessary clerical, technical or conforming changes to reflect the intent 

of the Committee. Chairman Lucas thanked all the Members and 

adjourned the meeting. 

COMMITTEE VOTES

In compliance with clause 3(b) of rule XIII of the House of Representatives, H.R. 4413 was reported by voice vote with a majority 

quorum present. There was no request for a recorded vote. 

COMMITTEE OVERSIGHT FINDINGS

Pursuant to clause 3(c)(1) of rule XIII of the Rules of the House 

of Representatives, the Committee on Agriculture’s oversight findings and recommendations are reflected in the body of this report. 

BUDGET ACT COMPLIANCE (SECTIONS 308, 402, AND 423) 

The provisions of clause 3(c)(2) of rule XIII of the Rules of the 

House of Representatives and section 308(a)(1) of the Congressional 

Budget Act of 1974 (relating to estimates of new budget authority, 

new spending authority, new credit authority, or increased or decreased revenues or tax expenditures) are not considered applicable. The estimate and comparison required to be prepared by the 

Director of the Congressional Budget Office under clause 3(c)(3) of 

rule XIII of the Rules of the House of Representatives and sections 

402 and 423 of the Congressional Budget Act of 1974 submitted to 

the Committee prior to the filing of this report are as follows: 

U.S. CONGRESS, CONGRESSIONAL BUDGET OFFICE, Washington, DC, May 19, 2014. 

Hon. FRANK D. LUCAS, 

Chairman, Committee on Agriculture, 

House of Representatives, Washington, DC. 

DEAR MR. CHAIRMAN: The Congressional Budget Office has prepared the enclosed cost estimate for H.R. 4413, the Customer Protection and End User Relief Act. 

If you wish further details on this estimate, we will be pleased 

to provide them. The CBO staff contact is Susan Willie. 

Sincerely, 

DOUGLAS W. ELMENDORF. 

Enclosure. 


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H.R. 4413—Customer Protection and End User Relief Act 

Summary: H.R. 4413 would authorize appropriations for the 

Commodity Futures Trading Commission (CFTC) through 2018 and 

make changes in some of the agency’s operating procedures. The 

bill also would amend the Commodity Exchange Act to provide 

greater protections for customer funds held by entities that broker 

transactions in commodity futures and to relax requirements on 

certain participants in swap transactions in a number of different 

circumstances. (A swap is a contract that calls for an exchange of 

cash between two participants, based on an underlying rate or 

index or on the performance of an asset.) CBO estimates that implementing H.R. 4413 would cost $207 million in 2015 and $948 million over the 2015–2019 period, assuming appropriation of the necessary amounts. CBO expects that 

enacting H.R. 4413 would affect direct spending and revenues; 

therefore, pay-as-you-go procedures apply. However, CBO estimates 

that those effects would not be significant. 

H.R. 4413 contains no intergovernmental or private-sector mandates as defined in the Unfunded Mandates Reform Act (UMRA). 

Estimated cost to the Federal Government: The estimated budgetary effect of H.R. 4413 is shown in the following table. The costs 

of this legislation fall within budget function 370 (commerce and 

housing credit). 

By fiscal year, in millions of dollars— 

2015 2016 2017 2018 2019 2015– 

2019 

CHANGES IN SPENDING SUBJECT TO APPROPRIATION 

CFTC Reauthorization: 

Estimated Authorization Level ............................................. 221 228 236 245 0 930 

Estimated Outlays ............................................................... 197 223 231 239 22 912 

Other Provisions: 

Estimated Authorization Level ............................................. 12 6 6 6 7 37 

Estimated Outlays 10 7 6 6 7 36 

Total Changes: 

Estimated Authorization Level .................................... 233 234 242 251 7 967 

Estimated Outlays ...................................................... 207 230 237 245 29 948 

Notes: CBO estimates that enacting H.R. 4413 would not have a significant effect on revenues or direct spending over the 2014–2024 period. CFTC = Commodity Futures Trading Commission. 

Basis of Estimate: For this estimate, CBO assumes that the bill 

will be enacted near the end of fiscal year 2014, the necessary 

amounts will be appropriated near the beginning of each fiscal 

year, and outlays will follow spending patterns for similar activities 

at the CFTC. 

Spending subject to appropriation 

CFTC Reauthorization. H.R. 4413 would authorize appropriations for CFTC operations through 2018; for 2014, the CFTC received an appropriation of $215 million. Based on the agency’s current budget and adjusting for anticipated inflation, CBO estimates 

that extending the authorization of appropriations for the current 

functions of the CFTC through 2018 would cost $912 million over 

the 2015–2019 period, assuming those inflation-adjusted amounts 

are appropriated each year. 

Other Provisions. H.R. 4413 would require the agency to change 

certain procedures in its rulemaking process and to improve safeVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00060 Fmt 6659 Sfmt 6602 E:\HR\OC\HR469.XXX HR469

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guards of market data in the agency’s control. The bill also would 

direct the CFTC to prepare a report for the Congress examining 

the effect of high-frequency trading (the use of technology and computer algorithms to rapidly trade contracts) on the markets it oversees. 

In addition, the bill would require entities that broker transactions in commodity futures, known as futures commission merchants, and the national association that regulates them to implement practices that provide additional protections for funds held 

for their clients. Finally, under the bill, certain swap transactions 

or participants in those transactions would be exempt from new 

regulations developed to meet the requirements of the Dodd-Frank 

Wall Street Reform and Consumer Protection Act. For example, the 

bill would, under certain circumstances, exempt nonfinancial entities that enter into a swap transaction from meeting certain margin requirements. 

Based on information from the CFTC, CBO estimates that the 

agency would require 25 additional personnel annually to handle 

the increased workload under these provisions, an increase of about 

4 percent over the agency’s 2013 staffing level. We estimate that 

salaries, benefits, and overhead for those additional staff, as well 

as new administrative expenses, would cost $36 million over the 

2015–2019 period, assuming appropriation of the necessary 

amounts. 

Direct spending and revenues 

H.R. 4413 would increase costs for the financial regulators (the 

Federal Reserve System, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency) to amend 

certain regulations, which would affect direct spending and revenues. The bill also would affect federally owned utilities by changing the way CFTC regulates certain electric and natural gas utility 

contracts. Taken together, CBO estimates that these costs would 

not be significant over the 2014–2024 period. 

Pay-As-You-Go considerations: CBO expects that enacting H.R. 

4413 would affect direct spending and revenues; therefore, pay-asyou-go procedures apply. However, CBO estimates that those effects would not be significant. 

Intergovernmental and Private-sector impact: H.R. 4413 contains 

no intergovernmental or private-sector mandates as defined in 

UMRA and would impose no costs on state, local, or tribal governments. 

Previous CBO estimates: On April 1, 2013, CBO transmitted a 

cost estimate for H.R. 1003, a bill to improve consideration by the 

Commodity Futures Trading Commission of the costs and benefits 

of its regulations and orders, as ordered reported by the House 

Committee on Agriculture on March 20, 2013. Provisions in title II 

of H.R. 4413 are similar to H.R. 1003, and the CBO cost estimates 

are the same. 

CBO prepared two cost estimates for H.R. 634, the Business Risk 

Mitigation and Price Stabilization Act of 2013. On April 11, 2013, 

we transmitted a cost estimate for a version of the bill ordered reported by the House Committee on Agriculture on March 20, 2013. 

On May 29, 2013, we transmitted a cost estimate for a version of 

the bill ordered reported by the House Committee on Financial 


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Services on May 7, 2013. Both versions of the bill are similar to 

provisions in title III of H.R. 4413, and the CBO cost estimates for 

those similar provisions are the same. 

CBO prepared two cost estimates for H.R. 677, the Inter-Affiliate 

Swap Clarification Act. On April 11, 2013, we transmitted an estimate for a version of the bill ordered reported by the House Committee on Agriculture on March 20, 2013. On May 30, 2013, we 

transmitted a cost estimate for a version of the bill ordered reported by the House Committee on Financial Services on May 7, 

2013. Both versions of H.R. 677 would place new requirements on 

the CFTC and the Securities and Exchange Commission. Provisions 

in title III of H.R. 4413 are similar to the provisions of H.R. 677 

that applied to the CFTC; the CBO cost estimates for the similar 

provisions are the same. 

CBO prepared two cost estimates for H.R. 742, the Swap Data 

Repository and Clearinghouse Indemnification Correction Act of 

2013. On April 11, 2013, we transmitted a cost estimate for a 

version of the bill ordered reported by the House Committee on Agriculture on March 20, 2013. On May 17, 2013, we transmitted a 

cost estimate for a version of the bill ordered reported by the House 

Committee on Financial Services on May 7, 2013. Both versions of 

the bill are similar to provisions in title III of H.R. 4413, and the 

CBO cost estimates for the similar provisions are the same. 

CBO prepared two cost estimates for H.R. 1256, the Swap Jurisdiction Certainty Act. On May 3, 2013, we transmitted a cost estimate for a version of the bill ordered reported by the House Committee on Agriculture on March 20, 2013. On May 30, 2013, we 

transmitted a cost estimate for a version of the bill ordered reported by the House Committee on Financial Services on May 7, 

2013. Both versions of the bill are similar to provisions in title III 

of H.R. 4413, and the CBO cost estimates for the similar provisions 

are the same. 

On April 1, 2012, CBO transmitted a cost estimate for H.R. 1038, 

the Public Power Risk Management Act of 2013, as ordered reported by the House Committee on Agriculture on March 20, 2013. 

Provisions in title III of H.R. 4413 are similar to H.R. 1038, and 

the CBO cost estimates are the same. 

Estimate prepared by: Federal Costs: Susan Willie; Impact on 

State, Local, and Tribal Governments: J’nell L. Blanco; Impact on 

the Private Sector: Paige Piper/Bach. 

Estimate approved by: Theresa Gullo, Deputy Assistant Director 

for Budget Analysis. 

PERFORMANCE GOALS AND OBJECTIVES

With respect to the requirement of clause 3(c)(4) of rule XIII of 

the Rules of the House of Representatives, the performance goals 

and objections of this legislation are to reauthorize the Commodity 

Futures Trading Commission, to better protect futures customers, 

to provide end users with market certainty, to make basic reforms 

to ensure transparency and accountability at the Commission, to 

help farmers, ranchers, and end users manage risks to help keep 

consumer costs low, and for other purposes. 


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COMMITTEE COST ESTIMATE

Pursuant to clause 3(d)(2) of rule XIII of the Rules of the House 

of Representatives, the Committee report incorporates the cost estimate prepared by the Director of the Congressional Budget Office 

pursuant to sections 402 and 423 of the Congressional Budget Act 

of 1974. 

ADVISORY COMMITTEE STATEMENT

No advisory committee within the meaning of section 5(b) of the 

Federal Advisory Committee Act was created by this legislation. 

APPLICABILITY TO THE LEGISLATIVE BRANCH

The Committee finds that the legislation does not relate to the 

terms and conditions of employment or access to public services or 

accommodations within the meaning of section 102(b)(3) of the Congressional Accountability Act (Public Law 104–1). 

FEDERAL MANDATES STATEMENT

The Committee adopted as its own the estimate of Federal mandates prepared by the Director of the Congressional Budget Office 

pursuant to section 423 of the Unfunded Mandates Reform Act 

(Public Law 104–4). 

EARMARK STATEMENT REQUIRED BY CLAUSE 9 OF RULE XXI OF THE

RULES OF HOUSE OF REPRESENTATIVES

H.R. 4413 does not contain any congressional earmarks, limited 

tax benefits, or limited tariff benefits as defined in clause 9(e), 9(f), 

or 9(g) of rule XXI of the Rules of the House of Representatives. 

DUPLICATION OF FEDERAL PROGRAMS

This bill does not establish or reauthorize a program of the Federal Government known to be duplicative of another Federal program, a program that was included in any report from the Government Accountability Office to Congress pursuant to section 21 of 

Public Law 111–139, or a program related to a program identified 

in the most recent Catalog of Federal Domestic Assistance. 

DISCLOSURE OF DIRECTED RULE MAKINGS

The Committee estimates that H.R. 4413 specifically directs 

CFTC to conduct one rule making proceedings within the meaning 

of 5 U.S.C. 551. 

CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

In compliance with clause 3(e) of rule XIII of the Rules of the 

House of Representatives, changes in existing law made by the bill, 

as reported, are shown as follows (existing law proposed to be omitted is enclosed in black brackets, new matter is printed in italic, 

existing law in which no change is proposed is shown in roman): 

COMMODITY EXCHANGE ACT 

* * * * * * * 


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SEC. 1a. DEFINITIONS. 

As used in this Act: 

(1) * * * 

* * * * * * * 

(7) 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 byproducts of such a commodity. 

ø(8)¿ (9) COMMISSION.—The term ‘‘Commission’’ means the 

Commodity Futures Trading Commission established under 

section 2(a)(2). 

ø(9)¿ (10) COMMODITY.—The term ‘‘commodity’’ means 

wheat, cotton, rice, corn, oats, barley, rye, flaxseed, grain sorghums, mill feeds, butter, eggs, Solanum tuberosum (Irish potatoes), wool, wool tops, fats and oils (including lard, tallow, 

cottonseed oil, peanut oil, soybean oil, and all other fats and 

oils), cottonseed meal, cottonseed, peanuts, soybeans, soybean 

meal, livestock, livestock products, and frozen concentrated orange juice, and all other goods and articles, except onions (as 

provided by the first section of Public Law 85–839 (7 U.S.C. 

13–1)) and motion picture box office receipts (or any index, 

measure, value, or data related to such receipts), and all services, rights, and interests (except motion picture box office receipts, or any index, measure, value or data related to such receipts) in which contracts for future delivery are presently or 

in the future dealt in. 

ø(10)¿ (11) COMMODITY POOL.— 

(A) * * * 

* * * * * * * 

ø(11)¿ (12) COMMODITY POOL OPERATOR.— 

(A) * * * 

* * * * * * * 

ø(12)¿ (13) COMMODITY TRADING ADVISOR.— 

(A) * * * 

* * * * * * * 

ø(13)¿ (14) CONTRACT OF SALE.—The term ‘‘contract of sale’’ 

includes sales, agreements of sale, and agreements to sell. 

ø(14)¿ (15) COOPERATIVE ASSOCIATION OF PRODUCERS.—The 

term ‘‘cooperative association of producers’’ means any cooperative association, corporate, or otherwise, not less than 75 percent in good faith owned or controlled, directly or indirectly, by 

producers of agricultural products and otherwise complying 

with the Act of February 18, 1922 (42 Stat. 388, chapter 57; 

7 U.S.C. 291 and 292), including any organization acting for a 

group of such associations and owned or controlled by such associations, except that business done for or with the United 

States, or any agency thereof, shall not be considered either 

member or nonmember business in determining the compliance 

of any such association with this Act. 

ø(15)¿ (16) DERIVATIVES CLEARING ORGANIZATION.— 

(A) * * * 

* * * * * * * 


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ø(16)¿ (17) ELECTRONIC TRADING FACILITY.—The term ‘‘electronic trading facility’’ means a trading facility that— 

(A) * * * 

* * * * * * * 

ø(17)¿ (18) ELIGIBLE COMMERCIAL ENTITY.—The term ‘‘eligible commercial entity’’ means, with respect to an agreement, 

contract or transaction in a commodity— 

(A) an eligible contract participant described in clause 

(i), (ii), (v), (vii), (viii), or (ix) of paragraph ø(18)(A)¿ (19)(A) 

that, in connection with its business— 

(i) * * * 

* * * * * * * 

ø(18)¿ (19) ELIGIBLE CONTRACT PARTICIPANT.—The term ‘‘eligible contract participant’’ means— 

(A) * * * 

(i) * * * 

* * * * * * * 

(vii)(I) a governmental entity (including the United 

States, a State, or a foreign government) or political 

subdivision of a governmental entity; 

(II) a multinational or supranational government entity; or 

(III) an instrumentality, agency, or department of 

an entity described in subclause (I) or (II); 

except that such term does not include an entity, 

instrumentality, agency, or department referred to 

in subclause (I) or (III) of this clause unless (aa) 

the entity, instrumentality, agency, or department 

is a person described in clause (i), (ii), or (iii) of 

paragraph ø(17)(A)¿ (18)(A); (bb) the entity, instrumentality, agency, or department owns and 

invests on a discretionary basis $50,000,000 or 

more in investments; or (cc) the agreement, contract, or transaction is offered by, and entered into 

with, an entity that is listed in any of subclauses 

(I) through (VI) of section 2(c)(2)(B)(ii); 

* * * * * * * 

ø(19)¿ (20) EXCLUDED COMMODITY.—The term ‘‘excluded commodity’’ means— 

(i) * * * 

* * * * * * * 

ø(20)¿ (21) EXEMPT COMMODITY.—The term ‘‘exempt commodity’’ means a commodity that is not an excluded commodity 

or an agricultural commodity. 

ø(21)¿ (22) FINANCIAL INSTITUTION.—The term ‘‘financial institution’’ means— 

(A) * * * 

* * * * * * * 

ø(22)¿ (23) FLOOR BROKER.— 

(A) * * * 

* * * * * * * 


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ø(23)¿ (24) FLOOR TRADER.— (A) * * * 

* * * * * * * 

ø(24)¿ (25) FOREIGN EXCHANGE FORWARD.—The term ‘‘foreign 

exchange forward’’ means a transaction that solely involves the 

exchange of 2 different currencies on a specific future date at 

a fixed rate agreed upon on the inception of the contract covering the exchange. 

ø(25)¿ (26) FOREIGN EXCHANGE SWAP.—The term ‘‘foreign exchange swap’’ means a transaction that solely involves— 

(A) * * * 

* * * * * * * 

ø(26)¿ (27) FOREIGN FUTURES AUTHORITY.—The term ‘‘foreign 

futures authority’’ means any foreign government, or any department, agency, governmental body, or regulatory organization empowered by a foreign government to administer or enforce a law, rule, or regulation as it relates to a futures or options matter, or any department or agency of a political subdivision of a foreign government empowered to administer or 

enforce a law, rule, or regulation as it relates to a futures or 

options matter. 

ø(27)¿ (28) FUTURE DELIVERY.—The term ‘‘future delivery’’ 

does not include any sale of any cash commodity for deferred 

shipment or delivery. 

ø(28)¿ (29) FUTURES COMMISSION MERCHANT.— (A) * * * 

* * * * * * * 

ø(29)¿ (30) HYBRID INSTRUMENT.—The term ‘‘hybrid instrument’’ means a security having one or more payments indexed 

to the value, level, or rate of, or providing for the delivery of, 

one or more commodities. 

ø(30)¿ (31) INTERSTATE COMMERCE.—The term ‘‘interstate 

commerce’’ means commerce— 

(A) * * * 

* * * * * * * 

ø(31)¿ (32) INTRODUCING BROKER.— 

(A) * * * 

* * * * * * * 

ø(32)¿ (33) MAJOR SECURITY-BASED SWAP PARTICIPANT.—The 

term ‘‘major security-based swap participant’’ has the meaning 

given the term in section 3(a) of the Securities Exchange Act 

of 1934 (15 U.S.C. 78c(a)). 

ø(33)¿ (34) MAJOR SWAP PARTICIPANT.— 

(A) * * * 

* * * * * * * 

ø(34)¿ (35) MEMBER OF A REGISTERED ENTITY; MEMBER OF A

DERIVATIVES TRANSACTION EXECUTION FACILITY.—The term 

‘‘member’’ means, with respect to a registered entity or derivatives transaction execution facility, an individual, association, 

partnership, corporation, or trust— 


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(A) * * * 

* * * * * * * 

A participant in an alternative trading system that is designated as a contract market pursuant to section 5f is deemed 

a member of the contract market for purposes of transactions 

in security futures products through the contract market. 

ø(35)¿ (36) NARROW-BASED SECURITY INDEX.— 

(A) * * * 

* * * * * * * 

ø(36)¿ (37) OPTION.—The term ‘‘option’’ means an agreement, 

contract, or transaction that is of the character of, or is commonly known to the trade as, an ‘‘option’’, ‘‘privilege’’, ‘‘indemnity’’, ‘‘bid’’, ‘‘offer’’, ‘‘put’’, ‘‘call’’, ‘‘advance guaranty’’, or ‘‘decline guaranty’’. 

ø(37)¿ (38) ORGANIZED EXCHANGE.—The term ‘‘organized exchange’’ means a trading facility that— 

(A) * * * 

* * * * * * * 

ø(38)¿ (39) PERSON.—The term ‘‘person’’ imports the plural 

or singular, and includes individuals, associations, partnerships, corporations, and trusts. 

ø(39)¿ (40) PRUDENTIAL REGULATOR.—The term ‘‘prudential 

regulator’’ means— 

(A) * * * 

* * * * * * * 

ø(40)¿ (41) REGISTERED ENTITY.—The term ‘‘registered entity’’ means— 

(A) * * * 

* * * * * * * 

ø(41)¿ (42) SECURITY.—The term ‘‘security’’ means a security 

as defined in section 2(a)(1) of the Securities Act of 1933 (15 

U.S.C. 77b(a)(1)) or section 3(a)(10) of the Securities Exchange 

Act of 1934 (15 U.S.C. 78c(a)(10)). 

ø(42)¿ (43) SECURITY-BASED SWAP.—The term ‘‘security-based 

swap’’ has the meaning given the term in section 3(a) of the 

Securities Exchange Act of 1934 (15 U.S.C. 78c(a)). 

ø(43)¿ (44) SECURITY-BASED SWAP DEALER.—The term ‘‘security-based swap dealer’’ has the meaning given the term in section 3(a) of the Securities Exchange Act of 1934 (15 U.S.C. 

78c(a)). 

ø(44)¿ (45) SECURITY FUTURE.—The term ‘‘security future’’ 

means a contract of sale for future delivery of a single security 

or of a narrow-based security index, including any interest 

therein or based on the value thereof, except an exempted security under section 3(a)(12) of the Securities Exchange Act of 

1934 as in effect on the date of the enactment of the Futures 

Trading Act of 1982 (other than any municipal security as defined in section 3(a)(29) of the Securities Exchange Act of 1934 

as in effect on the date of the enactment of the Futures Trading Act of 1982). The term ‘‘security future’’ does not include 

any agreement, contract, or transaction excluded from this Act 

under section 2(c), 2(d), 2(f), or 2(g) of this Act (as in effect on 


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the date of the enactment of the Commodity Futures Modernization Act of 2000) or title IV of the Commodity Futures 

Modernization Act of 2000. 

ø(45)¿ (46) SECURITY FUTURES PRODUCT.—The term ‘‘security 

futures product’’ means a security future or any put, call, 

straddle, option, or privilege on any security future. 

ø(46)¿ (47) SIGNIFICANT PRICE DISCOVERY CONTRACT.—The 

term ‘‘significant price discovery contract’’ means an agreement, contract, or transaction subject to section 2(h)(5). 

ø(47)¿ (48) SWAP.— 

(A) IN GENERAL.—Except as provided in subparagraph 

(B), the term ‘‘swap’’ means any agreement, contract, or 

transaction— 

(i) * * * 

* * * * * * * 

(iii) that provides on an executory basis for the exchange, on a fixed or contingent basis, of 1 or more 

payments based on the value or level of 1 or more interest or other rates, currencies, commodities, securities, instruments of indebtedness, indices, quantitative 

measures, or other financial or economic interests or 

property of any kind, or any interest therein or based 

on the value thereof, and that transfers, as between 

the parties to the transaction, in whole or in part, the 

financial risk associated with a future change in any 

such value or level without also conveying a current or 

future direct or indirect ownership interest in an asset 

(including any enterprise or investment pool) or liability that incorporates the financial risk so transferred, 

including any agreement, contract, or transaction commonly known as— 

(I) * * * 

* * * * * * * 

(XXI) an emissions swap; øand¿ 

(XXII) a commodity swap; and 

(XXIII) a utility operations-related swap; 

* * * * * * * 

(B) EXCLUSIONS.—The term ‘‘swap’’ does not include— 

(i) * * * 

ø(ii) any sale of a nonfinancial commodity or security for deferred shipment or delivery, so long as the 

transaction is intended to be physically settled;¿ 

(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— 

(I) exercise results in a physical delivery obligation; 

(II) cannot be severed or marketed separately 

from the overall transaction for the purpose of financial settlement; and 


emcdonald on DSK4SPTVN1PROD with HEARING
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(III) both parties are commercial market participants. 

* * * * * * * 

ø(48)¿ (49) SWAP DATA REPOSITORY.—The term ‘‘swap data 

repository’’ means any person that collects and maintains information or records with respect to transactions or positions 

in, or the terms and conditions of, swaps entered into by third 

parties for the purpose of providing a centralized recordkeeping 

facility for swaps. 

ø(49)¿ (50) SWAP DEALER.— (A) * * * 

* * * * * * * 

ø(D) DE MINIMIS EXCEPTION.—The Commission ¿ 

(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 in connection 

with transactions with or on behalf of its customers. 

The Commission shall promulgate regulations to establish factors with respect to the making of this determination to exempt. 

(ii) The de minimis quantity of swap dealing as described in clause (i) that is currently set at a quantity 

of $8,000,000,000 shall only be amended or reduced 

through a new affirmative action of the Commission 

undertaken by rule or regulation. 

(E) CERTAIN TRANSACTIONS WITH A UTILITY SPECIAL ENTI- TY.— (i) Transactions in utility operations-related swaps 

shall be reported pursuant to section 4r. 

(ii) In making a determination to exempt pursuant to 

subparagraph (D), the Commission shall treat a utility 

operations-related swap entered into with a utility special entity, as defined in section 4s(h)(2)(D), as if it 

were entered into with an entity that is not a special 

entity, as defined in section 4s(h)(2)(C). 

ø(50)¿ (51) SWAP EXECUTION FACILITY.—The term ‘‘swap execution facility’’ means a trading system or platform in which 

multiple participants have the ability to execute or trade 

swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate 

commerce, including any trading facility, that— 

(A) * * * 

* * * * * * * 

ø(51)¿ (52) TRADING FACILITY.— 

(A) * * * 

* * * * * * * 

(52) UTILITY OPERATIONS-RELATED SWAP.—The term ‘‘utility 

operations-related swap’’ means a swap that— 

(A) is entered into to hedge or mitigate a commercial risk; 

(B) is not a contract, agreement, or transaction based on, 

derived on, or referencing— 


emcdonald on DSK4SPTVN1PROD with HEARING
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(i) an interest rate, credit, equity, or currency asset 

class; or 

(ii) a metal, agricultural commodity, or crude oil or 

gasoline commodity of any grade, except as used as fuel 

for electric energy generation; and 

(C) is associated with— 

(i) the generation, production, purchase, or sale of 

natural gas or electric energy, the supply of natural gas 

or electric energy to a utility, or the delivery of natural 

gas or electric energy service to utility customers; 

(ii) all fuel supply for the facilities or operations of 

a utility; 

(iii) compliance with an electric system reliability obligation; 

(iv) compliance with an energy, energy efficiency, 

conservation, or renewable energy or environmental 

statute, regulation, or government order applicable to a 

utility; or 

(v) any other electric energy or natural gas swap to 

which a utility is a party. 

* * * * * * * 

SEC. 2. JURISDICTION OF COMMISSION; LIABILITY OF PRINCIPAL FOR 

ACT OF AGENT; COMMODITY FUTURES TRADING COMMISSION; TRANSACTION IN INTERSTATE COMMERCE. 

(a) JURISDICTION OF COMMISSION; COMMODITY FUTURES TRADING

COMMISSION.— 

(1) * * * 

* * * * * * * 

(6)(A) Except as otherwise provided in this paragraph and in 

paragraphs ø(4) and (5)¿ (4), (5), and (17) of this subsection, 

the executive and administrative functions of the Commission, 

including functions of the Commission with respect to the appointment and supervision of personnel employed under the 

Commission, the distribution of business among such personnel 

and among administrative units of the Commission, and the 

use and expenditure of funds, according to budget categories, 

plans, programs, and priorities established and approved by 

the Commission, shall be exercised solely by the Chairman. 

* * * * * * * 

(C) The appointment by the Chairman of the heads of major 

administrative units under the Commission shall be subject to 

the approval of the Commission, and the heads of the units 

shall serve at the pleasure of the Commission, report directly to 

the Commission, and perform such functions and duties as the 

Commission may prescribe. 

* * * * * * * 

ø(12) The¿ 

(12) RULES AND REGULATIONS.— 

(A) IN GENERAL.—Subject to the other provisions of this paragraph, the Commission is authorized to promulgate such rules 

and regulations as it deems necessary to govern the operating 

procedures and conduct of the business of the Commission. 

(B) NOTICE TO COMMISSION.— 


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(i) GENERAL RULE.—A division or office of the Commission may not issue an interpretive rule of general applicability, a statement of general policy, a response to a formal, 

written request or petition from any member of the public 

for guidance, or an exemptive, a no-action, or an interpretive letter, unless, at least 7 calendar days before the 

issuance, the division or office has provided the Commission with a copy of the matter to be issued. 

(ii) OPPORTUNITY FOR MEETING REQUIRED.—After receiving a copy of the matter provided in accordance with clause 

(i), any member of the Commission may request that the 

Commission hold a meeting to review the matter, and the 

Chairman shall immediately put any such request for a 

meeting before the Commission, and if the Commission decides to hold the meeting by a majority vote, the matter 

may not be issued until the Commission has concluded the 

meeting. 

(iii) LIMITATIONS ON APPLICABILITY.—By a majority vote, 

the Commission may waive the 7-day prior notice requirement of clause (i) when the Commission finds that requiring such a notice would be impracticable, unnecessary, or 

contrary to the public interest. 

(C) INTERNAL RISK CONTROLS.—The Commission staff and 

the Chief Economist shall develop comprehensive internal risk 

control mechanisms to safeguard and govern the storage of all 

market data by the Commission, all market data sharing agreements of the Commission, and all academic research performed 

at the Commission using market data. 

(E) REQUIREMENT TO PUBLISH IMPLEMENTATION PLAN FOR

COMMISSION RULES.—The Commission shall direct its staff to 

develop and publish in any proposed rule a plan for— 

(i) when and for how long the proposed rule will be subject to public comment; and 

(ii) by when compliance with the final rule will be required. 

* * * * * * * 

(F) APPLICABILITY OF NOTICE AND COMMENT RULES TO GUIDANCE VOTED ON BY THE COMMISSION.—The notice and comment 

requirements of chapter 5 of title 5, United States Code, shall 

also apply with respect to any guidance issued by the Commission after being voted on by the Commission. 

(13) PUBLIC AVAILABILITY OF SWAP TRANSACTION DATA.— 

(A) * * * 

* * * * * * * 

(C) GENERAL RULE.—øThe Commission¿ Except as provided in subparagraph (D), the Commission is authorized 

and required to provide by rule for the public availability 

of swap transaction and pricing data as follows: 

(i) * * * 

* * * * * * * 

(D) REQUIREMENTS FOR SWAP TRANSACTIONS IN ILLIQUID

MARKETS.—Notwithstanding subparagraph (C): 


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(i) The Commission shall 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 non-financial entity that is hedging or mitigating commercial risk in accordance with 

subsection (h)(7)(A). 

(ii) The Commission shall ensure that the swap 

transaction information referred to in clause (i) of this 

subparagraph is available to the public no 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. 

(iii) 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. 

ø(D)¿ (E) REGISTERED ENTITIES AND PUBLIC REPORTING.—The Commission may require registered entities to 

publicly disseminate the swap transaction and pricing data 

required to be reported under this paragraph. 

ø(E)¿ (F) RULEMAKING REQUIRED.—With respect to the 

rule providing for the public availability of transaction and 

pricing data for swaps described in clauses (i) and (ii) of 

subparagraph (C), the rule promulgated by the Commission shall contain provisions— 

(i) * * * 

* * * * * * * 

ø(F)¿ (G) TIMELINESS OF REPORTING.—Parties to a swap 

(including agents of the parties to a swap) shall be responsible for reporting swap transaction information to the appropriate registered entity in a timely manner as may be 

prescribed by the Commission. 

ø(G)¿ (H) REPORTING OF SWAPS TO REGISTERED SWAP

DATA REPOSITORIES.—Each swap (whether cleared or 

uncleared) shall be reported to a registered swap data repository. 

* * * * * * * 

(17) OFFICE OF THE CHIEF ECONOMIST.— 

(A) ESTABLISHMENT.—There is established in the Commission the Office of the Chief Economist. 

(B) HEAD.—The Office of the Chief Economist shall be 

headed by the Chief Economist, who shall be appointed by 

the Commission and serve at the pleasure of the Commission. 

(C) FUNCTIONS.—The Chief Economist shall report directly to the Commission and perform such functions and 

duties as the Commission may prescribe. 

(D) PROFESSIONAL STAFF.—The Commission shall appoint such other economists as may be necessary to assist 

the Chief Economist in performing such economic analysis, 

regulatory cost-benefit analysis, or research the Commission may direct. 


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(18) STRATEGIC TECHNOLOGY PLAN.— (A) IN GENERAL.—Every 5 years, the Commission shall 

develop and submit to the Committee on Agriculture of the 

House of Representatives and the Committee on Agriculture, Nutrition, and Forestry of the Senate a detailed 

plan focused on the acquisition and use of technology by 

the Commission. 

(B) CONTENTS.—The plan shall— 

(i) include for each related division or office a detailed technology strategy focused exclusively on market 

surveillance and risk detection, market data collection, 

aggregation, interpretation, standardization, harmonization, streamlining, and internal management and 

protection of data collected by the Commission, including a detailed accounting of how the funds provided for 

technology will be used and the priorities that will 

apply in the use of the funds; and 

(ii) set forth annual goals to be accomplished and 

annual budgets needed to accomplish the goals. 

* * * * * * * 

(h) CLEARING REQUIREMENT.— (1) * * * 

* * * * * * * 

(7) EXCEPTIONS.— (A) * * * 

* * * * * * * 

(C) FINANCIAL ENTITY DEFINITION.— (i) * * * 

* * * * * * * 

ø(iii) LIMITATION.—Such definition shall not include 

an entity whose primary business is providing financing, and uses derivatives for the purpose of hedging 

underlying commercial risks related to interest rate 

and foreign currency exposures, 90 percent or more of 

which arise from financing that facilitates the purchase or lease of products, 90 percent or more of which 

are manufactured by the parent company or another 

subsidiary of the parent company.¿ 

(iii) LIMITATION.—Such definition shall not include 

an entity— 

(I) whose primary business is providing financing, and who uses derivatives for the purpose of 

hedging underlying commercial risks related to interest rate and foreign currency exposures, 90 percent or more of which arise from financing that facilitates the purchase or lease of products, 90 percent or more of which are manufactured by the 

parent company or another subsidiary of the parent company; or 

(II) who is not supervised by a prudential regulator, and is not described in any of subclauses (I) 

through (VII) of clause (i), and— 


emcdonald on DSK4SPTVN1PROD with HEARING
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(aa) is a commercial market participant and 

is considered a financial entity under clause 

(i)(VIII) because the entity predominantly engages in physical delivery contracts; or 

(bb) enters into swaps, contracts for future 

delivery, and other derivatives on behalf of, or 

to hedge or mitigate the commercial risk of, 

whether directly or in the aggregate, affiliates 

that are not so supervised or described. 

(D) TREATMENT OF AFFILIATES.— ø(i) IN GENERAL.—An affiliate of a person that qualifies for an exception under subparagraph (A) (including affiliate entities predominantly engaged in providing financing for the purchase of the merchandise 

or manufactured goods of the person) may qualify for 

the exception only if the affiliate, acting on behalf of 

the person and as an agent, uses the swap to hedge 

or mitigate the commercial risk of the person or other 

affiliate of the person that is not a financial entity.¿ 

(i) IN GENERAL.—An affiliate of a person that qualifies for an exception under subparagraph (A) (including affiliate entities predominantly engaged in providing financing for the purchase of the merchandise 

or manufactured goods of the person) may qualify for 

the exception only if the affiliate enters into the swap 

to hedge or mitigate the commercial risk of the person 

or other affiliate of the person that is not a financial 

entity, provided that if the transfer of commercial risk 

is addressed by entering into a swap with a swap dealer or major swap participant, a credit support measure 

or other mechanism is utilized. 

* * * * * * * 

SEC. 4. (a) * * * 

* * * * * * * 

(c)(1) In order to promote responsible economic or financial innovation and fair competition, the Commission by rule, regulation, or 

order, after notice and opportunity for hearing, may (on its own initiative or on application of any person, including any board of trade 

designated or registered as a contract market or derivatives transaction execution facility for transactions for future delivery in any 

commodity under section 5 of this Act) exempt any agreement, contract, or transaction (or class thereof) that is otherwise subject to 

subsection (a) (including any person or class of persons offering, entering into, rendering advice or rendering other services with respect to, the agreement, contract, or transaction), either unconditionally or on stated terms or conditions or for stated periods and 

either retroactively or prospectively, or both, from any of the requirements of subsection (a), or from any other provision of this Act 

(except subparagraphs (C)(ii) and (D) of section 2(a)(1), except 

that— 

(A) unless the Commission is expressly authorized by any 

provision described in this subparagraph to grant exemptions, 

or except as necessary to effectuate section 361 of the Customer 

Protection and End User Relief Act, with respect to amendVerDate Mar 15 2010 21:22 Jun 09, 2014 Jkt 039006 PO 00000 Frm 00074 Fmt 6659 Sfmt 6601 E:\HR\OC\HR469.XXX HR469

emcdonald on DSK4SPTVN1PROD with HEARING
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ments made by subtitle A of the Wall Street Transparency and 

Accountability Act of 2010— 

(i) with respect to— 

(I) paragraphs (2), (3), (4), (5), and ø(7), paragraph 

(18)(A)(vii)(III), paragraphs (23), (24), (31), (32), (38), 

(39), (41), (42), (46), (47), (48), and (49)¿ (8), paragraph 

(19)(A)(vii)(III), paragraphs (24), (25), (32), (33), (39), 

(40), (42), (43), (47), (48), (49), and (50) of section 1a, 

and sections 2(a)(13), 2(c)(1)(D), 4a(a), 4a(b), 4d(c), 

4d(d), 4r, 4s, 5b(a), 5b(b), 5(d), 5(g), 5(h), 5b(c), 5b(i), 

8e, and 21; and 

* * * * * * * 

SEC. 4a. (a) * * * 

* * * * * * * 

(c)(1) No rule, regulation, or order issued under subsection (a) of 

this section shall apply to transactions or positions which are 

shown to be bona fide hedging transactions or positions, as such 

terms shall be defined by the Commission by rule, regulation, or 

order consistent with the purposes of this Act. Such terms ømay¿ 

shall be defined to permit producers, purchasers, sellers, middlemen, and users of a commodity or a product derived therefrom to 

hedge their legitimate anticipated business needs for that period of 

time into the øfuture for which¿ future, to be determined by the 

Commission, for which either an appropriate swap is available or 

an appropriate futures contract is open and available on an exchange. To determine the adequacy of this Act and the powers of 

the Commission acting thereunder to prevent unwarranted price 

pressures by large hedgers, the Commission shall monitor and analyze the trading activities of the largest hedgers, as determined by 

the Commission, operating in the cattle, hog, or pork belly markets 

and shall report its findings and recommendations to the Senate 

Committee on Agriculture, Nutrition, and Forestry and the House 

Committee on Agriculture in its annual reports for at least two 

years following the date of enactment of the Futures Trading Act 

of 1982. 

(2) For the purposes of implementation of øsubsection (a)(2) 

for contracts of sale for future delivery or options on the contracts or commodities, the Commission shall define what constitutes a bona fide hedging transaction or position as¿ 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— 

(A)(i) * * * 

(ii) is economically appropriate to the reduction øof 

risks¿ or management of current or anticipated risks in the 

conduct and management of a commercial enterprise; and 

* * * * * * * 

(3) The Commission may further define, by rule or regulation, 

what constitutes a bona fide hedging transaction, provided that 

the rule or regulation is consistent with the requirements of subparagraphs (A) and (B) of paragraph (2). 

* * * * * * * 


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SEC. 4d. (a) (1) It shall be unlawful for any person to be a futures 

commission merchant unless— 

ø(1)¿ (A) such person shall have registered, under this 

Act, with the Commission as such futures commission merchant and such registration shall not have expired nor 

been suspended nor revoked; and 

ø(2)¿ (B) such person shall, whether a member or nonmember of a contract market or derivatives transaction 

execution facility, treat and deal with all money, securities, and property received by such person to margin, guarantee, or secure the trades or contracts of any customer of 

such person, or accruing to such customer as the result of 

such trades or contracts, as belonging to such customer. 

Such money, securities, and property shall be separately 

accounted for and shall not be commingled with the funds 

of such commission merchant or be used to margin or 

guarantee the trades or contracts, or to secure or extend 

the credit, of any customer or person other than the one 

for whom the same are held: Provided, however, That such 

money, securities, and property of the customers of such 

futures commission merchant may, for convenience, be 

commingled and deposited in the same account or accounts 

with any bank or trust company or with the clearing house 

organization of such contract market or derivatives transaction execution facility, and that such share thereof as in 

the normal course of business shall be necessary to margin, guarantee, secure, transfer, adjust, or settle the contracts or trades of such customers, or resulting market positions, with the clearing-house organization of such contract market or derivatives transaction execution facility 

or with any member of such contract market or derivatives 

transaction execution facility, may be withdrawn and applied to such purposes, including the payment of commissions, brokerage, interest, taxes, storage, and other 

charges, lawfully accruing in connection with such contracts and trades: Provided further, That in accordance 

with such terms and conditions as the Commission may 

prescribe by rule, regulation, or order, such money, securities, and property of the customers of such futures commission merchant may be commingled and deposited as provided in this section with any other money, securities, and 

property received by such futures commission merchant 

and required by the Commission to be separately accounted for and treated and dealt with as belonging to the 

customers of such futures commission merchant: Provided 

further, That such money may be invested in obligations of 

the United States, in general obligations of any State or of 

any political subdivision thereof, and in obligations fully 

guaranteed as to principal and interest by the United 

States, such investments to be made in accordance with 

such rules and regulations and subject to such conditions 

as the Commission may prescribe. 

(2) Any rules or regulations requiring a futures commission 

merchant to maintain a residual interest in accounts held for 

the benefit of customers in amounts at least sufficient to exceed 


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the sum of all uncollected margin deficits of such customers 

shall provide that a futures commission merchant shall meet its 

residual interest requirement as of the end of each business day 

calculated as of the close of business on the previous business 

day. 

* * * * * * * 

(h) øNotwithstanding subsection (a)(2)¿ Notwithstanding subsection (a)(1)(B) or the rules and regulations thereunder, and pursuant to an exemption granted by the Commission under section 

4(c) of this Act or pursuant to a rule or regulation, a futures commission merchant that is registered pursuant to section 4f(a)(1) of 

this Act and also registered as a broker or dealer pursuant to section 15(b)(1) of the Securities Exchange Act of 1934 may, pursuant 

to a portfolio margining program approved by the Securities and 

Exchange Commission pursuant to section 19(b) of the Securities 

Exchange Act of 1934, hold in a portfolio margining account carried 

as a securities account subject to section 15(c)(3) of the Securities 

Exchange Act of 1934 and the rules and regulations thereunder, a 

contract for the purchase or sale of a commodity for future delivery 

or an option on such a contract, and any money, securities or other 

property received from a customer to margin, guarantee or secure 

such a contract, or accruing to a customer as the result of such a 

contract. The Commission shall consult with the Securities and Exchange Commission to adopt rules to ensure that such transactions 

and accounts are subject to comparable requirements to the extent 

practical for similar products. 

* * * * * * * 

SEC. 4q. SPECIAL PROCEDURES TO ENCOURAGE AND FACILITATE 

BONA FIDE HEDGING BY AGRICULTURAL PRODUCERS. 

(a) AUTHORITY.—The Commission shall consider issuing rules or 

orders which— 

(1) prescribe procedures under which each contract market is 

to provide for orderly delivery, including temporary storage 

costs, of any agricultural commodity enumerated in section 

ø1a(9)¿ 1a(10) which is the subject of a contract for purchase 

or sale for future delivery; 

* * * * * * * 

SEC. 4s. REGISTRATION AND REGULATION OF SWAP DEALERS AND 

MAJOR SWAP PARTICIPANTS. 

(a) * * * 

* * * * * * * 

(e) CAPITAL AND MARGIN REQUIREMENTS.— 

(1) * * * 

(2) RULES.— 

(A) * * * 

(B) SWAP DEALERS AND MAJOR SWAP PARTICIPANTS THAT

ARE NOT BANKS.—The Commission, in consultation with 

the prudential regulators and the Securities and Exchange 

Commission, shall adopt rules for swap dealers and major 

swap participants, with respect to their activities as a 

swap dealer or major swap participant, for which there is 

not a prudential regulator imposing— 


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(i) * * * 

* * * * * * * 

(3) STANDARDS FOR CAPITAL AND MARGIN.— (A) * * * 

* * * * * * * 

(D) COMPARABILITY OF CAPITAL AND MARGIN REQUIRE- MENTS.— 

(i) * * * 

(ii) COMPARABILITY.—The entities described in 

clause (i) øshall, to the maximum extent practicable,¿ 

shall establish and maintain comparable minimum 

capital requirements and minimum initial and variation margin requirements, including the use of non 

cash collateral, for— 

(I) * * * 

* * * * * * * 

(iii) FINANCIAL MODELS.—To the extent that swap 

dealers and major swap participants that are banks 

are permitted to use financial models approved by the 

prudential regulators or the Securities and Exchange 

Commission to calculate minimum capital requirements and minimum initial and variation margin requirements, including the use of non-cash collateral, 

the Commission shall, in consultation with the prudential regulators and the Securities and Exchange Commission, permit the use of comparable financial models 

by swap dealers and major swap participants that are 

not banks. 

(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 an exemption issued under 

section 4(c)(1) from the requirements of section 2(h)(1)(A) for cooperative entities as defined in such exemption, or satisfies the 

criteria in section 2(h)(7)(D). 

(f) REPORTING AND RECORDKEEPING.— (1) IN GENERAL.—Each registered swap dealer and major 

swap participant— 

(A) * * * 

* * * * * * * 

(D) shall keep any such books and records relating to 

swaps defined in section ø1a(47)(A)(v)¿ 1a(48)(A)(v) open 

to inspection and examination by the Securities and Exchange Commission. 

* * * * * * * 

(h) BUSINESS CONDUCT STANDARDS.— 

(1) * * * 

(2) RESPONSIBILITIES WITH RESPECT TO SPECIAL ENTITIES.— 

(A) * * * 

* * * * * * * 


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(D) UTILITY SPECIAL ENTITY.—For purposes of this Act, 

the term ‘‘utility special entity’’ means a special entity, or 

any instrumentality, department, or corporation of or established by a State or political subdivision of a State, that— 

(i) owns or operates an electric or natural gas facility 

or an electric or natural gas operation; 

(ii) supplies natural gas and or electric energy to another utility special entity; 

(iii) has public service obligations under Federal, 

State, or local law or regulation to deliver electric energy or natural gas service to customers; or 

(iv) is a Federal power marketing agency, as defined 

in section 3 of the Federal Power Act. 

* * * * * * * 

(5) SPECIAL REQUIREMENTS FOR SWAP DEALERS AS COUNTERPARTIES TO SPECIAL ENTITIES.— 

(A) Any swap dealer or major swap participant that offers to enter or enters into a swap with a Special Entity 

shall— 

(i) comply with any duty established by the Commission for a swap dealer or major swap participant, with 

respect to a counterparty that is an eligible contract 

participant within the meaning of subclause (I) or (II) 

of clause (vii) of section ø1a(18)¿ 1a(19) of this Act, 

that requires the swap dealer or major swap participant to have a reasonable basis to believe that the 

counterparty that is a Special Entity has an independent representative that— 

(I) * * * 

* * * * * * * 

SEC. 4t. LARGE SWAP TRADER REPORTING. 

(a) * * * 

(b) REQUIREMENTS.— 

(1) IN GENERAL.—Books and records described in subsection 

(a)(2)(B) shall— 

(A) * * * 

* * * * * * * 

(C) be open at all times to inspection and examination 

by the Securities and Exchange Commission, to the extent 

such books and records relate to transactions in swaps (as 

that term is defined in section ø1a(47)(A)(v)¿ 1a(48)(A)(v)), 

and consistent with the confidentiality and disclosure requirements of section 8. 

* * * * * * * 

SEC. 4u. RECORDKEEPING REQUIREMENTS APPLICABLE TO NON-REGISTERED MEMBERS OF CERTAIN REGISTERED ENTITIES. 

Except as provided in section 4(a)(3), a member of a designated 

contract market or a swap execution facility that is not registered 

with the Commission and not required to be registered with the 

Commission in any capacity shall satisfy the recordkeeping requirements of this Act and any recordkeeping rule, order, or regulation 

under this Act by maintaining a written record of each transaction 


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in a contract for future delivery, option on a future, swap, swaption, 

trade option, or related cash or forward transaction. The written 

record shall be sufficient if it includes the final agreement between 

the parties and the material economic terms of the transaction and 

is identifiable and searchable by transaction. 

SEC. 5. DESIGNATION OF BOARDS OF TRADE AS CONTRACT MARKETS. 

(a) * * * 

* * * * * * * 

(d) CORE PRINCIPLES FOR CONTRACT MARKETS.— 

(1) * * * 

* * * * * * * 

(23) SECURITIES AND EXCHANGE COMMISSION.—The board of 

trade shall keep any such records relating to swaps defined in 

section ø1a(47)(A)(v)¿ 1a(48)(A)(v) open to inspection and examination by the Securities and Exchange Commission. 

(e) CURRENT AGRICULTURAL COMMODITIES.— 

(1) Subject to paragraph (2) of this subsection, a contract for 

purchase or sale for future delivery of an agricultural commodity enumerated in section ø1a(9)¿ 1a(10) that is available 

for trade on a contract market, as of the date of the enactment 

of this subsection, may be traded only on a contract market 

designated under this section. 

* * * * * * * 

SEC. 5b. DERIVATIVES CLEARING ORGANIZATIONS. 

(a) * * * 

* * * * * * * 

(k) REPORTING REQUIREMENTS.— 

(1) * * * 

* * * * * * * 

(3) REPORTS ON SECURITY-BASED SWAP AGREEMENTS TO BE

SHARED WITH THE SECURITIES AND EXCHANGE COMMISSION.— (A) IN GENERAL.—A derivatives clearing organization 

that clears security-based swap agreements (as defined in 

section ø1a(47)(A)(v)¿ 1a(48)(A)(v)) shall, upon request, 

open to inspection and examination to the Securities and 

Exchange Commission all books and records relating to 

such security-based swap agreements, consistent with the 

confidentiality and disclosure requirements of section 8. 

* * * * * * * 

ø(5) CONFIDENTIALITY AND INDEMNIFICATION AGREEMENT.— 

Before the Commission may share information with any entity 

described in paragraph (4)— 

ø(A) the Commission shall receive a written agreement 

from each entity stating that the entity shall abide by the 

confidentiality requirements described in section 8 relating 

to the information on swap transactions that is provided; 

and 

ø(B) each entity shall agree to indemnify the Commission for any expenses arising from litigation relating to the 

information provided under section 8.¿ 


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(5) CONFIDENTIALITY AGREEMENT.—Before the Commission 

may share information with any entity described in paragraph 

(4), the Commission shall receive a written agreement from each 

entity stating that the entity shall abide by the confidentiality 

requirements described in section 8 relating to the information 

on swap transactions that is provided. 

* * * * * * * 

SEC. 5c. COMMON PROVISIONS APPLICABLE TO REGISTERED ENTITIES. 

(a) * * * 

* * * * * * * 

(c) NEW CONTRACTS, NEW RULES, AND RULE AMENDMENTS.— (1) * * * 

* * * * * * * 

(4) PRIOR APPROVAL.— 

(A) * * * 

(B) PRIOR APPROVAL REQUIRED.—Notwithstanding any 

other provision of this section, a designated contract market shall submit to the Commission for prior approval each 

rule amendment that materially changes the terms and 

conditions, as determined by the Commission, in any contract of sale for future delivery of a commodity specifically 

enumerated in section ø1a(10)¿ 1a(11) (or any option 

thereon) traded through its facilities if the rule amendment applies to contracts and delivery months which have 

already been listed for trading and have open interest. 

* * * * * * * 

SEC. 5h. SWAP EXECUTION FACILITIES. 

(a) * * * 

* * * * * * * 

(f) CORE PRINCIPLES FOR SWAP EXECUTION FACILITIES.— (1) * * * 

* * * * * * * 

(10) RECORDKEEPING AND REPORTING.— 

(A) IN GENERAL.—A swap execution facility shall— 

(i) * * * 

* * * * * * * 

(iii) shall keep any such records relating to swaps 

defined in section ø1a(47)(A)(v)¿ 1a(48)(A)(v) open to 

inspection and examination by the Securities and Exchange Commission.’’ 

* * * * * * * 

SEC. 6. (a) * * * 

* * * * * * * 

(c) PROHIBITION REGARDING MANIPULATION AND FALSE INFORMA- TION.— 

(1) * * * 

* * * * * * * 

ø(5) SUBPOENA.—For¿ 


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(5) SUBPOENA.— (A) IN GENERAL.—For the purpose of securing effective 

enforcement of the provisions of this Act, for the purpose 

of any investigation or proceeding under this Act, and for 

the purpose of any action taken under section 12(f), any 

member of the Commission or any Administrative Law 

Judge or other officer designated by the Commission (except as provided in paragraph (7)) may administer oaths 

and affirmations, subpoena witnesses, compel their attendance, take evidence, and require the production of any 

books, papers, correspondence, memoranda, or other 

records that the Commission deems relevant or material to 

the inquiry. 

(B) CONTENT OF SUBPOENA ORDER.—An order of the 

Commission authorizing the issuance of a subpoena— 

(i) shall state in good faith the purpose of the investigation; 

(ii) shall require only the provision of information 

reasonably relevant to that purpose; and 

(iii) shall not be for an indefinite duration. 

(C) RENEWAL.—An order issued under this paragraph 

may be renewed only by Commission action. 

* * * * * * * 

SEC. 12. (a) * * * 

* * * * * * * 

(d) There are authorized to be appropriated such sums as are 

necessary to carry out this Act for each of the fiscal years 2008 

through ø2013¿ 2018. 

* * * * * * * 

SEC. 15. CONSIDERATION OF COSTS AND BENEFITS AND ANTITRUST 

LAWS. 

(a) COSTS AND BENEFITS.— 

ø(1) IN GENERAL.—Before promulgating a regulation under 

this Act or issuing an order (except as provided in paragraph 

(3)), the Commission shall consider the costs and benefits of 

the action of the Commission. 

ø(2) CONSIDERATIONS.—The costs and benefits of the proposed Commission action shall be evaluated in light of— 

ø(A) considerations of protection of market participants 

and the public; 

ø(B) considerations of the efficiency, competitiveness, 

and financial integrity of futures markets; 

ø(C) considerations of price discovery; 

ø(D) considerations of sound risk management practices; 

and 

ø(E) other public interest considerations.¿ 

(1) IN GENERAL.—Before promulgating a regulation under 

this Act or issuing an order (except as provided in paragraph 

(3)), the Commission, through the Office of the Chief Economist, 

shall assess and publish in the regulation or order the costs 

and benefits, both qualitative and quantitative, of the proposed 

regulation or order, and the proposed regulation or order shall 

state its statutory justification. 


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(2) CONSIDERATIONS.—In making a reasoned determination 

of the costs and the benefits, the Commission shall evaluate— 

(A) considerations of protection of market participants 

and the public; 

(B) considerations of the efficiency, competitiveness, and 

financial integrity of futures and swaps markets; 

(C) considerations of the impact on market liquidity in 

the futures and swaps markets; 

(D) considerations of price discovery; 

(E) considerations of sound risk management practices; 

(F) available alternatives to direct regulation; 

(G) the degree and nature of the risks posed by various 

activities within the scope of its jurisdiction; 

(H) the costs of complying with the proposed regulation 

or order by all regulated entities, including a methodology 

for quantifying the costs (recognizing that some costs are 

difficult to quantify); 

(I) whether the proposed regulation or order is inconsistent, incompatible, or duplicative of other Federal regulations or orders; 

(J) whether, in choosing among alternative regulatory approaches, those approaches maximize net benefits (including potential economic and other benefits, distributive impacts, and equity); and 

(K) other public interest considerations. 

* * * * * * * 

SEC. 17. (a) * * * 

* * * * * * * 

(s) A registered futures association shall— 

(1) require each member of the association that is a futures 

commission merchant to maintain written policies and procedures regarding the maintenance of— 

(A) the residual interest of the member, as described in 

section 1.23 of title 17, Code of Federal Regulations, in any 

customer segregated funds account of the member, as identified in section 1.20 of such title, and in any foreign futures and foreign options customer secured amount funds 

account of the member, as identified in section 30.7 of such 

title; and 

(B) the residual interest of the member, as described in 

section 22.2(e)(4) of such title, in any cleared swaps customer collateral account of the member, as identified in section 22.2 of such title; and 

(2) establish rules to govern the withdrawal, transfer or disbursement by any member of the association, that is a futures 

commission merchant, of the member’s residual interest in customer segregated funds as provided in such section 1.20, in foreign futures and foreign options customer secured amount 

funds, identified as provided in such section 30.7, and from a 

cleared swaps customer collateral, identified as provided in 

such section 22.2. 

(t) A registered futures association shall require any member of 

the association that is a futures commission merchant to— 


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(1) use an electronic system or systems to report financial and 

operational information to the association, including information related to customer segregated funds, foreign futures and 

foreign options customer secured amount funds accounts, and 

cleared swaps customer collateral, in accordance with such 

terms, conditions, documentation standards, and regular time 

intervals as are established by the association; 

(2) instruct each depository, including any bank, trust company, derivatives clearing organization, or futures commission 

merchant, holding customer segregated funds under section 

1.20 of title 17, Code of Federal Regulations, foreign futures 

and foreign options customer secured amount funds under section 30.7 of such title, or cleared swap customer funds under 

section 22.2 of such title, to report balances in the futures commission merchant’s section 1.20 customer segregated funds, section 30.7 foreign futures and foreign options customer secured 

amount funds, and section 22.2 cleared swap customer funds, 

to the registered futures association or another party designated 

by the registered futures association, in the form, manner, and 

interval prescribed by the registered futures association; and 

(3) hold section 1.20 customer segregated funds, section 30.7 

foreign futures and foreign options customer secured amount 

funds and section 22.2 cleared swaps customer funds in a depository that reports the balances in these accounts of the futures commission merchant held at the depository to the registered futures association or another party designated by the 

registered futures association in the form, manner, and interval 

prescribed by the registered futures association. 

(u) A futures commission merchant that has adjusted net capital 

in an amount less than the amount required by regulations established by the Commission or a self-regulatory organization of which 

the futures commission merchant is a member shall immediately 

notify the Commission and the self-regulatory organization of this 

occurrence. 

(v) A futures commission merchant that does not hold a sufficient 

amount of funds in segregated accounts for futures customers under 

section 1.20 of title 17, Code of Federal Regulations, in foreign futures and foreign options secured amount accounts for foreign futures and foreign options secured amount customers under section 

30.7 of such title, or in segregated accounts for cleared swap customers under section 22.2 of such title, as required by regulations 

established by the Commission or a self-regulatory organization of 

which the futures commission merchant is a member, shall immediately notify the Commission and the self-regulatory organization 

of this occurrence. 

(w) Within such time period established by the Commission after 

the end of each fiscal year, a futures commission merchant shall file 

with the Commission a report from the chief compliance officer of 

the futures commission merchant containing an assessment of the 

internal compliance programs of the futures commission merchant. 

* * * * * * * 

SEC. 20. (a) Notwithstanding title 11 of the United States Code, 

the Commission may provide, with respect to a commodity broker 

that is a debtor under chapter 7 of title 11 of the United States 

Code, by rule or regulation— 


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(1) * * * 

* * * * * * * 

(4) any persons to which customer property and commodity 

contracts may be transferred under section 766 of title 11 of 

the United States Code; øand¿ 

(5) how the net equity of a customer is to be determinedø.¿; 

and 

(6) that cash, securities, or other property of the estate of a 

commodity broker, including the trading or operating accounts 

of the commodities broker and commodities held in inventory by 

the commodity broker, shall be included in customer property, 

but only to the extent that the property that is otherwise customer property is insufficient to satisfy the net equity claims of 

public customers (as such term may be defined by the Commission by rule or regulation) of the commodity broker. 

* * * * * * * 

SEC. 21. SWAP DATA REPOSITORIES. 

(a) * * * 

* * * * * * * 

ø(d) CONFIDENTIALITY AND INDEMNIFICATION AGREEMENT.—Before the swap data repository may share information with any entity described in subsection (c)(7)— 

ø(1) the swap data repository shall receive a written agreement from each entity stating that the entity shall abide by 

the confidentiality requirements described in section 8 relating 

to the information on swap transactions that is provided; and 

ø(2) each entity shall agree to indemnify the swap data repository and the Commission for any expenses arising from litigation relating to the information provided under section 8.¿ 

(d) CONFIDENTIALITY AGREEMENT.—Before the swap data repository may share information with any entity described in subsection 

(c)(7), the swap data repository shall receive a written agreement 

from each entity stating that the entity shall abide by the confidentiality requirements described in section 8 relating to the information on swap transactions that is provided. 

* * * * * * * 

(f) CORE PRINCIPLES APPLICABLE TO SWAP DATA REPOSITORIES.— 

(1) * * * 

* * * * * * * 

(4) ADDITIONAL DUTIES DEVELOPED BY COMMISSION.— 

(A) * * * 

* * * * * * * 

(C) ADDITIONAL DUTIES FOR COMMISSION DESIGNEES.— The Commission shall establish additional duties for any 

registrant described in section ø1a(48)¿ 1a(49) in order to 

minimize conflicts of interest, protect data, ensure compliance, and guarantee the safety and security of the swap 

data repository. 

* * * * * * * 


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SEC. 24. JUDICIAL REVIEW OF COMMISSION RULES. 

(a) A person aggrieved by a final rule of the Commission under 

this Act may obtain review of the rule in the United States Court 

of Appeals for the District of Columbia Circuit or the United States 

Court of Appeals for the circuit where the party resides, by filing in 

the court, within 60 days after publication in the Federal Register 

of the entry of the rule, a written petition requesting that the rule 

be modified or set aside in whole or in part. 

(b) A copy of the petition shall be transmitted forthwith by the 

clerk of the court to an officer designated by the Commission for 

that purpose. Thereupon the Commission shall file in the court the 

record on which the rule complained of is entered, as provided in 

section 2112 of title 28, United States Code, and the Federal Rules 

of Appellate Procedure. 

(c) On the filing of the petition, the court has jurisdiction, which 

becomes exclusive on the filing of the record, to affirm or modify 

and enforce or to set aside the rule in whole or in part. 

(d) The findings of the Commission as to the facts identified by 

the Commission as the basis, in whole or in part, of the rule, if supported by substantial evidence, are conclusive. The court shall affirm and enforce the rule unless the Commission’s action in promulgating the rule is found to be arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law; contrary to constitutional right, power, privilege, or immunity; in excess of statutory jurisdiction, authority, or limitations, or short of statutory 

right; or without observance of procedure required by law. 

(e) If either party applies to the court for leave to adduce additional evidence and shows to the satisfaction of the court that the 

additional evidence is material and that there was reasonable 

ground for failure to adduce it before the Commission, the court 

may remand the case to the Commission for further proceedings, in 

whatever manner and on whatever conditions the court considers 

appropriate. If the case is remanded to the Commission, it shall file 

in the court a supplemental record containing any new evidence, 

any further or modified findings, and any new order. 

Æ 


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